MCSI Index re-balancing could inject steroids into an already charged Nigerian stock market

Rebalancing  of the Morgan Stanley emerging market index could have a positive effect on the Nigerian Stock Exchange (NSE) this week. The All Share Index is up 21% year to date, largely driven by a change in the PENCOM rules which mandates them to increase their weighting of stocks in their portfolio as well as the CBN created investor window that have allowed foreign investor participation in the market.

The rebalancing of the index was due to the movement of Pakistan from the frontier market index to the emerging market index. Nigeria’s proportion of the MCSI was increased from 6.5% to 7.9%. A frontier market is a developing country that is in between the least developed countries and emerging countries. The term frontier market was coined by Fahrida Khambatta in 1992.

The effect?

• Morgan Stanley’s decision will have a greater impact on blue chip stocks on the NSE as they have an increased weighting.
• Many international fund managers who have passive portfolios tend to mirror the index.
• Morgan Stanley had in 2015 moved Nigeria to a ‘standalone’ position due to liquidity issues in the country’s foreign exchange market.
• The Central Bank of Nigeria (CBN) has addressed these issues with its pumping about $5 billion into the fx markets, and various windows including the investors/exporters (NAFEX). The investment bank will take a decision to review Nigeria’s position later this month.
• Some of the stocks that have had an increased weighting include Nigerian Breweries, Zenith Bank, GT Bank, Nestle and FBN holdings. The NSE All Share Index lost 6.17% in 2016, as the economy slipped into recession.