Forex Scarcity Dampens Foreign Portfolio Investment Inflows

As the foreign exchange market continues to experience illiquidity amidst scarcity of the greenback at the official windows, foreign investors have continued to pull out of the Nigerian market as their participation in the equity market depreciated to 14.7 per cent.

According to United Capital’s ‘Nigerian Equities Market H1-2022 Review and Outlook’ released over the weekend, domestic investors maintained domination of activities at the local bourse controlling 85.3 per cent of total transactions, leaving foreign investors with 14.7 per cent.

The report cited uncertainties in the economy such as political risk, inaccessibility of foreign exchange, and other global trends that have resulted in an unprecedented exit of foreign portfolio investors (FPIs).

“In line with our expectations, domestic investors’ participation in the equities market was primarily driven by domestic investors. According to NGX data on Foreign and Domestic investor’s participation in the equities market at the end of June 2022, the breakdown of the market participants in the period under review shows domestic investors have primarily driven the market with 85.3 per cent of total transactions, leaving foreign investors with 14.7 per cent of total transactions in H1-2022.

“This data suggests the continuation of the declining trend in foreign players’ participation. Plausible factors highlighted in our FY-2022 economic outlook document, “Navigating Stormy Seas” remain valid, particularly with the absence of positive catalysts, sustained forex illiquidity concerns and crystallisation of policy normalisation risks, thus creating a wet blanket on the attractiveness of the local equities market.”

In H1-2022, domestic investors’ trading activities in the market has seen them record transactions worth N1.4 trillion, as of June 2022, while international investor trading activities printed at N243.5 billion.

Analysing the activities of foreign equity investors along equity inflows vs equity outflows line shows a net outflow of N2.5 billion following total inflows of N120.5 billion vs outflows worth N123 billion at the end of H1-2022.

On the pre-election year syndrome which usually pushes for exit, it noted that, historically, the final six months preceding an election year have always been negative for the equities market.

“Since 2002, Nigeria has had five general elections, of which the benchmark NGX-ASI has lost an average of 2.9 percent in the second half, July December of the pre-election year.

“Interestingly, the NGX-ASI has lost in four of the five-second half of the pre-election year over the five election cycles. Thus, excluding the single gain of 26.9 percent in H2-2006 preceding 2007 general elections, Nigerian equities have lost an average of 10.3 percent over four-second halves of pre-election years,” it pointed out.

It added that the poor performance of Nigerian equities in the second half of a pre-election year is better understood when analysing the behaviour of investor categories during the period.

According to data from National Pension Commission (PenCom), Pension Fund Administrators(PFAs) allocation to domestic equities fell by an average of 14.8 per cent in the second half of the last two pre-election years H2-2014: -15.0 percent, H2-2018: -14.6 per cent.

“PFAs who currently set the pace of equity market direction tend to develop itchy feet towards Nigerian equities in a pre-election cycle. For FPIs, the consensus that they tend to exit emerging market equities whenever an election season starts holds true for Nigeria. For context, Over the past two pre-election years, data from the Nigerian Exchange Group (NGX) show that FPIs have been net sellers of Nigerian equities to the tune of N81.8bn in the second half of a pre-election year.

“In addition, data from the National Bureau of Statistics show that equity FPI inflows in the second half of the last three pre-election years have declined by an average of 26.9 per cent, compared to the first half of the same year, H2-2010: -2.2 per cent, H2-2014: -13.4 per cent, and H2-2018: -65.0 per cent,” it added.