People & Money

Nigeria’s Poor Forex Policy Puts Equities Market in Negative Stability

Market analysts at CSL Stockbrokers predict there will be no significant change in the direction of the Nigeria equities market due to continuing risk aversion on the part of  domestic and the challenges foreign portfolio investors continue to face despite recent tinkering with the country’s foreign exchange policy by the Central Bank of Nigeria.

In a report on domestic and foreign portfolio investment in Nigerian Exchange (NGX) for June from CSL Stockbrokers, total value traded grew 3.7% month on month to N100.8 billion or $244.9 million in June from N97.2 billion or $236.3 million in May 2021.

Investment from domestic investors, driven by  retail investors,  grew by only 0.6% to N77.4 billion or $188.0 million in June 2021. Retail investors in June  2021 staked N36.1 billion or $87.6 million in the Nigerian equities market, 9.5% above May 2021 level while institutional investors put  N41.3 billion or $100.3 million in the market in the same period, 6.1% less than the figure for May.

Also Read: Nigeria’s Dollar Trap: How it Impacts Foreign Investors and Nigerian Jobs

On the other hand, foreign investor participation in the local bourse increased, up 15.4% month on month to N23.4 billion or $56.9 million from N20.3 billion or $49.3 million.

Domestic investors had  maintained dominance of the local bourse as their share of total transactions in June was 76.8% (YTD; 78.5%) while that of foreign investors was 23.2% (YTD; 21.5%). Despite a dip in investment by institutional investors, they still dominated activities, with transactions worth N41.3 billion or $100.3 million while retail investors executed transactions worth N36.1 billion or $87.6 million.

The  CSL Stockbrokers report showed that foreign inflows grew to N13.9 billion in June 2021 compared with foreign outflows of N9.5 billion or $23.1 million in the same period, resulting in a net inflow of N4.4 billion (US$10.7m) as against a net inflow of N5.7 billion (US$13.9m) in May 2021.

“The higher outflows relative to inflows may indicate that foreign investors have been able to move some of their funds out of the market”.

In its projection for the market, analysts at CSL Stockbrokers expect no significant change in the direction of the equities market.

First, domestic investors who now account for about 70% of transactions on the Nigerian bourse are highly risk-averse; they will continue to find risk-free naira assets, principally treasury bills, more attractive, thus moderating the allocation of funds to equities investment.

Also Read: Foreign Portfolio Investments in Nigeria Climb to N38.98 billion

Secondly, subsisting  constraints on accessing foreign exchange by investors in the Nigerian bourse who wish to repatriate their capital or profits will continue to dampen foreign investors’ appetite for Nigerian stocks despite the cheap valuations of many equities.

Foreign investors used to account for about 70% of investment in the Nigerian stock exchange and was an important component of Nigeria’s foreign currency reserves. The Central Bank of Nigeria’s policy of restricting access to foreign exchange as a means of preventing a decisive devaluation of the naira has staunched this important source foreign exchange. Despite a persistent current account deficit, South Africa largely has avoided Nigeria’s growth-depleting foreign exchange crisis because it has managed to maintain a financial account surplus which relies largely on portfolio inflows.

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