Foreign investors have remained on the side-lines of the Nigerian stock market as currency uncertainties and grim outlook for the economy come into focus even though the country’s equities are one of the cheapest among continent peers this year.
In June, foreign investors’ participation on the domestic bourse dropped to 39.52% compared to 45.84% in the same period last year. Meanwhile Nigeria stocks are cheaper at a price to earnings of 8.64X compared to 10.96X for Egypt, and 17.64X for South Africa.
Analysts say dollar scarcity is keeping foreign stock investors at bay; uncertainties around the naira and inability to repatriate capital means new investments are put on hold.
“Ever since the drop in oil price in March, CBN has not been able to sustain its intervention in the I&E window leading to liquidity issues in that market,” said Gbolahan Ologunro, banking analyst at Lagos-based CSL Stockbrokers. “Foreign investors who put in funds before that time could not pull out their fund.’’
Amid scarcity of the dollar, backlog in FX demand rose to around $7 billion in June according to a BusinessDay report as daily turnover in the I&E market also declined. The Central Bank of Nigeria (CBN) promised to fund “legitimate” dollar demand but its firepower has been questionable in the face of stunted inflows.
Since March, the apex bank has stopped the sales of FX to retail traders, and adjusted the Bureau De Change (BDC) to N380 per dollar from N360.
It also adjusted the naira’s official rate from N307 to N360 which is a devaluation of 15%, while official rate was further devalued from N360 per dollar to N381 earlier in August.
Analysts say investors are also worried that gains on Nigerian stocks may be eroded due to currency adjustments.
‘‘Until there is better clarity on the exchange rate framework and improved flexibility such as the CBN allowing the market to determine prices in the I&E window, we are not likely to see a significant demand from investors despite cheap valuation’’ said Ologunro.
Depressing outlook on the economy, projected to decline 5.4% this year according to the IMF, is also weighing on foreign investors’ sentiments.
Earnings results for the first six months of the year especially in the consumer goods space have been unimpressive, showing COVID-19 effects. Second-quarter results showed huge decline in sales among the biggest food and beverage makers on the NSE.
For banks, the toast of foreign investors, both earnings and asset quality are expected to come under pressure this year.
While foreign investors are avoiding risky investments in most emerging markets, they have poured money into havens like gold which recently rose to its highest value since 2001 before declining on Tuesday. Amid uncertainties of the ongoing pandemic havens are seen as bets for investors.
For Nigerian stocks, domestic investors are taking advantage of the cheap valuation as their participation accounted for 60.48 percent in the first half of the year, from 54.16 which was recorded in 2019.
