Foreign investment in Nigerian stocks fell last month to its lowest level since President Bola Tinubu’s reforms that sparked a massive rally in the equities market, new data from the nation’s bourse show.
The total amount of stocks bought by foreign investors plunged to N9.45 billion from N22.72 billion in June, according to data from the Nigerian Exchange Limited (NGX).
Stocks worth N31.09 billion were offloaded by foreigners in July, compared to an outflow of N23.02 billion in the previous month.
Foreign inflow into Nigerian stocks had jumped more than seven-fold in May to N27.51 billion, its highest level since December 2021, as the market soared on the last two trading days of that month following the announcement of petrol subsidy removal by Tinubu on May 29. That month, the market posted its first net inflow this year as the outflow was N9.65 billion, up from N4.80 billion in the previous month.
The subsidy removal was followed by a foreign exchange reform that led to a large devaluation of the naira in mid-June.
“The uncertainty in the FX market may have led to the exit observed in July,” Ayodeji Ebo, managing director/chief business officer of Optimus by Afrinvest, told BusinessDay. “In addition, profit-taking may also be a major factor for the pull-out.”
Foreign participation in the equities market had increased to 11.51 percent in May from 4.43 percent in the previous month. It fell to 11.25 percent in June and 5.77 percent in July, the NGX data show.
The total transactions executed by Foreign investors fell by 11.37 percent in July to N40.54 billion (about $52.58 million) in the previous month, while domestic deals rose 83.50 percent to N662.44 billion.
BusinessDay had reported in February that for the first time in five years, foreign investors bought more Nigerian stocks than they sold in 2022.
The net foreign inflow came as foreign investors were forced to reinvest their dividends and sales proceeds into securities because they could not get dollars to repatriate their funds.
The latest data from the NGX explains foreign portfolio investors’ (FPIs) sentiments about the Nigerian capital market, hence the urgent need to provide confidence by increasing FX earnings in the medium to long term, Ebo said.
“We expect to see more FPIs in fixed income as yields improve, especially OMO bills,” he added.
On 10 August, the Central Bank of Nigeria (CBN) auctioned its first OMO bills since December 29, 2022.
Analysts at Cordros Securities Limited said in an August 15 note that the move represented one of the short-term fixes for the CBN to attract FPIs into the FX market amid concerns that the Treasury bills yields were too low to attract foreign investors.
They expressed cautious optimism that active OMO operations with competitive interest rates would complement recent FX reforms, even as they raised concerns over “a bifurcation of interest rates where rates are high for foreign investors (OMO bills) but low for domestic investors (Treasury bills) following the Debt Management Office’s efforts to keep borrowing costs low”.
“Moreover, bringing back OMO as a tool for attracting foreign investors takes us back to the unorthodox monetary policy era. It will come at a considerable cost to the CBN’s balance sheet,” the analysts added.
Bismarck Rewane, managing director of Financial Derivatives Company Limited, said the Nigerian stock market lost 1.43 percent in the last week of July following a 25 basis-point hike in the monetary policy rate and the release of underwhelming half-year earnings by some Nigerian companies.
The central bank raised its benchmark interest rate in July for the eighth consecutive month to 18.75 percent from 18.50 percent.
The NGX gained 5.53 percent in July, down from 9.38 percent in the previous month, with investors gradually exiting equities “for attractive fixed income yields”, Rewane said in his presentation at the Lagos Business School Breakfast Meeting this month.
The Economist Intelligence Unit (EIU) said in its latest country report on Nigeria that the CBN’s unification of the country’s multiple exchange rates in June led to the sharpest devaluation of the naira in history.
The new exchange rate was classed by the central bank as a ‘managed float’, but there are inconsistencies in application to a more liberal currency regime as foreign-exchange access restrictions still apply to an array of imports, according to the EIU.
“This will unnerve foreign investors, and a backlog of foreign-exchange orders the CBN failed to clear before opening up the market and deeply negative real interest rates will keep liquidity tight,” it said.
Businessday
