The recent demotion of Nigeria from Frontier to Unclassified Market Status by FTSE Russell, a subsidiary of London Stock Exchange Group (LSEG) due to the nation’s foreign exchange (FX) crisis is a new source of negative sentiment that is capable of triggering equities sell off at the Nigerian Exchange Limited (NGX).
FTSE Russell said further to the ‘FTSE Equity Country Classification – Watch List Status of Nigeria’ announcement published on June 30 that it has received feedback from market participants that although Nigeria has adopted a floating foreign exchange (FX) rate for the Naira in the Investors’ & Exporters’ (I&E) FX Window, which is now operating on a “Willing Buyer, Willing Seller” basis, “the lack of liquidity in the I&E FX Window continues to adversely impact the ability of international institutional to replicate benchmark changes”.
It further said, “Consequently, as index changes for Nigeria within FTSE Russell equity indices have been suspended since September 2022 and with no improvement in the ability of international institutional investors to repatriate capital at a foreign exchange rate that would be used in FTSE Russell equity indices, following ratification by the FTSE Russell Index Governance Board, FTSE Russell announced that the, “FTSE Equity Country Classification status of Nigeria will be downgraded from Frontier to Unclassified market status, with Nigerian index constituents deleted at zero value (0.0001 NGN) from the following FTSE Russell equity indices.
“Effective from the open on Monday September 18, 2023: FTSE Frontier Index Series, including the FTSE Frontier 50 Index, FTSE Ideal Ratings Islamic Index Series, FTSE/JSE All Africa Index Series, FTSE Middle East & Africa Extended Index Series, and FTSE/MV Exchange Index Nigeria will be retained in the FTSE ASEA Pan Africa Index Series, with the implementation of certain corporate events suspended until further notice”, it noted.
“The news from the UK has a negative impact on the Nigerian stock market, foreign portfolio investors (FPIs) are worried about the FX market,” said Olumide Adesina, financial market analyst at Lagos-based Quantum Economics.
Read also: Naira woes overshadow rare rise in dollar reserves
However, FTSE Russell said it will continue monitoring Nigeria once the foreign currency delays are cleared for a period of time, adding that Nigeria will be assessed as a new market in accordance with the FTSE Equity Country Classification Process.
“This process will follow the standard FTSE Equity Country Classification procedure and timetable for a new market, with Nigeria required to spend a period of time on the Watch List before it is readmitted as an eligible market for the FTSE Russell equity indices”.
Nigeria’s Central Bank has said it is making plans to clear the foreign exchange (FX) backlogs in the next weeks, according to Folashodun Adebisi Shonubi, acting governor, of the Central Bank of Nigeria. FX backlogs, which is the unmet demand for forex by investors and exporters, is estimated at $10 billion and have resulted in huge losses by many firms, according to analysts.
Before the disappointing news from FTSE Russell, Nigeria’s stock investors had despite concerns around the soaring inflation, interest rate hikes and weak macroeconomic indices shown confidence in the stock market, leading to Nigerian Exchange Limited (NGX) emerging as one of the best-performing exchanges in Africa during a 3-month duration. This development pushed the market to its 15-year high on the back of strong positive sentiments.
Also speaking on this development from FTSE Russell, Abiola Rasaq, former economists and head, investor relations for United Bank for Africa Plc said, “It is unfortunate that FTSE is taking this decision in a transition period when the country’s FX situation is expected to get better soon, given the commitment of the new authority to improving transparency and accountability within the foreign currency and overall financial market”.
He noted that liberalisation reforms, just like any policy or strategy hardly succeed at first contact, “and one would expect teething challenges and indeed FTSE and every market participant understand that market-oriented policies are not magic wands, hence there is always a lag period within which the policy impact would permeate the system to deliver expected result”.
“More so, in economies like Nigeria, where monetary policy transmission mechanism is relatively weak, it is expected that the lag effect of the structural rigidities occasioned by prolonged control measures previously used to manage the Naira may extend the transition period, with consequences of undermining the effect of the liberal policy in the initial months of execution.
“In addition, liberalisation on its own would not deliver the result, and the government thus far seems to be demonstrating a fair understanding of this fact, with some basic steps being taken to address both the supply and demand sides of the FX market, at both monetary and fiscal ends of the policy table. On this note, one would have expected FTSE to give more time for these policy measures from a new regime to evolve, before taking such a non-routine decision,” Rasaq said.
Read also: FTSE Russell equity indices: Nigeria gets a downgrade over FX crisis
Speaking further, he noted that “very limited global emerging market (GEM) and frontier market funds, which have interest in Nigeria, tracks the FTSE Russell index, thus the direct impact of this development is very marginal on the Nigerian equity market and overall financial system.”
“Nonetheless, it creates a negative vibe and may trigger bearish sentiments from investors in the MSCI Index, which has more investors compared to the FTSE Russell, especially at a time when the bullish steam in the market seems to be waning.
“Notably, valuations are no longer as attractive as they were earlier in the year, following the 33percent year-to-date (YtD) return of the NGX All Share Index with many of the counters trading at 52-week highs and some even trading at 5-year historic-high prices.
“Again, this reinforces my expectation that the bulk of the equity market returns for the year may have been concentrated in the past few months, and the market may take a breather from this point, pending when positive macro fundamentals trigger a new rally perhaps much later in 2024, when hopefully a simultaneous effect of easing interest rate in the global market and earlier effect of sectoral reforms in Nigeria may support positive valuation re-rating of Nigerian stocks and when hopefully there should be the better sentiment on the near-to-medium term stability of the Naira,” Rasaq said.
The stock market has seen increased sell-off since this week. As of Tuesday, September 12, investors in Nigeria’s equities market booked further loss of N293billion as the market recorded another session of negative close by 0.80percent. The Nigerian Exchange Limited (NGX) All-Share Index (ASI) and equities market capitalisation decreased from 67,296.18 points and N36.831trillion respectively to 66,760.2 points and N36.538trillion. The market’s return year-to-date (YtD) lowered to +30.26 percent on Tuesday.
The bullish trend can be attributed to investors’ jostling for low, medium, and high-capitalised stocks across some major sectors amid favourable policies introduced by President Bola Tinubu’s new administration such as the removal of fuel subsidies, unification of exchange rate, investors’ strategic positioning themselves and taking advantage of the recent record earnings posted by quoted firms and the recent formation of the country’s economic cabinet and executives.
Damilare Akinlotan, investment and equities analyst for Risevest said, “Removing us from these indexes means: Nigerian stocks listed on those indexes will no longer be accessible to foreign investors who invest in those indexes – no more FPI for our stocks listed on those indexes (No more Dollar inflow for us through those channels). All Nigerian stocks listed on those indexes will be sold since they are being removed, which means a sell-off on our stock market – the market reacted immediately yesterday and you would have noticed a drop in NSE yesterday.
“The main issue has to do with the inability of institutional investors to repatriate their funds to their parent countries, our recent FX policy was supposed to be encouraging and make FX available and accessible to these investors but it has not been so. It seems that no changes are really in sight and now they’ve decided to remove us after a period of observation- having being suspended since September last year.
“We are retained on the FTSE ASEA Pan Africa Index series though and our FX situation will be monitored, if we can resolve our FX issues we should be added back as a new market. Going forward, when the removal is effected we should expect more sell-offs,” Akinlotan noted.
