*As FPIs withdrawals spike to N513bn in 9months
By Nkiruka Nnorom
The withdrawal of funds by foreign portfolio investors (FPIs) from the equities market will continue at the current pace in the remaining part of the year even as the campaign for the 2019 polls gathers momentum across Nigeria.
Stability or otherwise in the quantum of outflow, according to operators in the market, will be determined by the outcome of the forthcoming general election that will see either the presidential candidate of People’s Democratic Party (PDP), Alhaji Atiku Abubakar or the All Progressive Congress (APC) candidate, Muhammadu Buhari, taking the helm of affairs in the country, according to investors’ permutations.
Already, the ensuing sell-off by foreign investors has seen total withdrawals amounting to N513.49 billion leave the shores of the country in the nine month period to September 2018, according to information on portfolio investment from the Nigerian Stock Exchange, NSE. This amounts to 63 percent increase in total outflow compared to N315.04 billion withdrawn in the same period in 2017.
Although both total foreign investment inflow and outflow increased month-on-month in September relative to the previous month, outflow grew at a higher speed, rising 27.6 percent to N43.78 billion from N34.31 billion in August.
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Foreign inflow, on the other hand, rose by 10.6 percent to N40.54 billion from N36.7 billion in the previous month.
Trend will be sustained – Operators
Investment experts, who attributed the sell-offs to political risks, said that the trend would be sustained throughout the election period.
Charles Fakrogha, a stockbroker at Foresight Securities, fingered political and economic uncertainty in the country for the incident, saying: “Companies are operating in a very difficult environment, the economy is not moving, nothing is working at all. The reason is just that foreign investors are not too sure what is going to happen in the country in the next few months.”
Going forward, he said, “We will see more and more foreign investment going out of the country because with the on-going campaign, there is going to be a lot of political shenanigan that will further heighten the already heated polity.”
He observed that foreign investors would prefer to invest in markets where they have future. So, I see more of the outflows in the coming months, he said.
Adding his voice, Tola Odukya, CEO, FSL Asset Management, said: “At least from now till the end of the election period, the trend will be sustained. Yes, there may be inflows, but the outflows will continue to outweigh the inflows. Subsequently, depending on what the outcome of the election is, you may see some stability in the sense that people sitting on the sideline waiting to see whether policies will be maintained or reversed will be begin take position.”
Highlighting the reason for the fund withdrawals by foreign investors, Odukoya attributed it to political risk given that the country is in an election year which is just about 90 days from now. “Also, if you look at the trend, naturally we have always had the trend where foreign portfolio investors are quite apprehensive about the political risk, the outcome and potential risks associated with election in Nigeria being a frontier country where institutions are not very strong and could be affected by change in government.
“Policy reversal are very possible and of course, this also heightens the exchange rate risk. Yes, the currency may be weaker, which is positive for the foreign portfolio investors, but the point is that getting the money out of the system could be quite challenging. These factors have contributed to the increase in foreign portfolio outflow,” Odukoya said.
Continued sell-off ‘ll be guided by covariance of election risks, US interest rate- United Capital
United Capital Plc, an investment banking firm, said though there was a great flow in 2017 and quarter one (Q1’18), but however, due to a strengthening US dollar, higher US interest rates, and treasury yields, naira assets began to experience marked pressure by Q2’18.
The firm said that despite the political concerns, the risk-off sentiment may be exaggerated given that economic fundamentals in Nigeria remain broadly supportive. Besides, Nigeria remains well armed to buffer any external shocks given its sizeable dollar reserves, it added.
In a report titled ‘How intense will the foreign bears be in H2-18?’, the investment banking firm said: “On one hand, the case for foreign bears would be tied to how the covariance of election risks and rising US interest rates would guide the intensity of offshore sell-off. On the other, Nigerian bonds offer attractive valuations compared to developed markets. Moreover, political risks are also brewing – if not higher – in developed countries, amid ripples from U.S.-China trade tensions. Besides, even though the Fed is raising rates, the market is already expecting it, so there is limited scope for a surprise.
“That said, the odds of Nigeria’s re-inclusion into the JP Morgan EM index remains in question, considering the recent gains recorded in the currency market. In analysing her re-inclusion prospects, the big question remains whether the I & E FX Window is enough, or whether a floating FX rate would seal the deal. Overall, we expect a continued flight from equity to fixed income investments as coping strategies for higher volatility in the financial market.”