Foreign Investors Sidestep Naira Assets
Foreign Currencies

Foreign Investors Sidestep Naira Assets

Foreign portfolio investors have left more portion of the Nigerian stock market to locals, according to a report by the Nigerian Exchange (NGX) on domestic and foreign portfolio participation for the month of March 2022.

The risk of investing in Nigerian financial markets has been noted to be relatively higher than the associated return, causing imbalanced risk-return tradeoffs for portfolios.

In March, Nigeria experienced an increase in foreign portfolio outflows, according to the latest report as large foreign currencies were pulled out. This happened right after there was a notable decline in foreign inflows in the market.

A similar trend was witnessed in the Nigerian debt capital market where inflation pressure has kept real return on investment negative.

Trading data showed that total equities market transactions increased by 0.93% to N185.26 billion in March 2022 from N183.56 billion in February 2022. Foreign investors’ tantrums following dollar scarcity and heavy FX backlog have been ‘get me out of Nigeria markets’.

Citing the detail from the report, Cowry Asset Management said in a report that when the result is compared to March 2021, total transactions decreased by 18.92% in the last 12-month.

Further analysis of the total transactions revealed that total domestic transactions increased by 3.59% to N143.09 billion in March from N138.13billion in February 2022.

However, total foreign transactions in March 2022 decreased by 7.17% to N42.17 billion from N45.43 billion in February 2022.

“The decrease in the total transaction was chiefly due to the very weak appetite of foreign portfolio investors (FPIs) which continue to decrease amid sustained fear of foreign exchange volatility eroding their returns on investment and insecurity currently being encountered in the country”.

Cowry Asset said in its report that foreign investors appeared to have their reservations about the Naira not being fairly priced against the greenback.

However, local investors seem to be taking position amidst the first quarter of the financial year 2022 earnings season, as they accumulate more shares of some fundamentally sound stocks.

“We saw local players’ participation in the equities market increased in March than in February 2022”. Further breakdown showed that domestic institutional investors outperformed retail investors by 16%.

A monthly comparison of domestic transactions shows that retail transactions decreased by 1.27% to N60.61 billion in March 2022 from N61.39 billion in February 2022.

Meanwhile, in the same period, the institutional composition of the domestic market increased by 7.48% to N82.48billion in March 2022 from N76.74billion in February 2022.

The 2021 transaction data shows that domestic investors contributed 77.24% of the total amount of transactions, whilst FPI contributed 22.73% 0f the total transactions in the same period, 2022 data revealed domestic transactions to be N563.29 billion and FPI N129.01billion.

The ratio of total domestic transactions to total foreign transactions tilted remained 77:23 at the end of March 2022, according to analysts.

A further breakdown of the FPI transactions showed that foreign portfolio inflows reduced to N16.37 billion (from N20.86 billion). Meanwhile, foreign portfolio outflows increased to 25.80 billion in March from N24.57 billion month on month in Feb 2022.

On the part of local investors, analysts at Cowry Asset Management said they saw an increased stake in the equities market – their purchase transactions were N76.08 billion, higher than N67.01 billion worth of outflows.

The equities market continues to be bullish in the first quarter of the year amid releases of the audited 2021 financial results. This was despite the dwindling level of participation by the foreign portfolio investors.

“We expect that going forward the performance of the local bourse would chiefly depend on the perceived level of risk in the political space as well as the performance of companies in Q1 2022”, Cowry Asset analysts stated.

In the short to medium term, analysts at Cordros Capital hint about their expectation that domestic investors will continue to dominate market performance albeit, buying activities will be constrained by expectations about an uptick in FI yields amid uncertainties associated with an election cycle.

Also, they said FPIs who have exhibited a lacklustre interest in domestic equities are likely to remain on the sidelines due to sustained FX liquidity challenges and interest rate hikes by central banks in advanced countries.

#Foreign Investors Sidestep Naira Assets