Despite sustained capital flows to the Nigerian economy, the equity market continue to bleed over policy uncertainty and growth concerns as investors remain pessimistic about a possible revival of the domestic bourse.
Figures sourced from the Nigerian Stock Exchange (NSE) showed foreign portfolio deficit, which is foreign portfolio inflow less outflow, aggravated 12 percent to N42.84 billion in the first half of 2019, from N38.41 billion in similar period last year. This is the lowest in the last five years.
Foreign portfolio outflow includes sales transactions or liquidation of equity portfolio investments through the stock market while inflow includes purchase transactions on the Nigerian exchange.
“Foreign investors who are major players are not encouraged to take risk in equities” said Taiwo Ologbon-Ori, Head of Research at Cashcraft Capital. “They saw no reason to take risk when they can get 12 to 14 percent return on fixed income securities without exposure”, Ologbon-Ori added.
The activities of foreign investors on the domestic bourse has waned as the ratio of foreign transactions to total transactions slowed to 46 percent in the first six months of 2019, from 50 percent a year before.
Foreign portfolio inflows to NSE slumped to N214.97 billion mid-year 2019, its lowest in two years, compared to N215.97 billion and N380.65 billion in similar periods of 2017 and 2018 respectively
“The economy is not making progress as key indicators remain mute and this explains why outflow continues to outpace inflow” said Ambrose Omordion, Chief Research Officer at Lagos-based InvestData Consulting.
“The few earnings that have been announced are unimpressive and this hints foreign investors that GDP figure for second quarter might turn out poor”, Omordion added.
Within a five year period spanning between half year 2014 and 2019, the market recorded surplus worth N1.7 billion only in 2017, thanks to the Investor and Exporter (I&E) foreign exchange window that was introduced during that period.
The continued bearish trend of the Lagos bourse in-spite influx of capital imported to the economy, affirms that foreign investors are rotating their funds to the less risky fixed income securities which offers one of the most attractive yields in emerging market.
Foreign investors remain wary of emerging economies like Nigeria that is very susceptible to external shocks given heightening concerns about dampened global growth.
Moreover, they have little or no confidence that the policies of the present administration would grow the economy. All these dis-incentivize foreign investor betting on naira stocks.
Analysts say until the fiscal authorities come up with bold policy pronouncements to complement efforts of monetary authorities, the equity market will keep losing massive capital flows to fixed income market.
“We already have an idea of government policies and the strong tendencies towards borrowing rather than expanding tax net to grow revenue. This has stoked gyrations in fixed income market”, Ologbon-Ori told BusinessDay.
Informed that the directive to compel lenders give out at least 60 percent of their deposits as loan to small businesses in a bid to boost growth, could hurt lenders’ profitability and asset quality, the Monetary Policy Committee (MPC) at its last meeting urged the apex bank to de-risk the financial markets, to encourage lenders grow their loan book.
One of those banks with huge exposure to foreign investors, Guaranty Trust Bank Plc, is trading near its 52-week low of N26.65. The stock has lost 5 percent since the directive was announced July 3.
The gauge of stocks listed on the Nigerian exchange appreciated marginally by 0.11 percent to close at 27, 950.36 index points Monday, down some 11 percent yearlong.
Israel Odubola
