Recently, MSCI Inc, a global provider of equity, fixed income and real estate indexes, announced that it is considering removing Nigeria from its Frontier Markets Indexes (MSCI Frontier Markets and MSCI Frontier Markets 100 indexes), citing currency restrictions.
Frontier Markets countries include: Bahrain, Bangladesh, Burkina Faso, Benin, Croatia, Estonia, Guinea-Bissau, Iceland, Ivory Coast, Jordan, Kenya, Lithuania, Kazakhstan, Mauritius, Mali, Morocco, Niger, Nigeria, Oman, Romania, Serbia, Senegal, Slovenia, Sri Lanka, Togo, Tunisia and Vietnam.
Launched on Apr 11, 2012, the MSCI Frontier Markets 100 Index is a representative and more easily replicable alternative to its broader parent index, the MSCI Frontier Markets IMI. The MSCI Frontier Markets 100 Index includes approximately 100 of the largest and most liquid constituents of the parent index.
The composition of the MSCI Frontier Markets 100 Index is fully reviewed on a semi-annual basis coinciding with the May and November Semi-Annual Index Reviews (SAIRs) of the MSCI Global Investable Market Indexes.
MSCI Inc. noted that that since March 2020, FX illiquidity and the widening gulf between the official and parallel Naira exchange rates have led to FX conversion and fund repatriation problems for foreign investors in the Nigerian equities market.
As a result, it further noted that market participants have continuously expressed concerns related to the investibility and replicability of the MSCI Nigeria Indexes and related composite indexes, such as the MSCI Frontier Markets Index.
Despite concerns raised by MSCI Inc, Nigeria bourse’s year-to-date (YtD) return strengthened to 21.65percent on Monday June 27, on the back of continued bargain hunting as investors cherry-picked stocks in anticipation of first-half (H1) 2022 earnings release. The market’s growth is driven by improved local participants who are earning good returns for themselves from notable counters.
In its latest domestic and foreign investment report for May 2022, the Nigerian Exchange Group (NGX) noted that total transactions on the local bourse grew by 195.1percent month-on-month (m/m) to N607.5billion in May. This implies a year-on-year (y/y) growth of 525percent.
Domestic participation in the Nigerian equities market remained dominant at 92.5percent in May alone (and circa 87percent year-to-date (YtD), while foreign investors accounted for the balance of 7.5percent.
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Boboye Olaolu, economist at CardinalStone Securities who noted that Nigeria has been on a watch list of MSCI Inc. due to FX concerns, said that equity part of the investible funds has been increasing because they are reinvested fund that were unable to exit the economy.
The dynamics is that it is not going to impact much on the equities market because not much of the foreign funds are currently in the market, he said; adding that the equity market’s growth is driven by improved local participation in stocks with good returns.
“This is not the first time MSCI Inc has considered removing Nigeria from the MSCI Frontier Markets (FM) Index. In April 2016, a similar situation occurred owing to the Central Bank of Nigeria’s currency restrictions at the time.
“The market’s view then was that around $500million in funds benchmarked to the MSCI FM index would head for the exit. In the end, Nigeria was not ejected, FX liquidity improved a year later (2017), and foreign investors bought Nigerian equities again in significant volumes. The situation now, six years later, is very different in terms of potential impact, in our view. Overall, we expect the impact to be very limited, for two reasons,” according to Coronation research analysts in their recent note.
Coronation research analysts also noted that first, since the beginning of 2018, around N439.43billion ($1.04billion at today’s rate) of foreign investor money has left the NGX Exchange. Foreign investors only account for around 13percent of trading on the exchange compared with a long-term average of around 42percent. “The foreign funds remaining are either unable to withdraw or remain committed to the Nigerian investment case for the long term.”
“Second, although it is difficult to estimate the total amount of money benchmarked to MSCI FM indices, we know it is substantially lower than it was in 2016. Many funds have abandoned the benchmark or switched to broader benchmark indices, example the MSCI Frontier Emerging Markets Index. As of April 2022, Nigerian stocks made up only 4.7percent of the MSCI Frontier Markets (FM) Index, a far cry from March 2016, where Nigerian stocks made up 11.7percent of the MSCI FM Index”
“We have studied the factsheets of the remaining FM Exchange Traded Funds (ETF) and some of the largest dedicated FM equity funds and found that if they were to sell their entire remaining holdings in Nigeria, this would account for just $150.0million (N63.1billion) of foreign equity selling.
Interesting, however, is that a lot of the exposure in the funds we looked at are in Airtel Africa, which is dual-listed and which could imply funds are only invested in the telco stock as a means of using the dual listing for repatriation of funds.
“Nevertheless, assuming all those funds were liquidated, it would equate to about 13 days of average daily traded value. Even then, the ability to repatriate those funds would not be guaranteed and the process could be protracted, in our view,” Coronation research analysts said in their June 27 note.
“Investors’ participation outcome in the month of May bucked the trend witnessed so far. In the four months leading up to April 2022, foreign investor participation was an average of circa 18percent, only to drop to 7.5percent in May. On a YtD (to May) basis, total market transaction amounted to N1.5trillion compared to N934.billion in the corresponding period last year.
“Foreign portfolio investors have largely exited Nigeria due to issues with FX liquidity which has led to a backlog of delayed external payments, estimated at circa $1.7billion by the World Bank,” according to FBN Quest Capital Research in their June 28 note. “Domestic institutional investors remain the most dominant players,” FBN Quest Capital Research added.
Lukman Otunuga, Senior Research Analyst at FXTM said in a June 24 note that, “Lower oil revenues and falling foreign exchange reserves are forcing Nigeria to ration dollars. The negative impacts continue to be reflected across the economy and local currency. But now the dollar shortages have attracted the attention of MSCI Inc. which is considering downgrading the MSCI Nigeria indexes to the status of a standalone market from frontier markets.
“It is worth keeping in mind that a developed market is the highest ranking, followed by emerging markets, frontier markets, and then finally standalone markets at the bottom. Given the difficulty in repatriating funds from Nigeria, this has placed the MSCI Nigeria Indexes in the crosshairs. Such a negative development may hit sentiment toward the county’s assets at a crucial period where economic growth remains fragile.
“To add insult to injury, the NGX All Share Index has gained roughly 20percent this year in local currency terms. A blockbuster performance when compared to the MSCI Emerging market Index which is down roughly -19percent,” Otunuga said.
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