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Dealers see further decline in months ahead

By Nkiruka Nnorom 

As the Nigerian economy approaches its first half year, 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 (FPIs), the main gauge of external sector confidence, has plummeted 41.57 percent in the first four months of 2021.

Figures on  Domestic and Foreign Portfolio Participation in Equity Trading for April 2021, published by the Nigerian Exchange (NGX)  Limited, showed that the foreign investors have reduced their stakes to N178.25 billion at end of April. This is against N305.05 billion invested in the corresponding period in 2020.

However, domestic investors raised their stake within the period by 46.11 percent to N658.21 billion as against N450.48 billion in the corresponding period of 2020 as a result of assets rotation by the locals from fixed income (FI) to equities following low yields in the FI market.

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Meanwhile, investment analysts have attributed the weak confidence by FPIs to concerns around foreign exchange (FX) 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 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 (NBS).

Explaining the FPI challenges, Tunde Abioye, Head, Equity Research, FBNQuest Merchant Bank, an arm of the First Bank of Nigeria, stated: “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 (Q4’20) was due to investors’ rotation out of fixed income securities as a result of the low yield environment.”

Domestic vs. foreign investors’ participation in equities

Financial Vanguard’s  analysis showed that while the foreign investors were down-sizing their investment, their local counterparts consistently raised their exposure.  

Distribution of foreign and domestic investors’ participation in equities showed that local investors accounted for  78.69 percent of the total transactions (N836.46bn) in the four months of the year, while the FPIs accounted for 21.31 percent.

FPI outflow during the four month period was N99.94 billion compared to N78.31 billion inflow.  

Further analysis showed a continuous decline in foreign participation on a month-on-month (MoM) basis.  

Financial Vanguard’s  findings show a huge decline of   50.74 percent in FPI in April 2021 to N20.02 billion from N40.64 billion in March.

The FPI commitment had fallen to N40.64 billion in March, 2021 from N62.07 billion in February indicating a 35.5 percent decline between February and March though it rose by 30.62 percent between February and January this year.

On the other hand, the domestic participation saw a fluctuation during the period under review. It declined by 29.8 percent MoM to N131.91 billion in April From N187.85 billion in March.   It had risen by 22.4 percent between February (N153.51bn) and March after falling by 17.0 percent between January (N184.94bn) and February, 2021.

Meanwhile, the institutional investors accounted for most of the domestic investors’ participation. The institutional investors staked N391.92 billion, representing 59.5 percent of the total domestic investors’ stake,   while the retail investors accounted for the remaining 40.5 percent or N265.29 billion within the four month period.

Analysts’ opinion

Financial analysts and investment dealers who spoke to  Financial Vanguard  were unanimous in their opinion that the dominance by domestic investors seemed to be reflective, in part, of the reduced participation from FPIs.

They stated that the current dominance of domestic investors would continue unabated in the near term if the absence of demand from foreign investors persists.

According to Lilian Olubi, CEO, EFG Hermes, Nigeria, a Lagos based stock dealing firm, “The previous two years saw a gradual but progressive exit of foreign portfolio investors from several frontier and emerging regions, from which Nigeria was not exempted. The dominance by domestic investors seemed to be reflective, in some part, of the reduced participation from FPIs coupled with increases in retail and proprietary activity.

“In the more recent past, we also witnessed increased participation from the Pension Fund Administrators (PFAs) owing to the decline in yields from the fixed income markets at the time.”

On  the outlook for the rest of the year, she said: “For the local PFAs, who are a major part of the local investor universe, a key variable as noted earlier, 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.

“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.”

In his own views, Tunde Abidoye, Head, Equity Research, FBNQuest, said that  market participation would likely be skewed towards local 

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