These 9 stocks to sell-off as MSCI kicks Nigeria out of frontier index

The stocks of nine companies will be directly impacted following Morgan Stanley Capital International (MSCI)’s reclassification of Nigeria Indexes from Frontier Markets to Standalone Markets status.

After long deliberation, MSCI announced Thursday that the Indexes will be reclassified due to the illiquidity challenges in the foreign exchange market, capital repatriation concerns and sustained parallel premium.

The reclassification will stoke an initial sell-off in the nine Nigerian stocks tracked by the MSCI Nigeria index, according to analysts at CardinalStone Partners. The stocks include DANGCEM (Dangote Cement), MTNN, GTCO, Zenith, Seplat, Stanbic, Nestle, NB (Nigerian Breweries) and BUA Cement.

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“However, given the impressive Q3’23 numbers from some of these 9 stocks, the sell-offs could create attractive re-entry opportunities, particularly for domestic investors,” the analysts said.

Liquidity challenges in Nigeria’s foreign exchange (FX) market since March 2020 have consistently affected the accessibility of its equity market, leading to ongoing capital repatriation concerns and a significant gap between the official and parallel exchange rates for the Nigerian Naira.

This has caused international institutional investors to face recurring challenges with index replicability and investability of the MSCI Nigeria Indexes and other indexes they are part of.

On June 22, 2023, MSCI announced that feedback from market participants obtained as part of the initial consultation conducted from June 2022 to June 2023 suggested that the limited accessibility of the Nigerian equity market would warrant the removal of the MSCI Nigeria Indexes from the MSCI Frontier Markets Indexes.

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However, MSCI extended the consultation period to September 29, 2023, to allow more time for the liquidity situation in the Nigerian FX market to stabilize following measures announced by the Central Bank of Nigeria on June 14, 2023.

“No significant improvements in FX liquidity were observed by market participants during the extended consultation period, confirming that the ease of capital inflows and outflows in the MSCI Nigeria Indexes is not to the standards expected from Frontier Markets,” MSCI said in a statement Thursday.

All hope is however not lost for Nigeria with the new administration showing commitment to improving FX liquidity in the country by reversing damaging policies that have drained investor confidence in the market.

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This means an “upside potential might be in the offing in the near to medium term,” according to analysts at CardinalStone.

Finance minister, Wale Edun said this week that the country is expecting $10 billion in FX inflows in “coming weeks,” which will be used to clear the FX demand backlog in the market.

The expected inflows could be higher if the government can obtain the $3.0 billion Afrexim bank loan and can get the World Bank facility of $5.0 billion ($3.5 billion for project development and $1.5 billion to support key policy reforms).