Forex policy keeps foreign investors from equities

2021 is a very mixed and dicey year

FOR ME, THE POLICY OF CENTRAL BANK of Nigeria on foreign exchange has been a major factor behind the ins and outs of foreign investors. When they find it difficult to exit after they have made money in Nigeria, it is discouraging; or when they come in and there is a devaluation of the naira, it wipes off all their gains within that period...

The year 2020 witnessed lower participation from foreign portfolio investors and local investors dominated share deals at the NSE, what does this really imply and how do you see it playing out this year?

AMBROSE OMORDION, an astute investment analyst, is one of the ubiquitous experts who provide deep analyses of market trends in the Nigerian capital market. He is the Chief Research Officer (CRO) of Investdata Consulting Limited, and leads a team of other experts in the firm. In this interview with BUSINESS A.M’s CHARLES ABUEDE, the capital market expert takes a broad and succinct look around the market environment to spot lurking opportunities and risk factors for investors and the economy while hinting at the government and market regulators on tips that can help the market deliver its mandate as an enabler of economic growth. EXCERPTS:

FOR ME, THE POLICY OF CENTRAL BANK of Nigeria on foreign exchange has been a major factor behind the ins and outs of foreign investors. When they find it difficult to exit after they have made money in Nigeria, it is discouraging; or when they come in and there is a devaluation of the naira, it wipes off all their gains within that period. The expatriates are being careful. Nigeria has different exchange rates for different people. These portfolio investors want various rates to be harmonized. Just let there be one rate for everybody within the economy. If that is achieved and our external reserves are still up, it will attract them.

Regardless, I believe that anywhere in the world if you depend on foreign investors, your market will not be stable for planning. In any country, the stock market is for long term investment which people can plan with. But when foreign investors come into the market and have 80 per cent of the market when they are going, the market will start bleeding and you cannot plan with such a market. Now, the reverse is the case in Nigeria as we are seeing local investors taking a big chunk of the market. It is a welcomed development for the local equities market.

Also, despite the usual fear in January, the January effect did not really play out in our market this year because the market is not in the hands of those who start running once they hear a cough. Now, we have people with long term funds that are also dividend players in the market because they are pension administrators. For me, it is a welcomed development that we have less participation from the expatriate side. However, I believe that the foreign investors would come back and it would be a plus but they cannot dominate the market again like before and that would support retail investors. With the current arrangement, the market is becoming more stable and that is what we need to plan and know that a market is a good one. For foreign investors, they are welcomed anytime, but I think policy direction is what they are just waiting for.

What is your appraisal of what happened in the Nigerian capital market in 2020?

If you look at what happened in the market in 2020, I’ll say it is something that surprised many analysts and investors. The return was unprecedented because following the outbreak of COVID-19 in Nigeria around February 2020, the market reacted negatively and there was a lot of sell-offs in the market that dropped the market to 11-year low by the end of March. This was caused by panic sell-offs. The outbreak of the pandemic also affected the oil price which fell as low as $12 per barrel, and the market also reacted to that. But the good thing is that immediately the prices were undervalued, and there was value in the market and the price of crude oil started looking up again in April, market responded because of positive sentiments from the recovery of crude oil price. These are factors that drove the market higher especially in April. Then, numbers that came in 2019 also supported the market recovery in April because the financial performance of most of the companies beat market expectation. Dividends were still coming and Q1 numbers for many companies were not too bad and that supported the market in April and May.

However, the market slowed down in June because of expected Q2 numbers. And despite that there was a whole month lockdown, the Q2 numbers of many companies were still above expectation. People expected that the pandemic will gravely affect performance because the lockdown led to low activities in the economy and that was reflected in the Purchasing Manager Index (PMI) for the month. However, that didn’t affect the Q2 numbers of many companies and that also gave the market another leaf of support. Then, the crude oil price sustained its recovery and the sentiment of low interest that also affected the fixed income market was a plus for the equities market because people were seeing opportunities in the market. These are what kept the market throughout the year and positioned the Nigerian equities market for 50.034 per cent gain to close 2020. This is the same market that recorded a loss of 18.2 per cent as of the end of March. For the market to have risen by more than 50 per cent from those points means that in essence, the market even gained more than 50 per cent.

However, our concern was that the market rally was not general or even. Very few securities drove the market, and