Analysts: Foreign Investor Drought May Have Spared NGX of Global Systemic Risk

Kayode Tokede

Analysts have expressed that foreign investors’ exit from the Nigerian Exchange Limited (NGX) has spared the stock market from global systemic risk.

Amidst volatility in stock markets across advanced countries caused by risk assets sell-offs by investors, the Nigerian stock market is recording its best performance in two years with a 15.88per cent Year-till-Date (YtD) return as of yesterday.

A cursory look at the NGX Domestic and Foreign Portfolio Investment Report for November 2022 shows foreign inflows surpassed outflows on a Year-till-Date (YtD) basis.

Net foreign inflows amounted to N10.22billion. Meanwhile, domestic investors’ transactions totalled N1.82trillion YtD, occupying 83.33per cent of total transactions in the equities market showing positive domestic investor sentiment.

“The relative absence of foreign investors has taken off a measurable global risk off the market,” says Uwa Osadiaye, Senior Vice President, FBN Quest. “It is good for now, but it limits possible upside in their absence.”

Research Analyst at Atlas Securities Limited, Olaide Baanu notes it has had a significant impact on the local bourse, arguing that the market has been resilient in the face of aggressive monetary rate hikes that have led to investors seeking yield in dollar funds and fixed income instruments.

“But the absence of foreign investors has made the price of major stocks to be low compared to what we had 2-3 years ago. Their absence will still limit pricing of listed stocks despite impressive earnings reports and also impact the FX liquidity in the system,” Baanu added.

In July, the Financial Times reported that emerging markets were being hit by record streak of withdrawals by foreign investors.

Cross-border outflows hit $38billion between March and July, data from the Institute of International Finance showed, as the United States Federal reserve continued to raise rates and implement its quantitative tightening regime.

Sri Lanka, a frontier market, defaulted on its sovereign debts, while Bangladesh and Pakistan approached the International Monetary Fund for help. Ghana has also since applied for a bailout and recently announced a pause on all its Eurobond payments, constituting a default.

Despite yields on local treasury bonds issued by the Federal Government nearing 12 per cent, the stock market has performed relatively well with the Nigerian Exchange Limited’s (NGX) flagship All-Share Index (ASI) returning 15.88 per cent YtD, according to data from the Exchange.

The US S&P 500, the tech-heavy Nasdaq 100 and the Dow Jones Industrial Composite have each returned -19.82 per cent, -32.58 per cent, and -9.60 per cent YtD respectively, country economy revealed.

The Johannesburg Stock Exchange’s FTSE/JSE All-Share Index was at -0.91per cent YtD as of market close on December 20, 2022.

Looking forward, there remains reason to be optimistic about the Nigerian stock market. The African Exchanges Linkage Project (AELP) which seeks to pool liquidity across multiple exchanges in Africa opens up NGX to capital from a wider range of investors and potential issuances that could deepen the capital market.

Also, the recently approved rules for listing on the proposed NGX Technology Board would allow the exchange participate in the capital formation ongoing in the technology sector, where startups have raised more than $2billion between 2015 and 2022, according to a Disrupt Africa report.