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Foreign portfolio investment in equities shrinks by 34%

Investment experts divided on outlook

By Nkiruka Nnorom

As the bearish sentiment in the equities market continues to hold sway, foreign investors have reduced their stake in the market by 34.4 percent to N594.5 billion, from N906.9 billion in the last eight months.

This is even as investment experts express divided opinion on the possibility of a rebound in foreign investors’ interest in the market. Some believed that the market valuations are right and might spike interest in the local bourse, while others argued that lack of market catalyst has inspired little confidence in foreign investors.

Meanwhile,  Financial Vanguard  analysis of FPIs in the equities market showed consistent rise in the volume of outflow in contrast to inflow.

P&ID, Nigeria, China

A breakdown of foreign investors participation showed that total withdrawals stood at N316.19 billion, 12 percent higher than N278.27 billion inflow within the eight month period.

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For the first quarter 2019, Q1’19, total outflow stood at N124.25 billion, 21.4 percent higher than N97.63 billion inflow.

The trend followed the same pattern in half year to June 30, 2019 as total FPI outflow rose to N257.82 billion compared to N214.97 billion inflow.

Experts comment

Commenting on the situation, Mustapha Wahab, Research analyst at Cordros Capital, said that the trend might sustained following trade dispute between USA and China which has led to sustained investors’ apprehension towards the market as well as lack of catalyst to move the market forward.

He stated: “Two key things are cardinal for us, one is the trade war-induced uncertainties across the global environment. Clearly, the impact of that largely contributed to the sustained investors’ apprehension towards most emerging and frontier economies. Thus, a

unresolved trade dispute between the US and China should leave FPI’s cold-feet into Nigeria intact.

“Secondly, despite the attractive valuation story in Nigeria’s equities market, the uninspiring growth story, weak corporate earnings and lack of market catalyst has inspired little confidence. Thus, bias is for capital flight to continue in the next few months.”

He, however, stated that more market friendly policies would reignite foreign investors’ interest in the market, saying: “An institution of a market reflective PMS price, should help bolster FGN revenue, and by extension, drive aggressive budget implementation, especially capital expenditure (CAPEX) which has historically underperformed. The chain effect of that, could potentially drive economic growth to about three percent levels. In that case, FPIs will naturally see Nigeria as a sound investment destination.”

In the same vein, analysts at Cowry Asset Management explained that foreign portfolio investors (FPIs) had diverted their cash away from equities market in first half of the year due to perceived view of less commitment by the current administration to implement market-friendly policies as well as the heightened insecurity in the northern part of Nigeria, which has spread to the southern and eastern regions of the country, but said that FPIs and domestic institutional investors are expected to have renewed interest in equities market, given the likely indication that the US Fed would lower its monetary rate to support its country’s economic growth going forward.

“We expect that with the prospect of softened interest rates, especially in advanced economies as they implement accommodative monetary policies to support economic growth, we expect increase foreign portfolio inflows into frontier economies such as Nigeria. This should boost Nigeria’s external buffers and further enhance exchange rate stability.

In the same vein, the current low fixed income yields environment in Nigeria, which has moderated towards lower double digit should make investors see the need to gravitate towards patronizing the local equities market.

“Many companies’ share prices are way undervalued and their dividend yields have become incredibly high. This portends good entry-price opportunity for investors to make a “finger-licking” gains in the near term.

“We may see the falling equity prices tending towards a possible replay of the bearish market in 2016/2017, when the local bourse came under severe bearish attack and profit-making businesses traded below their equity values. Only those investors who exercised enough patience partook in the bullish market run, which eventually surfaced in 2017 when the stock market returned a whopping gain of 42.3 percent to investors,” they said.

Also speaking, Mallam Garba Kurfi, Managing Director/CEO, APT Secuirities and Investment, said that valuations are attractive enougn to lure foreign investors back to the market.

“I see the foreign investors coming back if the third uqrater earnings are released. Guranty Trust Bank has relaesed its Q3 report with marginal increase in profit, but when you look at the share price of GTB, it is cheaper compared to its price this same time last year.

“When stock prices are low, foreign investors will take advantage of the low prices to enter the market. I see more foreign investors coming because share prices have fallen below their fair value. Guinness Nigeria Plc, for instance, has not traded at N27 per share in the last 10 years. Nigerian Breweries (NB) has not traded at N47 in the last 10 years. Now, GTB is trading at over N26, Zenith Bank is trading at N17, while First Bank trades at N5 per share. Access Bank post merger with Dianond Bank is trading at N7.00. All these show that the prices are right.

“Once prices are low, foreign investors do their analysis and come in. Local investors don’t do analysis, they only follow the market; if the market starts going up, you will see them putting buy mandate. If the market goes down, they will disappear as well,” he said.

Continuing, he said: “For the first time in many years, we have the president present the budget before December and they are working on it. If you remember, it was only during the military regime that we started implementing the budget by January.

“Also, the president ahs appointed economic advisers whose integrity and exposure are not in doubt. It is just like getting the right people at the right time. I beileve that this is also going to help the market, and attract foreign investors.

“We are not envisaging that the price of crude oil will go down. The budget benchmark is N67 and it is currently trading at N60 per barrel. So, if the price of crude oil is sustained at N60 per barrel, that will be enough to sustain our reserve and it will attract more foreign investors at that level.”

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