Devaluation: A buying opportunity or a warning?

Forex
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Thursday, November 26, 2014 1:14 PM / Research

 

The recent devaluation has drawn attention to the (un)known challenges investors are likely to face. Ordinarily, investors are bound to suffer losses through devaluation in both currency and through decline in the stock market. Though, it is our thinking that the recent devaluation brings about not only problems but opportunities to smart speculators who have anticipated this.

Considering the recent downtrend of about 20.00%, we would consider the recent devaluation to be a buying opportunity for value investors, who can see beyond the picture. The rationale for this would be highlighted in the subsequent paragraphs.

With the recent position of MPC, CBN has been able to show clearly the direction the economy and the entire financial industry would be treading. This actually negates the previous position of the CBN governor on benchmark rate at 12% till after general election in 2015.

In a simple term, CBN has only moved to reduce pressure on the Naira for a while with a bold step to frustrate unproductive dollar lending within the economy while simultaneously mobbed up the excess liquidity in the system as a way of fighting against anticipated inflationary growth.

As regards to stock market, those who have already invested may hold position as we envisage a new wave of rallies on the bourse soon. Those foreign investors who sold-down recently may see the devaluation as an opportunity to buy/accumulate more with little dollar irrespective of uncertainties built around forthcoming elections, which market had already discounted in the recent bear run.

The ongoing unexpected northward trend in the stock market with corresponding growth in volume is another indication of likely improvement in investors' appetite towards investment in equities.

To FG and CBN, we want to believe that this decision on devaluation of Naira has not been taken without considering the huge external debts (in dollar) of the nation, which means cost of debt has gone up and governments would need more funds in servicing the debts in the face of falling revenue.

 


Our concerns are that, if this is not properly managed, this may force structural adjustments on the economy by default. While all this is going on, government’s plan(s) on how it intends to restore confidence in the Naira remains relatively unknown even as the nation appears to be making fiscal side moves to battle the drivers of dollar demands.
 

It is the hope by stakeholders that, the Government of Nigeria (GON) and the Central Bank (CBN), follows through on the devaluation of the naira by eliminating the dual-market approach and taking commensurate action on the fiscal side by using taxes to suppress the demand funding non-essentials.
 

At the moment, the parallel market seems to present a more realistic pricing of the Naira.
 

In closing, it is worthwhile to resound that investors should temper fear with caution, taking a contrarian view that sees this developments as an opportunity to increase your patronage towards blue chips and value stocks. The market at the current level is more attractive to foreign investors who are ready to take advantage of recent plunge in value of Naira, before it settles to a more predictable floor around N200 level.

 

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