Domestic Investors Still Hold Ace in Nigeria’s Stock Market

Domestic investors have continued to overshadow their foreign counterparts in terms of participation in the Nigerian capital market, amid numerous regulatory reforms. In this report, Kayode Tokede writes on the trending domestic investors’ participation in the stock market over 10 years and the prospects for foreign investors

An Investigation by THISDAY revealed that foreign investors’ participation in the stock market overtook domestic investors’ only in 2018 and later, between 2014 and 2023. 

The profile of investors in Nigeria’s domestic capital markets in 2023 was very different from what it was then. Foreign Portfolio Investment (FPI) has declined over successive years and makes up a small proportion of the investment pool.

In 2018, foreign investors’ participation in the stock market was 50.70 per cent as against 49.30 per cent recorded by domestic investors. In the same period, the total transaction was N2.4 trillion out of which the share of foreign investors was put at N1.22 trillion, while those of domestic investors was N1.19 trillion. 

Further breakdown revealed that foreign inflow and outflow were N576.45 billion and N652.65 billion in 2018, respectively. On the flip side, domestic retail investors and domestic institutional investors transacted N524.63 billion and N560.67 billion in 2018 respectively. 

Before 2018, domestic investors dominated the market, trading an average of 53 per cent as foreign investors had exited the market in 2007-2008 amid the global economic crisis.

As of 2023, domestic investors continued to dominate the stock market on the backdrop of the push by some domestic institutional investors whose transactions amounted to N2.05 trillion out of the overall N3.58 trillion.

Findings showed that Pension Fund Administrators (PFA) are part of the domestic institutional investors responsible for the stock market growth amid double-digit inflation, insecurity, and weak purchasing power, among other macroeconomy challenges.

The Vice President, of Highcap Securities Limited, Mr. David Adonri recognised the role of PFAs in lifting the stock market, stating that some high-network investors opted to invest in the fundamental stocks on the bourse.

According to him, “The only thing that drives domestic investors’ increasing participation in the stock market performance so far has been the keen interest of PFAs investment in some fundamental stocks and that the latest policies by the CBN on foreign exchange have contributed to increasing participation in the stock market.”

Analysts at Coronation Asset Management Company in a report titled, “Investment Opportunities from FX Liberalisation”, said foreign investors were still a significant factor in the Nigerian equity market in 2017; much less now, although recent data showed a net inflow of foreign investment into the stock market.

They noted that the monetary authorities were also able to engineer market interest rates above the rate of inflation, something to which investors usually respond positively. “This raised one question about the second half of 2023, which was, to which direction interest rates in Nigeria would be going?

“A liberalised foreign exchange rate points to elevated interest rates to make it worthwhile holding money in naira. Fuel subsidy removal, effective May 31, 2023, suggests that cost pressures will push inflation upwards, which also argues for elevated interest rates. Against this, the All Progressives Congress (APC) manifesto proposed low-interest rates to encourage economic growth. We do not know, at this stage, how the APC administration and the Central Bank of Nigeria will resolve this critical area of policy.

“On the bright side, the removal of fuel subsidies and the liberalisation of the naira foreign exchange rate are historic events, and will themselves straighten out much of the dysfunctional economic behaviour we have become accustomed to,” Coronation stated.

On June 14, 2023, the Central Bank of Nigeria (CBN) announced the unification of all segments of the foreign exchange (FX) market, implying that the exchange rate will rise or fall based on the supply and demand in the market.

President Bola Tinubu had explained that he couldn’t have kept the previously multiple foreign exchange system and benefited from it, but instead, he decided to unify the official and parallel market rates to save the country from a financial crisis.

It was a testament to the rising confidence in local markets, as domestic investors in Nigeria have significantly overshadowed foreign investors in terms of participation, making up an impressive 88.52 cent of total market transactions in 2023 from 83.68 cent reported in 2022.  

This remarkable turnout from domestic investors can, in part, be attributed to recent governmental policy changes.  

The decision to withdraw fuel subsidies and unify the exchange rate appears to have galvanized domestic investment, rejuvenating interest and participation in the Nigerian stock market.  

However, the unification has been reflected in the rate of Naira since June 2023, dropping to N1,444.56 against the dollar as of January 7, 2024, from N770.38 against the dollar it closed in June 2023. 

 However, the decline in foreign investment serves as a cautionary note, signaling the need for a more diversified investment base to ensure long-term market stability, in which PFAs are currently playing the role. 

The subdued participation of foreign portfolio investors is likely reflective of broader concerns about the state of the Nigerian economy amid foreign exchange scarcity and CBN clearing backlogs. 

As the stock market signifies a positive momentum, ensuring its sustainability will likely require targeted policy measures aimed at alleviating foreign investor concerns and fostering a more balanced, stable investment environment. 

Clearing FX Backlog

The Governor of CBN last week stated that Nigeria will soon be free of its $7 billion foreign exchange backlog, as $2.3 billion has already been paid to foreign airlines and other sectors.

On September 26, 2023, the CBN governor, had said the apex bank was working on settling the $7 billion foreign exchange backlog liabilities. The apex bank, which began clearing the debt in November 2023, recently released $500 million to various sectors to address the backlog of verified FX transactions.

Adonri expressed that with the move to clear the foreign exchange backlog, foreign investors’ confidence may be restored to the stock market and trigger increasing participation in 2024. 

“For now, we will continue to see more PFAs and domestic investors participation in the stock market as investors confidence has been restored coupled with impressive corporate earnings by listed companies,” he added. 

The Managing Director, of Wyoming Capital and Partners, Mr. Tajudeen Olayinka stated that foreign investors are on the sidelines, awaiting the backlog to be cleared. He expressed optimism that once it is cleared, the stock market might begin to see an uptick in foreign investors participation this year and next coming year.

Prospects for Foreign Investors

Capital market analysts have explained that the Nigerian stock market cannot operate in isolation. With the call for more PFA exposure in the stock market, domestic investors are expected to continue to dominate the market. 

A Pan-African credit rating agency, Augusto & Co had projected that Nigeria’s total pension assets will rise to an impressive N19 trillion by the end of 2024.

Augusto said Nigeria has the second-largest pension industry in Africa with assets under management (AuM) of N16.1 trillion ($34.9 billion) as of May 31, 2023, representing a 13.5 per cent increase from the corresponding period in the prior year.

The agency said the 13.5 per cent growth was primarily fueled by robust investment returns and, to a lesser extent, by additional contributions, mirroring the patterns observed in other well-established pension markets.

“Given the NGX’s bullish stance in recent times, we expect PFAs to realign their investment portfolios to capitalise on favourable market conditions, which could potentially amplify investment returns in the near to medium term,” the firm added. 

Adnori added that Nigeria’s population size is another contributing factor to drive domestic investors’ participation once the government and market stakeholders introduce co-friendly policies to attract the youth. 

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