…Down 30.5% year-on-year
…Analysts hinge recovery on policy

By Nkiruka Nnorom

FOLLOWING the massive fall in the level of commitment by foreign investors in equities, investment analysts have predicted that foreign portfolio investment, FPI, may continue to go down in the coming year except there are deliberate attempts by the federal government to initiate pro-stock market policies.

Foreign investment into Nigeria falls by 48% in Q3’18

According to them, policies such as the deregulation of the downstream oil and gas sector and further devaluation of the naira must be in place to spur investors interest in equities, otherwise FPIs into equities would remain largely depressed despite the massive investment inflows into emerging markets expected in 2020 in the wake of lower rates in the advanced markets.

Available statistics showed that post 2016 recession, FPI in equities worsened in 2019, falling below its two-year position.

Data obtained by Financial Vanguard showed that the figure fell by 30.5 percent year-on-year (y/y)  to N688.91 billion in the nine month period ended September 30, 2019 as against N991.19 billion in the preceding period in 2018.

The figure also represents 12.1 percent decline compared to its position in 2017 when foreign investors staked N783.34 billion in the market. Though there was a decline in both foreign portfolio inflow and outflow year-on-year to September 2019, but inflow fell at greater rate during the period.

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However, their level of participation improved in the third quarter 2019 (Q3’19), rising by five percent to N216.13 billion from N205.91 billion in the second quarter 2019 (Q2’19).

The FPI’s participation also remained stable month-on-month, rising, though marginally, by nine percent to N103.73 billion in October from N94.45 billion in September 2019.

Wahab Mustapha, Research Analyst at Cordros Capital, a Lagos-based investment banking firm, said the decline is not surprising, arguing that there has been month-on-month decline since early last year.

“The last time we saw month-on-month growth in equities was in February 2018. Since then, performance for equities has been lagging behind and that is because the federal government has not been able to implement most of the policies that foreign portfolio investors would like to see.

“You know there is this story about Nigerian equities being cheap; if you check the price-earning (PE) ratio of Nigeria equities versus comparable countries such as Egypt, Kenya and South Africa, you will realise that Nigerian stock market is very cheap compared to those markets. If you check valuations compared to where we are coming from, there should not be a question of people buying equities or not.

“They should start buying, but that drive to do equity investment is not there. People are not excited about Nigeria’s market because the policy direction and some market friendly reforms that foreign portfolio investors would like to see, that would rejig the market, are not there and that’s why you see that negative movement as far as FPI is concerned to equities,” he explained.

Mustapha said that the quarter-on-quarter increase was due to the recent Central Bank of Nigeria (CBN) policy that barred local investors and non-bank individuals from participating in Open Market Operations (OMO) auctions.

“So, there was a lot of liquidity in the system that was looking for investment vehicles because Treasury Bills (TBs) was becoming less attractive while dividend yield at that same period was attractive.

“Dividend yield was getting close to 16 percent when you compare it to TB yields of five to six percent. So, it made sense for people to look at equities as the next investment vehicle when fixed income instrument was not attractive any more. That was why you see that small uptick on quarter-on-quarter basis,” he said.

Outlook

Though he said that lower rates in the advanced market is expected to trigger higher portfolio inflow into Nigeria and other emerging markets, he added that Nigeria is not positioned to benefit from the expected inflow.

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He stated: “FPI into Nigeria’s market is still largely going to be depressed because looking at the global market, monetary environment in the globe is more expansionary rather than the hawkishness we have seen. So, when rates are lower in the advanced markets, what you expect is that portfolios inflows into emerging countries like Nigeria and Egypt would increase.

“Policy-wise, we do not think that Nigeria is well positioned to benefit from that massive inflow we would see from foreign investors. We do not see some of the policy decisions that would renew FPI interest in our market happening.

“Deregulation of the downstream sector of the oil and gas sector is supposed to happen in 2020, but we do not see that happening. We think that the Muhammadu Buhari’s government is going to ensure that it keeps PMS price at N145.00 considering the impact a jerking up will have on the already pressured consumer wallet.”

He said that though foreign investors would want the Naira to be devalued the federal government would prefer to keep the exchange rate at N360 per dollar.

“It is all clear that the only reason you see Naira at N360 is the invisible hand of CBN that is actually holding naira at that level. We think that the naira should be devalued to about N415.00 if it was fairly valued and foreign investors understand this.

“So, they would want Nigeria to allow naira exchange to the dollar to be devalued with a little percentage. Is the federal government going to implement that kind of policy? I think the answer is no.

Buhari’s government is bent on keeping naira at N360 per dollar. These are the kind of policies foreign investors would like to see,” he stressed.

Also speaking, Victor Chiazor, Research Analyst at FSL Securities, said: “I don’t think anything is going to change because if you look at the environment and the performance of the market, it shows that we have little or no activities happening compare to what has been happening in the previous quarter. So, it shows that the interest of foreign investors is not significant enough to drive activities. They are more or less still sitting on the sideline and are still playing in the fixed income space.

“I think what exactly would change the dynamics of 2020 would be the economy at large. If the budget cycle improves, that would help to spur activities in the economy. If the economy begins to do well, companies will begin to do well and once that happens, investors will begin to look at the market.

“Secondly, we know a lot of people have an eye on our reserve. So, the higher our reserve, the more comfortable most of the foreign investors are, when they want to exit the market. If we continue to have oil price at decent level – oil price that would be well above $60 per barrel – that will be a plus.

If our reserve goes up and we have revenue to fund the budget rather than going about borrowing, those are positive signs that FPI and investing public, generally, are looking out for. Once all these are in place, we might have a better 2020 going forward.”

Ayodeji Ebo, Managing Director, Afrinvest Securities, posited that there should be deliberate policies to bring in private investor to grow this economy.

According to him, some of the things that would give major signal to foreign investors include the deregulation of the oil and gas sector as well as stabilising the power sector.

Uncertainty over foreign investment inflow in 2020

He said that beyond early passage of the 2020 budget, foreign investors would be interested in how the budget would be funded. “It is not about passing the budget, but will there be enough revenue to fund the capital expenditure and drive implementation of the budget,” he queried.

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