After FTSE Russell Downgrade, MSCI Moves to Reclassify Nigerian Stock Market

Kayode Tokede

Few weeks after FTSE Russell, a subsidiary of London Stock Exchange Group (LSEG) downgraded the Nigerian equities market, MSCI Nigeria Indexes has announced plans to reclassify the Nigerian market from frontier markets to standalone markets status in one step coinciding with the February 2024 index review.

Notwithstanding, the stock market added N121.5billion at the close of trade yesterday.

Also, the market capitalisation of overall listed stocks closed yesterday at N36.885 trillion, gaining 0.33 per cent or N121.5 billion from N36.764 trillion it opened for trading during the week under review.

Consequently, the NGX All-Share Index gained 221.17 basis points or 0.33 per cent to 67,136.58 basis points from 66,915.41 basis points it opened for trading this week.

FTSE Russell had in September 2023 downgraded the Nigerian market on the backdrop of Nigeria’s foreign exchange (FX) challenges, which is a new source of negative sentiment that is capable of triggering stocks sell off at the Exchange, most especially foreign investors.

Naira at the Investors & Exporters Foreign Exchange (I & E FX) has depreciated to N837.49/$ as of October 27, 2023 from N448.55/$ early this year, following the Central Bank of Nigeria (CBN) policies to unify the market.

MSCI in a report stated that it arrived at a conclusion following feedback received from market participants from its recent extended Consultation on a Market Reclassification Proposal for the MSCI Nigeria Indexes.

According to the American finance company, “Since March 2020, liquidity challenges in the Nigerian foreign exchange (FX) market have consistently affected the accessibility of its equity market, leading to ongoing capital repatriation concerns and a significant gap between the official and parallel exchange rates for the Nigerian Naira. This has caused international institutional investors to face recurring challenges with index replicability and investability of the MSCI Nigeria Indexes and other indexes they are part of.

“On June 22, 2023, MSCI announced that feedback from market participants obtained as part of the initial consultation conducted from June 2022 to June 2023 suggested that the limited accessibility of the Nigerian equity market would warrant the removal of the MSCI Nigeria Indexes from the MSCI Frontier Markets Indexes. However, MSCI extended the consultation period to September 29, 2023 to allow more time for the liquidity situation in the Nigerian FX market to stabilise following measures announced by the Central Bank of Nigeria on June 14, 2023.

“No significant improvements in FX liquidity were observed by market participants during the extended consultation period, confirming that the ease of capital inflows and outflows in the MSCI Nigeria Indexes is not to the standards expected from Frontier Markets. This has led to MSCI’s decision to reclassify the MSCI Nigeria Indexes.

“In order to facilitate index replicability at the time of the reclassification, MSCI will delete each Nigerian security from the MSCI Frontier Markets Indexes at a price that is effectively zero as of the close of February 29, 2024. More information on this and other details related to the implementation of the reclassification will be shared at a date closer to the reclassification.”

Capital market analysts over time expressed that the stock market is driven by domestic high network investors, and Pension Fund Administrators (PFAs) with less contribution from foreign investors, stressing that foreign exchange challenges play a lesser impact on bourse fundamentals.

Activities in the local bourse have been dominated by local investors, who accounted for 90.49 per cent Year-till-Date (YtD) market participants, while foreign investors accounted for 9.51 per cent YtD as of September 2023, as analysts have expressed that the report may not be a major concern for the local market as greater concerns are the local dynamics.

The Chief Executive Officer, Wyoming Capital and Partners, Mr. Tajudeen Olayinka, stated that the downgrade of NGX from frontier status to Standalone Markets was activated because of persistent liquidity challenges around the official foreign exchange market, which crippled the capacity of foreign portfolio investors to replicate benchmark changes.

According to him, the difficulty of making investment decisions that are urgently required can be very devastating for foreign institutional investors, and that suggests persistent accumulation of losses in the opportunity space.

He explained further that, “This will obviously discourage foreign portfolio investors from participating in Nigeria’s stock market and possibly dampen chances of liquidity recovery in the foreign exchange market in the immediate to near term.

“NGX All-Share Index (ASI) had experienced a pushback but recovered. I think government should continue to push hard on its foreign exchange reforms, in a way to address numerous challenges in the economy.

“There’s no doubt that the immediate past regime of President Muhammadu Buhari did so much damage to the economy.”