The Nigerian Stock Exchange (NSE) has rallied for three straight after the country’s central banks introduced a free floating exchange rate this week, something that has attracted investors back into the West African equities market.
The NSE’s All Share Index has rallied 8 percent between June 20 and June 23 to reach 31,071.25 points, the most among 94 major equity indexes tracked by Bloomberg.
“Volumes in the equity market have gone from about $8 million a day last week to more than $20 million,” Chris Becker, an analyst at Investec, told Bloomberg. “It’s a big increase, but it’s not all new foreign money coming in. A lot of the rally is down to local money being switched from the bond market to stocks.”
On Monday, the naira plunged 40 percent following the decision by the Central Bank of Nigeria (CBN) to devalue the local currency by allowing it to trade freely without a peg to the U.S. dollar.
CBN’s move was seen as a response to tumbling oil prices. Nigeria is the top oil producer in Africa and derives most of its revenue from the commodity.
Analysts ar Renaissance Capital expect the devaluation of the naira to attract dollar investors into Lagos stocks in pursuit of cheaper assets at the expense of other African markets such as the Nairobi Securities Exchange, Business Daily reported.
Renaissance Capital global chief economist Charles Robertson told Bloomberg that in the medium term, Nigerian investments are set to become more attractive to investors, having been put off in the past by the currency distortions in Africa’s biggest economy.
“A bigger issue for Kenyan stock market or appetite for Kenya assets could be how successful Nigeria is with the currency transition that has just been announced. If that is very successful and Nigeria starts to look very attractive you could see money out of Kenya to go look at those opportunities in Nigeria,” Robertson said.
The Nigeria stock market has been attracting at best the same level of net foreign inflows as Kenya’s in recent months in spite of being three-and-a-half times larger in terms of monthly traded volumes and twice as large in market capitalization.
At the moment, most foreign investors are still waiting for the naira to weaken further and for some assurance from regulators on if foreign exchange controls had been relaxed, before they can move in more capital in the NSE.
“Foreigners aren’t really coming back yet” Mickael Avou Ahonzo, head of currency trading at Ecobank Transnational, told Bloomberg.
“They want to take positions. It’s less about the level of the naira than its stability and the liquidity. There’s enough liquidity for small trades, but not really for big transactions.”
