As concerns about general elections and worldwide economic turbulence grew, foreign investment outflows on the Nigerian Exchange Limited (NGX) surged to N122.97 billion in the first half (H1) of 2022, up 5.4% from N116.72 billion in the first half of 2021.
Foreign portfolio investors, according to experts, have mainly fled Nigeria owing to challenges with foreign exchange liquidity, resulting in a backlog of delayed external payments.
Foreign investors have continued to depart Nigeria due to the unfavorable investment environment in Africa’s largest economy.
They went on to say that there is no greater example of this than the reduction in FDI flows to Nigeria, which fell from nearly $4 billion in 2015 to $600 million in 2016.
In a report titled, “Nigeria: 2022 mid-year outlook: same challenges, new shocks,” Cardinalstone Limited, noted that since Russia invaded Ukraine, emerging market (EM) debts and equities have suffered a net outflow of $18.7 billion from foreign portfolio investors.
Cardinalstone explained that investors were largely risk-averse due to, “global hawkish rendition; decline in global liquidity, and erosion of the stock of negative-yielding debt across developed markets from $11.3 trillion at the start of the year to the current value of $2.7 trillion.”
The report explained, “Akin to the trend witnessed in emerging and frontier markets, Nigeria was also mostly unappealing to foreign capital providers in H1 2022. This risk-off sentiment was fanned by geopolitical uncertainties and hawkish rendition from global central banks. In addition to these global factors, the lack of market reflective FX rates, illiquidity and a backlog of uncleared foreign exchange demand dampened investors’ sentiments.
“Even though it is yet to have any noticeable impact on the market, the recent MSCI proposal to reclassify Nigeria to a stand-alone status was inspired by similar FX concerns. In the first quarter of the year, the combined impact of the mentioned drivers (ex MSCI proposal) cascaded to a 17.5 per cent YoY decline in foreign inflows.
“Specifically, the “other investments” component of capital importation nosedived by 43.3 per cent YoY, while FPI contracted by 1.7per cent YoY. In our view, the imminent intensification of pre-election activities will likely keep foreign investors at bay and throw up more financial account-related concerns.”
Despite the rising outflow, the latest NGX domestic and international investment report for H1 2022 indicated that foreign investment inflows increased by 114.5 percent to N120.51 billion in H1 2022, up from N105.24 billion in H1 2021.
According to the NGX data, both international and local investors have transacted N1.66 trillion in the stock market this year, a remarkable rise of 60.7 percent over N1.03 trillion in the first half of 2021.
The stock market increased its market capitalization by N5.64 trillion in H1 2022, owing to strong performance by listed basic firms. The market capitalisation in H1 2022 increased by N5.64 trillion or 25.3% to N27.935 trillion on June 30, 2022, from N22.297 trillion when trading began on January 4, 2022.
However, extract from the report by the bourse revealed that foreign investors’ transactions moved to N243.48billion in H1 2022 from N221.96billion in H1 2021, while domestic investors’ participation in the stock market increased significantly to N1.42trillion, representing an increase of 74.6 per cent from N812.46billion in H1 2021.
It implies that domestic institutional investors remain the most dominant players in the stock market of the NGX.
Domestic investors have contributed 85.35 per cent in H1 Year-to-date (YTD) performance from 78.54 per cent YTD H1 2021, while foreign investors’ contribution dropped to 14.65 per cent YTD H1 2022 from 21.46 per cent YTD reported in H1 2021.
Historically, the performance of the stock market over 15 years period revealed that domestic transactions dropped by 58.8 per cent from N3.56trillion in 2007 to N1.47trillion in 2021, whilst foreign transactions also decreased by 29.38 per cent from N616billion to N435billion over the same period.
According to the report, “total domestic transactions accounted for about 77 per cent of the total transactions carried out in 2021, whilst foreign transactions accounted for about 23 per cent of the total transactions in the same period.
The transaction data for 2022 shows that total domestic transactions are circa N1.42 trillion, whilst total foreign transactions are circa N243.48 billion. “