Investors in Nigeria’s stock and currency markets were unmoved by the surprise announcement that Donald Trump is going to be the next President of the United States of America much against the general expectation in the country.
The initial announcement that Donald Trump and not Hillary Clinton was going to be president sent shock waves through the global financial markets but the Nigerian markets remained largely unmoved despite the fact that many Nigerians had thrown their weight behind a Clinton presidency.
“The low participation of foreign investors in the Nigeria equity market is the main reason the market did not react. The naira also remained largely stable because the CBN controls what happens in the currency markets” said deals in the Nigerian financial market.
The All Share Index (ASI), which measures the average change in the price of shares on the Nigerian Stock Exchange (NSE), declined by an insignificant 0.72%. But this was a continuation of the decline the market has been experiencing in the last six days as investors continue to sell down their holdings in Nigerian stocks over the not so impressive performance of companies releasing their results for the first nine months of 2016.
In the currency markets, the naira closed trading at N315 to the US$ in the inter-bank market unchanged from its previous position. In the black market, the naira actually experienced a steep appreciation and BDC operators agreed to sell the dollar at no more than N400 to the US$ as against the N465 it sold on November 8.
Liquidity levels in the stock and currency markets remained largely stable, an indication that there was no panic over the Trump victory unlike what happened in the international markets.
“The medium term impact of Trump’s victory on the Nigerian market will be dependent on the specifics of his policies” said analysts at Cardinal Stone, an investment firm.
There was some reaction in trading in fixed income securities, which has a significant amount of foreign portfolio holdings. On announcement that Donald Trump is the President-elect of the United States, sentiment turned negative in the Treasury Bills market as yields climbed 40basis points on average, dealers told BusinessDay.
The sell pressure was mainly in the short-mid dated maturities with yields, which could be that investors were taken defensive positions preferring to reduce their exposure in the face of the uncertainty, brought about by a Trump victory.
Similarly, bearish sentiment emerged in the bond market with almost all benchmark bonds advancing during the day’s session.
“It is likely that sentiment in fixed income market was driven by the surprise outcome of the United States Presidential elections. We expect this to drive further sell offs in tomorrow’s session. We believe the All Share Index is headed for another negative close in the session ahead amidst the overall weak investor appetite,” said Vetiva Capital analysts..
The announcement that Donald Trump has won the US elections on November 9 created and uncertainty in the international markets with fears that it will slow down global economic growth.
“Mr Trump’s election victory will cause widespread alarm across the global economy, given his loose grasp of economic policy, unabashed political populism and tendency for contradiction. We expect to see wild gyrations in bond, stock and currency markets until Mr Trump provides some clarity on his policy agenda. Given this volatility, it is unlikely that the Federal Reserve (the central bank) will raise interest rates in December, as we had previously expected,” said the Economists’ Robert Ward.
Currencies ranging from the Mexican Peso and the South-African rand witnessing sharp volatility as global markets were taken aback by Trump’s win.
But one of the few currencies that remained stable was the naira’s official rate but that is because the Central Bank of Nigeria (CBN) fixes it.
Morgan Stanley’s Adam Parker, wrote in an investment note that “Trump’s victory increases uncertainty in the market, an overhang that could last until after the newly-elected president is inaugurated on January 20.”
Many analysts are forecasting a potential rise in interest rates in the US following the Trump victory, which could lead to a higher cost of borrowing for Nigeria if the country goes ahead with its almost US$30 billion borrowing plan.
Razia Khan, Managing Director, Chief Economist, Africa Global Research, Standard Chartered Bank says that the “immediate implications for Nigeria’s economy and its markets are likely to be fairly limited.”
However, Razia Khan explains that Trump is likely to pursue trade protectionism and fiscal expansion, which could spark tightening of financial conditions globally.
“Should a steeper US yield curve result from greater fiscal expansion in the US, then investors will look for higher returns to compensate them for the risk of investing elsewhere. The bar is likely to be raised with African sovereigns held to a higher reform standard if they are to attract foreign investor inflows, both into domestic or external markets.”
Also Samir Gadio, Head of African Strategy, Standard Chartered Bank also expressed concern of a potential rise in interest rates. “A Fed rate hike in December is now also unlikely. Yet investors may be worried about potential fiscal expansion in the US. Should this fiscal risk eventually materialise, it could result in increased bond supply in the US and a steeper treasury curve, which in turn may possibly put some pressure on emerging- and frontier-market Eurobond valuations.”
A picture of what could happen to the cost of borrowing for Nigeria was revealed on 9 November when in reaction to Trump’s victory, the interest rate on US 10-year bonds rose by 15 basis points to 1.97 percent from 1.82 percent because of the fear that a Trump presidency could lead to larger budget deficits in the US.
“The 15 basis points rise in interest rate added at least $1.5 million per annum to Nigeria’s interest payments” said Charles Robertson, the chief economist at Renaissance Capital in response to questions.
Nigeria paid a total of $91.2 million to bondholders in 2015, servicing its three outstanding Eurobonds, $500 million each, maturing in 2018, 2021 and 2023.
But the immediate rise in bond yields will take servicing costs to $92.7 million; an increase of 1.6 percent, assuming the current rise is not reversed.
Nigeria’s currently spends an average of 35% of its revenues servicing its debts, which makes the country sensitive to any potential rise in interest rates.
Analysts have also warned that the global uncertainty brought about by Trump’s victory could raise the risk sensitivity of investors in search for higher yields to compensate them for investing outside the US who may look away from Nigeria if current currency woes persist.
Data from the National Bureau of Statistics (NBS) shows that Nigeria received US$430 million from the US in the third quarter of 2016. Also total remittances to the country from diaspora Nigerians in the US were $5.7 billion in 2015 according to data from the World Bank. An estimated 400,000 Nigerians leave in America.
During the presidential campaigns, Trump’s anti immigration rhetoric has made him quite unpopular with Nigerians. Many Nigerians preferred a win for Hillary Clinton and feared a Trump victory because of his threat against immigrants.
But Bismarck Rewane, an Economist and Chief Executive Officer, Financial Derivatives Company says, “The things said in the heat of campaigns are very different from reality. It is when you have the security briefing and the intelligence briefing. When the facts are put before you, then your options become fewer. It is these briefings that will determine what you do”
