• Monday, April 22, 2024
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BusinessDay

Foreign investors uptick in sight for Nigeria’s equities market

Transcorp Hotels, others drive market’s N21bn gain as week opens

The economic outlook for Nigeria is expected to cause an uptick in foreign investors in Nigeria’s equities market thanks to a number of reforms implemented by President Bola Tinubu.

In the first half of 2023, Tinubu’s most significant reforms have been the removal of the fuel subsidy and float of the naira, a marked departure from years of a currency peg that spooked foreign investors and hurt the economy.

These policies have been praised by economists and investors for their potential to boost economic growth and attract foreign investment.

Analysts and experts who spoke to BusinessDay said the developments paint a stable second-half outlook for Nigeria’s equities market.

“Our view is that foreign investors’ participation in the equities market will pick up from current levels in the second half of 2023 but will remain far off pre-pandemic levels – understandably,” analysts at Cordros Research said in its outlook for financial markets.

Cordros analysts said for a return to pre-pandemic levels, “we believe stability around the exchange framework and an improvement in key economic metrics will be decisive in re-attracting foreign investors.”

The analysts also revised their expectations for Nigeria’s equities market from 3.5 percent to 25.8percent.

“This is because we believe that all risks are now tilted towards the upside, as the factors we cited as tailwinds for an overtly positive market, particularly around market-friendly reforms and an accommodative monetary policy stance, have started to materialize,” Cordros analysts said.

Analysts said the equities market resilience reflects heightened investor optimism for domestic growth with the new administration’s promulgation of long-needed policies.

To buttress this, the market gained 14.6 percent from when the new administration took office on 29 May, representing the bulk of the gains recorded in H1-23.

Notably, domestic investors accounted for 88.5 percent of all transactions in the first five months of the year, with foreign portfolio investors’ participation still in limbo.

“In the equities market, we believe the positive sentiment we have witnessed would persist as domestic investors take more position in the market, in anticipation of increased foreign participation,” analysts at ARM research said.

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It added, “Half-year earnings release, as well as dividend declaration, would also influence the market in H2:2023.”

In Africa’s biggest economy, last month witnessed a notable shift in the FX market as the Nigerian Naira was floated, leading to a significant surge in the equities market’s year-to-date performance of 18.96 percent.

“We attribute this growth to increased participation from foreign investors who sought a liberalized FX system that facilitates easy and seamless fund repatriation. Our prognosis is based on the impact of a similar event in the Nigerian market, highlighting the positive effects of the policy transition,” analysts at ARM research said.

On April 21st, 2017, the Central Bank of Nigeria introduced the I&E window, as a result, the foreign portfolio participation rose by 240.48percent month on month to N110.42bn while foreign portfolio inflow surged by 403.09 month on month to N73.15bn in May 2017.

By 2022, foreign portfolio participation surged by 133.20 percent to N1.33trn while total transaction on the bourse soared by 120.75 percent to N2.54trn.

“Anticipating a similar trajectory, we foresee the liberalization of the FX market exerting a substantial influence on driving Foreign Portfolio Investment (FPI) into the equities market this year,” analysts at ARM research said.

Analysts at Meristem said the inauguration of a new administration whose tough start seems to signal a willingness to address some necessary economic pain points (like the fuel subsidy bill) has sent some positive signals to domestic and foreign investors.

“We expect the equities market to remain positive in H2:2023, though with pockets of profit-taking activities. System liquidity should remain a major factor in determining the direction of fixed-income yields for the rest of the year,” Meristem said in its half-year outlook report.

BusinessDay had reported that foreign portfolio investments in the market were almost going extinct as the investors held just about four percent of the market as at the end of April 2023 following the myriads of challenges relating to foreign exchange and the difficulty in repatriating their funds.

They had reduced their investment by 7.83 percent to N8.47 billion in April from N9.19 billion in March 2023, indicating a greater intensity of their pullback. The FPIs had maintained a steady decline over the past seven years.

But in May foreign investors raised their stake to N37.16 billion from N8.47 billion in April, representing a 338.72 percent increase, according to the Nigerian Exchange Limited (NGX) report on Domestic and Foreign Portfolio Investors’ Participation in Equity for May.

The new FPI position represents 11.5 percent of the total equity transaction during the month and a 7.07 percentage point increase compared to their total transaction (4.43%) in April.

Upon his inauguration on May 29, 2023, President Tinubu signaled an economic direction with a high point in removal of fuel subsidies and subsequent announced a foreign exchange market reform which caused a wave of excitement across the private sector as well as the domestic and foreign investors.

Oscar Onyema, Group CEO, NGX Group, had expressed optimism over the possible impact of the policy changes on foreign portfolio investment inflow into the market.

Speaking in reaction to the policy changes, Onyema said: “There is bound to be more investment flows in Nigeria. All these are the right noises for money. Money goes to the least resistant places where it can get the best risk adjustment returns without unnecessary hassles because there is competition across the globe.

“On what we have seen in the last eight years, there has been an outflow of foreign portfolio investments predominantly and more than half of our markets are outside of America, but with these policy changes, you can begin to understand why we are very optimistic that these flows will come back and with it, attract additional flows.”