August 31, 2020

More foreign investors leave as FPI flows crash by 228%


A map of Nigeria

•Experts link this to low confidence in the economy

By Peter Egwuatu

Foreign Portfolio Investment, FPI, inflow to the Nigerian economy has recorded massive decline in the first seven months of 2020 (January-July) amidst growing negative macroeconomic numbers.

FPI mirrors the confidence level of foreign investors in the economy. The investments are made in the stocks of leading companies in the Nigerian Stock Exchange, NSE.

Financial Vanguard investigations reveal that total FPI inflow, so far this year, stood at N143.65 billion while ouflow is N287.57 billion, yielding a negative flow of N143.92 billion. The negative flow is 228 per cent higher than the N43.87 billion recorded in the corresponding period of 2019.

Development economists and financial experts told Financial Vanguard that the trend would lead to further pressure on the Naira exchange rate as the exiting foreign investors pull their cash from the nation’s foreign reserves.

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Moreover, the withdrawal of the FPIs has put pressure on the nation’s stock market, forcing stock prices to crash with year-to-date losses to investors at -5.7 per cent as at last weekend.


Domestic Investments 

However, amidst the negative sentiments from the foreign investors, their domestic counterparts appear to be taking advantage of the situation filling the gaps created by the retreating foreign investors, by buying up the stocks now at lower prices.

Consequently, total domestic portfolio investment rose to N675.55 billion as against total N670.45 billion in the corresponding period of 2019.


Experts comment

Reacting to the latest development in the FPI, the Executive Vice Chairman of Highcap Securities Limited, Mr David Adonri, said: “The prospects of Nigeria’s economy do not give confidence to foreign investors hence their exit.

‘‘The figures above reflects decline of foreign investors’ confidence. Nigeria lacks the capacity to surmount current economic challenges and investors have seen the government running helter-skelter to obtain foreign loans that will not facilitate economic recovery faster.

“With exit of foreign investors, hard currency inflow will plummet causing further decline of Naira. Foreign investors detest anything that will devalue local currency. Nigeria is entering a deadly period of stagflation which may persist till 2021.’’

Also commenting, Prof. Uche Uwaleke, a financial economist and Professor of Capital Market at the Nasarawa State University, said: “Expectedly, prior to COVID-19 there was a remarkable level of foreign investor participation in the stock market.

‘‘Since the pandemic entered the country late February followed by the collapse in crude oil price, country risk heightened in Nigeria leading to lower ratings by global Rating Services such as Moody and Fitch and the exit of many foreign investors.

‘‘As a matter of fact, the signs of foreign investors’ exit began to manifest in December 2019 when domestic investors outperformed their foreign counterparts, a trend that continued into the following year.

“To see clearly what has happened pre-COVID and now, one needs to use the NSE Domestic and FPI monthly reports as a guide. An interesting development to note in these reports is that transactions on the NSE were dominated by foreign investors prior to the pandemic in Nigeria. Except for the months of May, June and December 2019 that witnessed the dominance of domestic investors, foreign investors led transactions throughout 2019.

‘‘But all that has changed since 2020 with domestic investors outperforming foreign investors in relation to transactions executed.

‘‘The NSE reports reveal that institutional investors such as PFAs (Pension Funds Administrators) have been driving trades in the domestic space except for the months of April and May which saw retail investors taking the upper hand.

“Unlike during the 2008 financial crisis when the exit of foreign investors also resulted in significant dampening of sentiments of domestic investors leading to a near-crash of the stock market, this time around domestic investors have risen to fill the void created by their exit. ‘‘I think COVID-19 presents an opportunity to detach the stock market from the apron-string of foreign investors by leveraging the country’s huge population to deepen the participation of domestic investors.”

Regarding the return of foreign investors, he said: “ I think the spread, intensity and duration of the pandemic will determine when the capital market will witness an influx of FPIs.

‘‘Factors that will encourage their return include unification of exchange rates as well as reducing the spate of insecurity in the country.”

Reacting as well, Victor Chiazor, an analyst and head of Research and Investment at FSL Securities and Investment Limited, said: “The rise in foreign portfolio outflow year-to-date (July 2020) was largely as a result of the huge outflows recorded in January (N46.50 billion), February (N52.32billion) and March 2020 (N87.73 billion) as investors sold down to exit their investments on the back of fears around the country’s readiness to deal with the COVID-19 pandemic and the drop in global oil price.”

“The sell-off saw share prices of blue chip companies drop to historic lows as panic selling set in and caused a major dip in share prices.

‘‘Impressively, domestic portfolio investments was higher than foreign portfolio investments year-to-date and we believe this would impact the market positively as these funds will not put pressure on our local market when compared to foreign portfolio investments which are hot monies that could easily be withdrawn from the market and the economy at large once there are signs of economic headwinds.’’


Way forward

Suggesting solutions to the predicament, Uwaleke stated: “The massive rise in foreign outflow suggests the need to diversify sources of earnings for foreign exchange, as some of these investors will be looking at exiting their capital off the shores of the country and, depending on the level of demand for foreign exchange, it may adversely put pressure on the Naira given the level of the country’s foreign reserves.”

Reacting on ways to shore up foreign earnings, he said: “A possible increase in foreign inflow will be supported by the combination of significant improvement in company earnings, continuous rise in our foreign reserves and visible stability in the foreign exchange market, where the Naira is traded at a market determined rate.

“Going into Q3’20 (third quarter 2020), we expect foreign outflows to continue to outweigh inflows especially given the COVID -19 distortions, uncertainties around the value of the Naira and the level of our foreign reserves, but expect a bit of an improvement in the fourth quarter of 2020 as oil prices improve and impacts positively on the country’s FX reserves.”

In their comments, analysts at InvestData Limited said: “ The high foreign outflow was as a result of socioeconomic uncertainty associated with the COVID-19 pandemic, negative macroeconomic indices and mismatch in policies that had failed to give direction.’’

On the effect to the market, they said “The effect is on market liquidity which will slowdown economic recovery.  As the market and the economy are moving in opposite direction, the prevailing low rates and yield have continued to push funds into stock market as way of hedging against inflation.

“The domestic investors increasing their stake in the market is good but the government and its economic managers should articulate policies that will support economic stability and the market. At the same time they should educate Nigerians on how to invest profitably in the market which will boost participation.

“The negative impact of the pandemic cannot be totally ruled out but Q3’20 performance would be better than Q2’20 as easing of lockdown continues across the globe.

‘‘With government and CBN intervention expected to start having positive effect on the system, on the whole, investors should have good entry and exit strategies at all time.”