Foreign investors trade cautiously on Nigerian stocks amid FX uncertainty
Foreign investors continued to play on the sidelines of Nigeria’s equity market in June as currency volatility risks discouraged the offshore players from taking advantage of cheap valuations.
In the first six months of the year, foreign investors account for a meagre 39.52percent of transactions on the market as against 45.84percent in the first six months of 2019. On the other hand, domestic investors took advantage of the relatively cheap pricing to take position in bellwether stocks thereby accounting for 60.48percent of total transaction in the first six months of the year, compared to 54.16percent in the same period in 2019.
A further analysis show that total foreign transactions increased by 59.88percent from N35.24 billion in May to N56.34 billion in June while total domestic transactions decreased by 13.55% from N83.91billion in May to N72.54 billion in June 2020.
Speaking on the reduced participation of foreign investors in the equities market, Yinka Ademuwagun, fixed income & equity analyst at United Capital said foreign investors would continue to play on the sideline due to uncertainty in foreign exchange outlook.
“There is a lot of opportunities in the market as most of the stocks are currently underpriced but the fact that the FX uncertainty can wipe off their gains would continue to keep foreign investors on the sidelines, those who are currently in the market are finding it difficult to pull out their funds and this would discourage others from coming,” he said.
The Central Bank has continued to maintain capital control policy resulting in illiquidity for current foreign investors to pull out their funds, while manufacturers are finding it difficult to access the greenback to import raw materials.
In March, it suspended fx sales to retail currency traders, it also moved the rate for BDC to N380 to the U.S dollar from the previous N360. It subsequently adjusted the naira’s official rate to N360 weaker than its previous peg of N306, implying a 15percent devaluation. It devalued the official exchange rate earlier this month to N381 per dollar from N360
As at 30 June 2020, total transactions at the nation’s bourse increased by 8.17% from N119.15billion in May 2020 to N128.88billion in June 2020. The performance of June 2020 when compared to the performance in June 2019 ( N297.25billion) revealed that total transactions decreased by 56.64%. In June 2020, the total value of transactions executed by Domestic Investors outperformed transactions executed by Foreign Investors by approximately 12%
Local institutional investors however outperformed retail Investors by 10%. A comparison of domestic transactions in June and May 2020 revealed that retail transactions decreased by 23.35% from N42.19 billion in May 2020 to N32.34 billion in June 2020. Whilst the institutional composition of the domestic market also decreased by 3.64% from N41.72 billion in May 2020 to N40.20 billion in June 2020.
According to Ademuwagun, the risk appetite of domestic institutional investors such as Pension and insurance companies are not that massive compared to foreign investors.
“Retail investors are quick to take profit, once they make 10-11percent increase they are very quick to take out that profit unlike foreign investors who stay longer with big risk appetite because of the volume of fund,” he said.