Uncertainties: Transactions on Nigerian Exchange Down by 63%

Uncertainties: Transactions on Nigerian Exchange Down by 63%

Total transactions conducted in the Nigerian Exchange declined strongly in the month of August 2023 as both foreign and domestic investors pulled back amidst uncertainties in the local economy.

According to the domestic and foreign portfolio report of the Nigerian Exchange (NGX), total transactions in the domestic equities market dropped to a five-month low, declining by 62.7% to N262.56 billion in August from N702.99 billion in July.

The bearish performance occurred as a result of the weak macroeconomic direction and uncertainties in the economy amidst rising inflation and interest rates – key drivers of yield repricing in the fixed income market.

Unfortunately, both the equities and fixed income markets weakened in the months due to investors’ apathy toward naira assets. The real return on investors has worsened in the debt market, though the equities market closed the third quarter at a 30% year-to-date return.

According to the NGX report, the local investors led the decline in transaction levels reported in August, a development that analysts said it reversed the previous trend – a pattern supported by macroeconomic woes.

The report showed that domestic transactions which accounted for 85.8% of gross transactions on the Nigerian Exchange went down by 66.0% to N225.40 billion in August from N662.45 billion in July 2023.

Also, foreign transactions which accounted for 14.2% of gross transactions conducted in the local exchange recorded their second consecutive month of decline, falling by 8.3% to N37.16 billion in August from N40.54 billion as the government’s reform-induced momentum slowed, dampening foreign sentiments, Cordros Capital said. 

“We expect domestic investors to continue to dominate the domestic equities market over the short-to-medium term, even as higher fixed income yields may constrain buying activities.”

Simultaneously, while foreign investors will likely continue to adopt a wait-and-see approach in the near term, we expect to see improvement in foreign participation over the medium term. Cordros Capital said its medium-term expectation is hinged on the expectations of positive policy pronouncements and reforms by the current administration.

A closer examination of investor types revealed that institutional investors outpaced retail investors by a notable 14% margin. In particular, retail transactions dwindled by 57.76%, sliding from N229.95 billion in July to N97.13 billion in August 2023.

Meanwhile, institutional investments also contracted, albeit by a greater extent, plunging by 70.34% from N432.49 billion in July 2023 to N128.27 billion in August 2023. Current data for 2023 suggests that total domestic transactions hover around N2.194 trillion, whereas total foreign transactions stand at roughly N222.78 billion.

Cowry Asset Management Limited said negative sentiment in the local bourse has arisen due to economic uncertainties, including currency fluctuations and inflation, while government policies have introduced an element of unpredictability.

Asset managers said despite these challenges, foreign investors appear to be reevaluating the Nigerian market’s potential, emphasizing the need for a nuanced understanding of the factors influencing market dynamics.

Analysts said the recent surge in foreign investor activity in the Nigerian stock market stands in contrast to the pre-COVID-19 era when their market share was below 25%. This shift can be attributed to a change in sentiment driven by macroeconomic factors and government policy reforms. Naira Devaluation Deepens Economic Crisis in Nigeria