How instability within the FX market set off overseas buyers apathy in Nigeria’s equities market

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The Chief Executive Officer of Cowry Asset Management, Mr Johnson Chukwu, has defined how a mix overseas change crises have negatively impacted overseas buyers’ sentiment in Nigeria’s equities market.

The evaluation was in response to the latest Nigerian Stock Exchange’s Domestic and Foreign Portfolio Investment Report for January 2021, which confirmed that home participation within the equities market outperformed overseas transactions, because the latter might solely account for 20% of the full market actions.

The report additional indicated a downward pattern within the share of overseas participation within the equities market, from about 51% in 2018 to twenty% as at January 2021.

Reacting to the event, Mr Chukwu in an interview with Arise TV blamed the mix of FX liquidity disaster and instability of the Nigerian overseas change market as underlying causes for the downward trajectory.

He mentioned: ‘’If you take a look at the pattern up to now three years, you’ll observe that overseas portfolio funding into Nigerian equities market has been declining. In 2018, it was 51% of all the market, so they really trumped native buyers. By 2019, it declined to 49%, implying that the native buyers had trumped them. However in 2020, they solely accounted for 34% of all the market, it additional got here down to twenty% by January 2020. Of course, we all know these components which are driving away overseas portfolio funding within the nation, and till these components are addressed, we’re more likely to see the pattern proceed.”

On how FX instability and illiquidity contributed to the decline, Mr Chukwu remarked that: “The main factor that drive foreign inflow into the economy is the liquidity in the FX market. Foreign investors want to be able to convert back to their foreign currencies when they want to exit. If there is no liquidity in the FX market, foreign portfolio investors stay away from the market. As you know, the Nigeria FX market witnessed locking of foreign portfolio investors who sold their investments and wanted to exit, but they could not access FX to exit. So because those people couldn’t exit, new investors couldn’t come in. You can’t really go into a market when people are trapped.

“Another factor that could influence them is the stability or predictability of the exchange rate. But the most important factor is the liquidity in the FX market. If you look at the year, these foreign portfolio investments were impressive, oil price was quite strong, for example in 2018, they brought in about N1.2 trillion accounting for 51% of the market activities.”

On the flip facet, Mr Chukwu defined why native buyers’ participation has been rising. He attributed the rise to the collapse of rates of interest and the spectacular returns posted by the NSE final yr.

‘’The primary factor that occurred was that as a result of native rates of interest collapsed final yr they usually stay very low even in January, , native buyers significantly institutional buyers are underweighting their portfolios in fastened earnings and overweighting them in equities. When rates of interest are very low, buyers will swap to the devices that may give them excessive yield and on this occasion, variable earnings belongings like equities and that was what occurred final yr and continues to be taking place now,’’ he mentioned.

What it’s best to know

  • Nairametrics reported that regardless of a bullish run of the NSE in 2020, whole investments within the Nigerian inventory market as at January 2021 dipped by 13.7% M-o-M.
  • Total overseas transactions as on the aforementioned interval stood at N47.52 billion, whereas home transactions stood at N184.94 billion.

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