…as analysts blame crisis on deterioration in macro-economic environment
There are indications that foreign investors’ confidence is yet to return even after two consecutive quarters of positive gross domestic product, GDP.
Foreign Portfolio Investors, the main gauge of external sector confidence, has plummeted 10.92 per cent in the first six months of 2021.
Data on domestic and Foreign Portfolio Participation in Equity Trading for July 2021, published by the Nigerian Exchange Limited, showed that the foreign investors have reduced their stake from N100.77billion at the end of June 2021, to N89.77billion invested in July 2021.
On a monthly basis, the Nigerian Exchange Limited polls trading figures from market operators on their domestic and foreign portfolio investment flows.
FPIs generally consist of securities and alternative foreign financial assets that are passively held by foreign investors. It involves an investor purchasing foreign financial assets, such as; equities, bonds, derivatives, mutual funds, and guaranteed investment certificates, among other instruments.
Some financial analysts and capital market operators said the decline in foreign investments could be attributed to the current condition of Nigeria’s economic and business space, as well as the security challenges, structure, and policy inconsistent bedevilling the country. “The Nigerian government, as well as business stakeholders, will need to take innovative steps to attract foreign investments (FPI and FDI) into the country in order to ensure speedy economic growth”.
A cursory look at the domestic and foreign portfolio investment report of the Nigerian Exchange, revealed that the performance of the current month, when compared to the performance in July 2020 (N103.21billion) decreased by 13.02 per cent In July 2021, the total value of transactions executed by Domestic Investors outperformed transactions executed by foreign investors by approximately 66 per cent.
Further analysis of the total transactions executed between the current and prior month of June 2021, also revealed that total domestic transactions decreased by 4.02 per cent from N77.35billion in June to N74.24billion in July 2021, while total foreign transactions also dropped by 33.69 per cent from N23.42billion (about $56.91million) to N15.53billion (about $37.75million) between June 2021 and July 2021.
The domestic transactions shows that retail Investors outperformed Institutional Investors by 2 per cent. A comparison of domestic transactions in the current and prior month (June 2021) revealed that retail transactions increased by 4.24 per cent from N36.06billion in June 2021 to N37.59billion in July 2021.
However, the institutional composition of the domestic market decreased by 11.24 per cent from N41.29billion in June 2021 to N36.65billion in July 2021.
However, over a fourteen-year period, domestic transactions decreased by 59.54 per cent from N3.556trillion in 2007 to N1.439trillion in 2020. whilst foreign transactions increased by 18.45 per cent from N616billion to N729billion over the same period.
Total domestic transactions accounted for about 74 per cent of the total transactions carried out in 2020, whilst foreign transactions accounted for about 26 per cent of the total transactions in the same period. The transaction data for 2021 shows that total foreign transactions are circa N237.49billion, whilst total domestic transactions are N886.70billion.
Investment analysts and capital market operators have attributed the weak confidence by FPIs to concerns around foreign exchange liquidity and the deterioration in the macro-environment. While foreign reserves have been on the decline, Nigeria’s economy was pushed into recession in the second quarter of 2020.
The analysts also pointed to the rising inflation as part of the challenges as Nigeria’s inflation rate rose sharply for nineteenth consecutive month up till April 2021, with moderate reversal in May at 18.12 percent, according to the inflation figures of the National Bureau of Statistics.
Reacting, analysts at InvestData Consulting Limited said: ‘‘We expect the mixed trend to continue on profit booking and repositioning in value and growth stocks on the strength of half-year earnings reports, while investors continue their portfolio reshuffling and studying of the corporate earnings ahead of the July inflation, and Q2 GDP data release, as well as results from interim dividend-paying banks.
“Also, investors are still observing the interplay of market forces following recent developments in the forex, FX market with the decision to stop the sale of US$ to Bureau De Change, BDC operators.”
Explaining the FPI challenges, Head, Equity Research, Tunde Abioye, FBNQuest Merchant Bank, an arm of the First Bank of Nigeria, said: “It’s more of a case of apathy by offshore investors rather than increased participation by domestic investors. “Concerns around FX liquidity and the deterioration in the macro-environment dampened the appetite of FPIs. The surge in domestic interest in equities towards the fourth quarter of 2020 was due to investors’ rotation out of fixed income securities as a result of the low yield environment.”
On the outlook for the rest of the year, Chief Executive Officer, Lilian Olubi, EFG Hermes, Nigeria, a Lagos based stock dealing firm, said: “For the local Pension Fund Administrators, PFAs who are a major part of the local investor universe, a key variable is the interest rate direction. Following the pick-up in recent times, we have already started noting the rotation out of equities and the ensuing herd action from the other segments. Our projection on the interest rate environment is for an upward, even if marginal trajectory”
She said, while interest rates are projected to remain on the upward trend, which could dissuade increased participation in equities, “we note the recent demutualisation announcement of the NGX, which is a very welcome development to market stakeholders.”
