NIGERIA’s stock market gained N3.281 trillion in the last three weeks of trading sessions as investors’ sentiments went upbeat following the President Bola Tinubu administration’s removal of fuel subsidy, and exchange rate unification
As a result, the All-Share Index (ASI) rose by 11.38 per cent to 59,000.96 basis points, hitting a 15-year high, and the market capitalisation closely inched by 11.37 per cent to N32.126 trillion between May 30 and June 16.
The positive performance pushed the year-to-date return of the index to stand at 15.12 per cent as of Friday, June 16, even as the five major sectoral indices tracked appreciated. See the chart below.
The sentiment arose from President Bola Tinubu’s “audacious economic actions, which remarkably increased investors’ confidence,” David Adonri, the executive vice chairman of Highcap Securities Limited, said.
“Market correction may occur in due course to purge equities of excessive sentiment. If half-year results justify the recent policy hype, another rally may ensue.
“While it is heartwarming to see demand for equities rise in the secondary market, I hope this can translate into reactivation of the primary market, which is the essence of the capital market,” Adonri explained in a chat with The ICIR.
Analysts at Cowry Asset Management said that the unification of the exchange rate is also expected to attract foreign investors.
It also comes with short-term pain and long-term gain, they said.
A professor of capital market at Nasarawa State University, Uche Uwaleke, recalled that when former president Goodluck Jonathan congratulated his successor, then incoming President Muhammadu Buhari, the equities market leapt.
“I recall at that time it was called the Buhari effect. We had the Buhari effect around March 2015, but it didn’t last because after he came into office, it took time to put several things in place,” he said.
Foreign investors’ confidence eroded
Foreign investors’ confidence in the Nigerian stock market has dropped significantly in past years, as foreigners faced difficulties repatriating their funds due to scarcity of foreign exchange, and weakening foreign direct investment (FDI), foreign portfolio investments (FPI), and other capital importation.
Total capital importation in 2022 at over 20 per cent declined to $5.32 billion, relative to $6.70 billion in 2021, a significant weakness to 2020 and pre-COVID years, and reflected a lack of investor confidence in the forex regime, especially with currency rationing occasioned by relative scarcity.
“That shows that no matter how attractive the domestic capital market is, foreign investors will always factor in the ability to transfer their domestic earnings into the foreign exchange that they can repatriate to their countries,” the director-general, Securities and Exchange Commission (SEC), Lamido Yuguda, pointed out at the first capital market committee (CMC) held in April.
The Central Bank of Nigeria (CBN) floated the exchange rate on June 14 to allow the forces of demand and supply to determine the rates.
Uwaleke said, “The only way to maintain and allow market forces to determine the naira rate and have stability is either you have sufficient (external) reserves or enough inflows by way of exports.”
He feared that the foreign portfolio investment (FPI) coming in would not be long-term.
“What we need in the country is foreign direct investment, which might not start flowing immediately because of factors like insecurity and the overall business climate,” Uwaleke, who also serves as president, Association of Capital Market Academics of Nigeria, said.
Drop in portfolio investment
Every month, the Nigeria Exchange Limited (NGX) polls trading figures from market operators on their domestic and foreign FPI flows, and reports them in its ‘Domestic and Foreign Portfolio Participation in Equity Trading.’
The latest report showed that as of April 30, total transactions in the equities market increased by 30.77 per cent, from N146.22 billion in March to N191.21 billion in April.
When compared to the N205.88 billion reported in April 2022, it showed that total transactions decreased by 7.13 per cent.
But the total value of transactions executed by domestic investors outperformed transactions conducted by foreign investors by about 92 per cent.
Further analysis of the total transactions between the current and previous month domestic transactions increased by 33.35 per cent, from N137.03 billion in March to N182.74 billion in April 2023.
Total foreign transactions, however, decreased by 7.83 per cent from N9.19 billion to N8.47 billion between March and April.
Historical analysis of domestic and foreign transactions
Foreign transactions decreased by 63.02 per cent from N1.025 trillion in 2015 to N379 billion in 2022, while domestic transactions increased by 120.77 per cent from N881 billion to N1.945 trillion in the same period.
Total domestic transactions accounted for about 84 per cent of the complete transactions carried out in 2022, against foreign transactions that accounted for about 16 per cent of the total transactions in the same period.
Meanwhile, the transaction data for 2023 shows that total domestic transactions are N659.26 billion, while total foreign transactions are N62.18 billion.
Foreign investors exit worrisome
Since 2020, after the Covid, there has been a continuous exit of foreign investors from the domestic market, leaving local investors to hold sway.
But what is likely to happen now is that many foreign investors would be showing interest, and domestic investors would be positioning in anticipation of that as the banking industry responds significantly to reform, Uwaleke said.
The big banks have proven over time to be the principal vehicle of capital importation into the country, he noted.
A look at some banks’ current share prices showed Stanbic IBTC Holdings has risen to N52.00; Zenith Bank at N31.00; Guaranty Trust Holding Company, N30.60; Access Holdings, N14.25; and FBN Holdings, N15.80.
“The major banks’ shares are appreciating significantly on the back of this unification, and the expectation is that more capital inflows will come in. So when we have foreign investors coming in, they will likely displace domestic investors soon,” Uwaleke said.
Challenges in forex unification
Uwaleke believed that except Nigeria gets to the point where it diversifies its export base, what is happening now is temporary.
“Mark you, portfolio investment is nothing but hot money. As it seems, investors may be attracted to the market because the return on investment will be high. At the slightest shock, they will leave.
“So, sustainability is tied to companies’ fundamentals,” he said.
He pointed out that foreign investors want stability, where they will have an idea of what it will take to bring in and take out their money.
“It then means that the regulator must guarantee and take care of the supply side of forex.
“If we completely float the naira, which I will recommend, there has to be a plan on the ground. That could mean, for example, liberalising the market so that even the items you deny access to forex will be welcome.”
Senate promises improvement in FDI
The Senate president, Godswill Akpabio, has hinted that the 10th National Assembly would make laws that will attract FDI into the country, as well as improve the country’s revenue stream.
That would be welcome news to analysts like Adonri, who said, “Such investors can repatriate their profit back to their countries. If the operating environment for businesses is enabling, the FDI environment will include adequate security, sound legal and regulatory framework, ease of doing business, low cost of production, liberalised foreign exchange market with freedom of movement of capital, business-friendly taxation, world-class infrastructure, the available pool of skilled labour and government incentives to encourage foreign direct investment.
“The National Assembly can examine the laws guiding these areas, amend those that are inimical to FDI, or enact new ones that will encourage FDI; foreign investors will be attracted to Nigeria.”
He added that improving Nigeria’s revenue stream means growing the gross domestic product (GDP).
He explained, “Appropriate fiscal and monetary policies can help achieve such a goal. Massive reduction of import dependence and export promotion are the main strategies for increasing domestic wealth creation.
“If the NASS can appropriate properly, and enact or amend laws to enhance these areas, GDP growth can be assured.”
