Flexible Exchange Rate May Spur Stock Market Investment

Obinna Chima

The much-anticipated flexible exchange regime to be introduced by the Central Bank of Nigeria (CBN) is expected to result in an increased allocation of investments by Pension Fund Administrators (PFAs) in the Nigerian Stock Exchange (NSE).
According to a report by Lagos-based CSL Stockbrokers Limited, the stock market would benefit positively from the expected forex regime.

“Our belief is that PFAs will increase allocations to equities if the market starts to move higher following a clarification, from the Central Bank of Nigeria, on exchange rate policies that assuages concerns of foreign investors. Whether and when this will happen remains the big unknown. But if and when it does, the equity market is likely to move rapidly higher as pension funds reposition themselves,” the report stated.

CBN Governor, Mr. Godwin Ifeanyi Emefiele, had at the last monetary policy committee, said the central bank resolved to introduce greater flexibility in the foreign exchange market structure and to retain a small window for critical transactions for prospective investors.

“With the foreign exchange market framework now ready, the MPC voted unanimously to adopt greater flexibility in the exchange rate policy to restore the automatic adjustment properties of the exchange rate,” he had explained.

Data published by the National Pension Commission (PenCom) showed that pension fund allocations to equities have fallen to multi-year lows in early 2016. Only 8.6 per cent of total assets were allocated to domestic equities in March 2016, far lower than the peak of 14.6 per cent in December 2013, and also lower than the 2013-2015 average allocation of 12.6 per cent.
Total pension funds’ assets were N5.4 trillion in March 2016, having grown by an average of 1.4 per cent month-on-month since January 2013.

Continuing, the report added: “If PFAs were to increase their equity allocation to the average of the last three years (12.6%), this would result in inflows of more than N220 billion to the equity market. If PFAs were to increase their allocation to the 2013-2015 high of 14.6 per cent, this would result in inflows of N330 billion. Were PFAs to increase their allocation to its statutory limit of 25 per cent of total assets, this would result in inflows of around N900 billion.

“When one considers that daily equity market turnover has averaged N2.3 billion in 2016, a bullish shift in sentiment on the part of the PFAs towards equities could lead to a substantial rally. Of course the big question is what might lead to such a shift in sentiment.”