After a turbulent period of foreign investor outflows, the equity market has signalled a tentative recovery, luring back international traders with renewed optimism.

The latest data reveal a substantial 62 percent year-on-year decline in net foreign selling on the Ghana Stock Exchange (GSE), dropping from GH¢26million in Q1 2023 to GH¢million this quarter.

This positive shift follows a challenging stretch when the GSE witnessed sustained net foreign outflows amid economic headwinds. However, analysts now point to government’s fiscal discipline and economic reform agenda as catalysts restoring confidence among global investors.

“The commitment to prudent policies seems to be resonating,” said Databank in its quarterly market review. “There’s cautious optimism that the reforms will bear fruit.”

Diving into specifics, the financial sector stands out as a turnaround story. Previously battered by aggressive selling, financial stocks have seen the ask/bid ratio – a key gauge of market sentiment – plummet from a lofty 24.41x in Q1 2023 to a more balanced 1.42x this quarter. This indicates buyers and sellers are nearing equilibrium after an extended period of imbalance.

However, the narrative is not uniformly positive across sectors. Fast-moving consumer goods (FMCG) and oil marketing companies, which rallied last quarter, are now experiencing profit-taking as the ask/bid ratios tilt toward net selling.

“This profit-taking is natural after recent gains. But the broader reduced foreign selling trend remains encouraging,” Databank noted.

The market saw a mixed performance quarterly, with 14 stocks registering price movement – 9 up, 5 down – while 23 remained unchanged. This consolidation phase follows the previous quarter’s volatility.

Foreign investors accounted for 58 percent of total equity trades from January to April 2024, up from 50 percent in 2023 – highlighting their growing participation as confidence improves. Conversely, pension funds’ share fell to 10 percent from 19 percent; signalling a strategy adjustment among local institutions.

Key equity indices reflected the market’s nuanced narrative over the past four months. The GSE Composite Index gained 7.51 percent while the GSE Financial Stocks Index surged 17.79 percent – underscoring the financial sector’s outperformance amid the broader upswing in investor sentiment.

As policymakers double down on reforms, Ghana’s equity markets are at an inflection point. A return of foreign capital, if sustained, could catalyse a virtuous cycle by inspiring greater local investor confidence. However, any reform backsliding risks derailing the fragile recovery. All eyes are on the economic mandarins to solidify gains.

Positive investment outlook for banking stocks

Banking stocks are expected to remain a positive investment option despite the recent Bank of Ghana (BoG) Cash Reserve Ratio (CRR) requirement directive, which is expected to dampen earnings in the short-term marginally.

Analysts believe high interest rates – in the region of 20 to 29 percent – and improved efficiency will continue to support overall earnings growth in the banking sector.

The positive outlook comes on the heels of the new, tiered CRR rule announced by the central bank last month. It requires banks to hold a higher percentage of their deposits as reserves, which could limit their ability to invest in government securities – especially in Treasury bills – as about 95 percent of banks shore-up GH¢14billion to GH¢19billion in reserves.

However, analysts believe this short-term headwind will be outweighed by long-term benefits of the CRR rule. The move is aimed at incentivising banks to lend more, which could boost economic growth and further increase bank profits.

“We expect lower impairment provisioning and improved efficiency to support banks’ profitability,” analysts at Databank Research said in their Strategy Report for the first quarter (Q1).

“In view of the recent adjustment to CRR for banks, we foresee a mild effect on earnings in the medium- to long-term. However, we expect the loan-to-deposit effect on CRR to augur well for banks’ core business, leading to an aggressive but cautious expansion of loan books that will contribute to earnings growth,” they added in the report dubbed ‘Positioning for Sustainable Growth’.