Investment bankers commend Investors’ & Exporters’ FX window

Two investment banking and Securities Company have commended the Central Bank of Nigeria (CBN) for introducing the new investors’ and exporters’ (I&E) foreign exchange (FX) window.

While, Global fund management and securities company, Renaissance Capital (RenCap), said it is the best indicator of where the market thinks the naira should be trading, as it allows trades at a market-determined rate, Afrinvest West Africa Limited observed that in April, investor sentiment strengthened following the commencement of the  FX window; adding that this signalled a possible return of flexibility in foreign exchange market (FX) rate determination; though multiplicity of rates at official windows is still a concern.

According to RenCap in its latest report titled: ‘Sub-Saharan Africa: Pockets of Value,’ the I&E FX window will help local and foreign investors who are doubtful of the true value of Naira, to make decisions as it truly allows the currency  to be determined by the natural forces of supply and demand.

“Nigeria’s new investors’ and exporters’ (I&E) FX window allows trades at a market-determined rate. Of all the other rates in Nigeria, we think this is the best indicator of where the market thinks the naira should be trading (closing rate of N383/$1 at the I&E window on May 3),” it stated.

Afrinvest further observed that the Nigerian All Share index trended on a 10-day bullish streak majorly “due to the improvements in the FX market.”

Within the last two years, the exit of foreign portfolio investors from the equities market, given the perceived mispricing of the domestic currency, was majorly responsible for the drag witnessed in the equities market. This was further compounded by the massive spread of approximately N200/$1 between the official and parallel market exchange rates.

However, through the various recent intermittent but steady interventions by the CBN, the spread between the market rates has trimmed considerably. “Our interactions with FX traders and Afrinvest equity brokerage desk suggest that the launch of the I&E FX window on April 21, 2017 was the major “game changer” as the equities market has witnessed improved participation from foreign portfolio investors, especially this last week.

Consequently, the benchmark index recorded a decline on only two trading days since the launch of the window while appreciating 11.9 per cent post launch with year-to-date (YTD) return currently at +4.9 per cent. Interestingly, all the sectors have majorly benefitted from the renewed investor participation in equities as the banking, consumer goods, oil and gas, industrial goods and insurance sector indices have gained 22.3 per cent, 16.7 per cent, 8.4 per cent, 4.1 per cent and 2.7 per cent respectively since the launch of the I&E window.

“In our view, the current bullish trend in the market is majorly hinged on foreign investors’ perception on activities within FX market particularly with regards to the  sustainability of the newly launched I&E FX window.

“ If managed appropriately, we expect to see influx of foreign investors which could potentially spark massive rallies in the market given the comparably cheaper valuation of Nigerian equities at a price earning (P/E) of 12.6x relative to average P/E of 14.7x for African markets,” Afrinvest stated in a report to investors.