As Foreign Investors Shed Stakes in Nigeria’s Equities Market

CAPITAL MARKET

 As foreign portfolio investors continue to exit the Nigerian stock market in response to the prevailing challenges in the nation’s foreign exchange market and the spike in interest rates, Kayode Tokede, in this piece, says the emerging development has created ample opportunities for local investors to take strong position’s in the market  

In 2014, foreign investors dominated transactions on the Nigerian equities market, trading over 57.52 per cent of the total transactions, while domestic investors recorded  42.48per cent.  

The stock market’s total foreign and domestic participation was put at N2.68 trillion with N1.54 trillion contribution by foreign investors and N1.14 trillion in domestic investors’ participation. 

Foreign investors continued to dominate the equities market till 2015 but the trend changed in 2016 when the global stock market succumbed to some challenges which included falling stock markets, low commodity prices, risks of debt crises in developing countries and risks of deflation. 

Between 2016 and 2021, domestic investors made up of retail and institutional dominated the stock market, outpacing foreign investors. 

In 2022, a report by the Nigerian Exchange Group (NGX) revealed that domestic investors still dominate the stock market in its Year-till-Date performance, trading at over 83.19per cent, the highest so far in many years.  

As of October 2022, data by the NGX revealed that domestic investors’ portfolio participation in stock trading stood at 83.19per cent while foreign investors stood at 16.81 per cent.  

The report stated that both foreign and domestic investors’ portfolio participation increased to N2.08 trillion in 10 months as against N1.54 trillion in 10 months of 2021. 

The report disclosed that “Over 15 years, domestic transactions decreased by 58.80per cent from N3.556trillion in 2007 to N1.465trillion in 2021 while foreign transactions also decreased by 29.38per cent from N616billion to N435billion over the same period.

“Total domestic transactions accounted for about 77per cent of the total transactions carried out in 2021, while foreign transactions accounted for about 23per cent of the total transactions in the same period. The transaction data for 2022 shows that total domestic transactions were N1.729 trillion, while total foreign transactions were put at N349.59 billion.”

According to the CEO of Wyoming Capital and Partners, Mr Tajudeen Olayinka, “The domestic investors’ participation in the stock market has always been there, except that it is now proportionally higher than what it was in the past because of the absence of a significant number of foreign portfolio investors in the market. 

“That is one of the reasons for domestic investors’ dominance in the market. Another factor driving domestic investors’ dominance is the immediate benefit of buying stocks at extremely low prices, with some fundamentally sound stocks trading at a PE ratio of between 3 and 4. Buying stocks at today’s prices is like enjoying a free ride.”

He said the sole reason for the reduction in the stake of foreign portfolio investors in the domestic stock market is the volatility in the nation’s foreign exchange market, due largely to poor exchange rate management and dwindling foreign reserves.

Mixed Performance

This stock market so far this year has witnessed mixed performance amid a hike in the inflation rate and Monetary Policy Rate (MPR) of the Central Bank of Nigeria (CBN). 

In a desperate attempt to tame the growing inflation rate, the CBN had raised the MPR to 16.5 per cent from 11 per cent, and the world economy, according to the World Bank may be edging towards a global recession and a string of financial crises in emerging market and developing economies in 2023.

On the backdrop of impressive corporate earnings by some key companies and low yield in the fixed-income market, among other factors, the stock market segment of the NGX added N5.64 trillion in the first half (H1) of 2022.

Consequently, the NGX All-Share Index (ASI), which tracks the general market movement of all listed companies on the Exchange rose by 21.31 per cent or 9,101.15 basis points to close at 51,817.59 basis points in H1 2022, the highest performance in 14 years from 42,716.44 basis points it opened for trading.

The stock market in H1 2022 has maintained positive momentum as domestic investors outpace foreign investors in active trading amid spiking inflationary pressure and a challenging environment.

However, in July, the stock market started dropping as mostly high-network investors and foreign investors began to swing interest to fixed-income markets. 

The stock market in July 2022 plunged by N772 billion to N27.163 trillion, and in August, it dropped further by N283 billion.

The stock market between June and August 2022 witnessed a hike in the inflation rate (19.64 per cent as of July 2022), and a scarcity of foreign exchange that has led to the outflow of foreign investors.

Specifically, foreign investors’ inflow dropped from N16 billion in July to N12.43 billion in August. It dropped further to N9.59 billion in September 2022 and it dropped by N2.57 trillion in October 2022 as escalated global energy and commodity crises triggered massive foreign investors’ portfolio realignments.

Capital market analysts have expressed that the MPR increase, uncertainty towards the 2023 political elections, inflation rate and most especially the scarcity of foreign exchange have contributed to foreign investors’ exit.

Findings by THISDAY revealed that Naira at the Investors & Exporters (I & E) Foreign Exchange Market depreciated to N443.87/ Dollar as of November 28, 2022, from N412.99/ Dollar it closed in 2021.

Speaking with THISDAY, the Vice President of Highcap Securities, Mr. David Adnori attributed the foreign investors’ decline in the stock market to foreign exchange scarcity, stating that domestic investors have increased their holding in some listed fundamental stocks on the Exchange.

According to him, “Foreign investors are not investing again in Nigeria’s stock market, leading domestic investors to dominate the market. The decline in foreign investors’ confidence in the economy of Nigeria is also another key issue.

“If you consider the debt area, a lot of foreign investors usually invest in Nigeria’s public debt. As it is now, a lot of them have stayed away over looming fear that the government may not be able to service those debts.”

He noted that foreign investors are critical in the global stock market.

He explained, “With more foreign investors, you will have more foreign currencies in an economy. What is happening now is that our macro economy has been mismanaged by the debt crisis. The federal government needs new debts to service existing debts. It is a worrisome situation for foreign investors and it is contributing to their exit from the stock market.”

The Chief Operating Officer of Supra Commercial Trust Limited, Mr. Charles Fakrogha explained that “Recently, domestic institutional investors have dominated the stock market. I will not blame foreign investors for exiting the market as they are here for a short time. Once there is any negative report in the domestic stock market, the next thing is for foreign investors to move their portfolio to another market. 

“We all want foreign investors but at the same time, we have been canvassing retail/institutional investors on the market. With domestic investors surpassing foreign investors, it now shows they are aware of the need to develop their stock market.”

He noted that economic parameters must be favourable for domestic investors to invest in the stock market and drive liquidity.

“However, we have witnessed retail investors losing money during the global meltdown and it will be difficult to attract them to the market right now. High network and institutional investors always diversify their portfolio to another market and they are well poised to remain in the market.”

In addition, a stockbroker and capital market player, Mr Rotimi Fakayejo explained that the instability of the value of the naira is eroding foreign investors away from the stock market. 

He said, “Foreign investors are exposed to the stock market currently at its lowest rate. We might not see foreign investors returning until the last quarter of 2023.”

On what is driving domestic investors’ participation in the stock market, he said the market has witnessed price stability.

“The volatility we used to have before is no longer there. Most of the volatility seen before was caused by the foreign portfolio investors.”

Although market watchers might have expressed anxiety over the reduction in the stake of foreign investors in Nigeria’s equities market, a school of thought believes the development bodes well for the Nigerian economy as it allows local investors to avail themselves of the current impressive performance of the stock market.