Offshore investors have further reduced their participation in the local equities market amid the global shift toward tighter monetary policy stances to contain inflationary pressures.
This has largely led to a strengthening of the U.S. dollar and rising long-term bond yields, inducing the widened sovereign bond spreads, capital flow reversals and currency pressures.
Per the Ghana Stock Exchange (GSE) report to fund managers, cumulatively, activities of foreign investors accounted for 61% of equity market trades as of the end of May 2022 – declining from 74% in April 2022 compared to 71% for May in 2021.
For context, foreign investors contributed 87% of equity market trades in January 2022.
The shift in market participation in May resulted in the local bourse recording an all-time-high for a month, as shares worth GHC607.31million were traded.
Offshore investors accounted for GHC1.24billion of the trades, while local investors engaged in trades valued at GHC787.94million. The data further revealed that pension funds contributed to 4 percent of equity trades cumulatively as of May 2022, compared to 7% for the same period in 2021.
Data from the Central Securities Depository (CSD) indicate that foreign investors hold approximately GHC14.95billion of the GSE’s GHC62.28billion market capitalisation; a decline from GHC16.71billion in April 2022.
Fed rate hike
The US central bank – the Federal Reserve – on Wednesday raised its benchmark short-term rate by 0.75 percentage points, the highest increase since 1994, and signalled that more rate hikes will come.
This has rippling effects on global investments, since as rates rise in the United States safer American government and corporate bonds start looking more attractive to global investors.
In effect, investors pull their funds out of the emerging market and developing economies. Those shifts drive up the U.S. dollar and push down currencies in the developing world.
Governor of the Bank of Ghana, Dr. Ernest Addison, said at the last monetary policy committee press briefing that the shift toward less accommodative monetary policy stances to contain inflationary pressures has resulted in tighter global financing conditions with negative spill-over effects on emerging markets and frontier economies.
“The strengthening of the U.S. dollar and rising long-term bond yields have led to widened sovereign bond spreads, capital flow reversals and currency pressures, especially for Emerging Market and Developing Economies with weaker fundamentals and fewer buffers,” he said.
To defend the sinking currency, the central bank is most likely to raise the policy rate in the upcoming MPC meeting.
The cascading effect can be damaging to the economy, as it slows growth, wipes out jobs and squeezes business borrowers. This will force the indebted government to spend more on interest payments, amid increasing yields.
Bonds market
On the reverse, in the local bond market – the Ghana Fixed Income Market (GFIM) – foreign investors have increased their position to GHC31.75billion from a lower position of GHC28.65billion at the end of 2022 first quarter.
The bond market sustained its impressive performance, recording a volume traded of 17.31 billion, valued at GHC17.11billion, which represents 27.50% and 20.81% respectively, more than the trades in the same period last year.
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