Operators Identify Factors Discouraging Foreign Investors from Stock Market

By Goddy Egene

Foreign investors’ low patronage of the Nigerian stock market has been attributed to scarcity of foreign exchange (FX) as well as concerns about the coronavirus pandemic.

Transactions in the local bourse used to be dominated by foreign investors until 2019, when the domestic investors took over the lead.

Market analysts and operators told THISDAY that lack of access to FX by foreign investors to repatriate their funds after selling their shares or receiving their dividends, has made them to stay away from the market. Hence, the market is currently being dominated by domestic investors, especially institutional ones who exited the fixed income market when yields hit low levels last year.

A breakdown of the transactions on the Nigerian Stock Exchange (NSE) between domestic and foreign investors showed that in 2018 foreign investors accounted for N1.219 trillion while domestic traded N1.183 trillion. In 2019 domestic took over, transacting N985 billion, while foreign investors staked N943 billion. The gap widened further in 2020 as domestic investors accounted for N1.439 trillion, while foreign investors traded N729 billion.

A frontline investment banker and founding partner of Cardinalstone Partners Limited, Mohammed Garuba, said the primary reason why foreign investor are not dominant is lack of liquidity in the FX market. According to him, instead of thinking of returning, more foreign investors are selling.

Garuba explained that even though stocks prices have been attracting investors around the world, they continue to exit Nigeria.

“Foreign investors have started going back to Ghana and other countries but they have started coming to Nigeria because of the FX illiquidity. So most foreign investors are scared to come because it is very difficult for them to exit,” he said.

In his comments, another leading operator and Chief Executive Officer of Dunn Loren Merrified (DLM), Mr. Sonnie Ayere, said foreign investors apathy to Nigerian securities declined amid foreign exchange control and other macroeconomic risks, which he explained had made Nigeria less attractive to foreign investors.

“In addition, the widespread between exchange rates at the parallel market and the I&E window also suggests a mispricing of the currency, which makes foreign investors reluctant to invest in Nigeria financial assets,” he said.

He explained that the naira had experienced a lot of volatility, due to weak FX earnings, persistent concerns about the impact of the coronavirus, among others.

The pressure on the naira, he added, exacerbated after crude oil prices fell below $30 per barrel at the international oil market.

According to Ayere, in response to Nigeria’s weakening external buffers, the CBN in March 2020 repriced the naira exchange rate at the official window to N360/$1 from N307/$1 representing a 15 per ent devaluation and therefore narrowing the spread between the official rate and the rates in other FX market segments.

“Elsewhere, exchange rate at the Investors and Exporters (I&E) foreign exchange window was also moved, from N360/$1 to N380/$1and Bureau de Change (BDC) from N358/$1 to N378/$1.

“While the CBN explained that the new exchange rate was not a devaluation but an adjustment of price to establish a convergence that will eliminate the multiple exchange rate policy with a uniform exchange rate for official transactions, bureau de change (BDC) operators and importers and exporters of goods and services. In July 2020, the currency’s official value was further reduced by 5.5 per cent to N380/$1.

“Regardless, the naira is still under pressure at the parallel market, currently trading around N470/$1. This, in addition to subdued Diaspora remittances growth has forced foreign investors in both fixed income and equity markets to reprice naira risks amid lower oil prices and COVID-19 concerns,” he explained.

The investment banker said most part of first quarter (Q1) and second quarter (Q2) 2020, the CBN was absent at the I&E window for its weekly large-scale FX intervention sales to improve FX flows, while it is also held off supply of FX at the BDC segment.

Apart from FX liquidity issues, the DLM CEO said the reaction of foreign investors to the COVID-19 pandemic also led to a decline in their participation in the market.

He explained that the role of investors’ risk appetite could be particularly relevant in a time of sudden large shocks and when fundamental drivers suffer from higher uncertainty, adding that the market initially reacted to news of the pandemic with the benchmark index Nigerian Stock Exchange (NSE) All-Share Index (ASI) declining by 21 per cent in the Q1 of 2020.

“However, the market immediately regained a majority of this lost value, rising by 15 per cent in Q2 of 2020, a surge that led the index back to where it stood in the pre-Covid era.

“The market gains in most of 2020 pandemic era could be tied to investors looking forward to a post recovery. While about 69 per cent of the stock market investors is composed of institutional investors, such as Pension Fund Administrators, investment advisors and fund managers, others include individual investors amongst others,” Ayere said.