For an economy that suffered significant outflow of investment in the last quarter of 2014, European Central Bank’s Asset Purchase Programme (ECB APP), which commenced last week, has raised hope of improved investment inflow.
Financial analysts at WSTC Financial Services said it would increase capital inflow to high-yield currencies like the naira and a couple of emerging market currencies which investors believe will deliver compelling risk-adjusted returns.
But how much this expected inflow impacts investors at the financial markets depends on the risk appetite of individual investors, whether in equities or fixed income instruments.
Local investors continue to show deep-seated apathy after the unsavoury experience of 2008/2009 when the equities market crash wiped off the wealth of investors.
Foreign counterparts also struggle with investor confidence issues. The amount of capital brought into the country last year fell by $576.61 million.
Capital importation reports
Capital importation report for the 2014 fiscal year released recently by the National Bureau of Statistics (NBS) showed that investment attracted by the economy dropped from $21.31 billion (N4.21 trillion) in 2013 to $20.75 billion (about N4.1 trillion) in 2014, representing 2.66 per cent decline.
The trend continued in January 2015, according to the Central Bank of Nigeria (CBN) Economic Report.
Provisional data showed that foreign exchange (forex) inflow through the CBN was $2.93 billion and outflow $3.97 billion, a net outflow of $1.03 billion, compared with the net outflow of $0.88 billion and $2.11 billion in the preceding December and the corresponding period of 2014.
“Relative to the level in the preceding month, inflow fell by 10.7 per cent, but indicated an increase of 15.4 per cent above the level in the corresponding period of 2014,” the CBN said.
Total inflow was $9.47 billion, a decline of 9.2 and 19.2 per cent below the levels at the end of the preceding month and the corresponding period of 2014, respectively.
ECB’s asset purchase programme
The ECB’s Asset Purchase Programme now includes a monthly purchase of euro-denominated investment-grade public-sector securities in the secondary market. This latest move by the ECB is in addition to its asset-backed securities and covered bonds purchase which took effect from October 2014.
According to the ECB, the combined monthly purchase of public and private sector securities will amount to €60 billion and will be extended to September 2016 or when a sustained adjustment in the path of inflation is consistent with achieving inflation rates below, but close to, 2 per cent over the medium term.
WSTC analysts noted that the Nigerian equities market trading at a P/E ratio of 10.5x, lower than most of other emerging markets; Brazil (13.8x); India (20.3x); South Africa (20.5x), and Indonesia (31.9x) offers attractive returns, and therefore more likely to attract a chunk of the funds.
“We believe that attractive valuation in the Nigerian markets compared to its emerging market peers, and increasing stability in the foreign exchange market, presents attractive risk-adjusted return to institutional investors.
“Overall, we reckon that despite current political risk associated with the general elections and the threat of a rating downgrade by S&P, the ECB’s asset purchase programme will constitute a net positive for the Nigerian financial markets,” they said.
Asset purchase programme to ease liquidity
The ECB’s asset purchase programme will ease liquidity in the euro area (through money and credit growth), according to the WSTC.
“Just as in the case of the recently concluded United States Federal Reserve quantitative easing programme, we believe that this scenario will increase the flow of funds out of the single-currency bloc, as cheaper liquidity is expected to increase the risk appetite of institutional investors for high-yield currencies (mostly in emerging markets) that provide attractive risk-adjusted returns.”
The analysts, however, said unlike in the era of the U.S. loose monetary policy, when expectations were quite high about the performance of the Emerging Market Economies, current expectations have been somewhat lowered on the outlook of emerging markets as a result of slowdown in China, geopolitical tensions in Russia and lingering weakness in the Eurozone.
Between U.S. and EMEs returns on investment
According to the WSTC, institutional investors now hold a bullish outlook about the U.S. economy, especially as the U.S. economy continues to firm up, and as the likelihood of a sooner-than-later hike in U.S. rates remains on the horizon.
“We believe that this will pitch the U.S. market against the EMEs in terms of competition for asset allocation.”
The analysts noted that ECB’s APP was primarily anchored on the need to ward off the heightened risk of deflation and low inflation, particularly given the slide in crude oil prices in recent times and its downside effect on inflation.
They said it is also expected to revive business confidence and investment, thus improving economic activity in the area, adding that recovery in the Eurozone is sluggish and growth momentum is weak.
