Nigerian stocks are underperforming when compared with peer African markets as investors worry over a slowdown in badly-needed reforms to reset a fragile economy.
Since February this year, the NSE ASI has underperformed relative to the NSE20 in Nairobi, Kenya, and the All Share Index in Johannesburg, South Africa.
Its -2.5 percent decline since the beginning of the year compares with gains of 9.9 percent in Nairobi and 12 percent in Johannesburg.
Analysts say neither the narrative for the economy nor demand factors are supportive. Although the economy grew by 5.01 percent in the second quarter of 2021, the growth was solely down to low-base effects following a 6.1 percent contraction in the same period last year. This means average incomes are still under pressure and poverty is deepening.
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“Pre-COVID, there were some reforming signals in Nigeria, but these have disappeared and the Federal Government is reluctant to add to the pain felt by the low-income majority,” analysts at FBNQuest said.
Subsidy removal, whether for electricity or petrol, falls into this category of reform.
Daily turnover on the NSE has averaged $8.6 million year-to-date (ytd) (at the I&E/NAFEX rate), unchanged from the same period of 2020.
It has not exceeded $10 million since the first week of May.
In Nairobi, the ytd figure is as low as $4.9 million. Growth prospects, which are a core driver for investors, are dull.
The International Monetary Fund (IMF) currently sees 2.5 percent for Nigeria in 2021. This compares with 7.6 percent for Kenya and 4 percent for South Africa.
Foreign portfolio investors (FPIs) have become less visible players. They accounted for 21 percent of all transactions on the Lagos exchange in January-July 2021, a sharp fall on the 39 percent posted in the year-earlier period.
The pipeline of delayed external payments that developed last year is surely a factor.
“We do hear anecdotal evidence that some FPIs have made at least a partial exit yet these tend to be investors in debt securities rather than equities,” FBNQuest analysts said.
Regulators forget sometimes that FPIs have a large choice of emerging/frontier markets from which to choose. Their favourite in Africa remains Cairo.
Further afield, they are heavily invested in markets characterised by a combination of economic reforms, entrepreneurial culture and new listings. Vietnam, the Philippines and Bangladesh tick many of the required boxes.
Domestic institutions were responsible for 46 percent of all transactions in the first seven months of this year.
A sub-group of this category, the PFAs, have added to their holdings from a low base to a total of N860 billion at end-July. (As a point of reference, the market cap of the exchange is roughly N20trn.)
The 33 percent balance of transactions stem from domestic retail, for which no convincing analysis is available.
