Investors in the Nigerian stock market may need to keep an eye on the exit, as troubles in emerging markets could lead to foreign investors exiting the market.
Emerging markets have had a rough patch this week, beginning with news of South Africa’s economy technically entering a recession. GDP growth declined by 2.6% in the first quarter. This led to the rand depreciating by 3% against the dollar.
Argentinian President Macri was forced to call on the IMF to expedite a $50 billion lifeline. A series of wrong economic decisions has led foreign investors to exit the country, putting pressure on its reserves.
Other emerging market currencies such as the Mexican Peso and Indian Rupee have also dipped.
Stocks are also falling
Stocks in these markets are also dropping, the MCSI Emerging Markets Index has fallen sharply in the last three days.
Secondary factors
Possibilities of the United States Fed (the country’s central bank) hiking interest rates are at least twice this year, could also worsen outflows from emerging markets.
The United States has also shown no signs of relenting in its trade war with China and other countries. Tensions emanating from this, lead to a flight to safety and investors moving funds to major financial markets.
How does this affect you?
Frontier markets like Nigeria could witness investors exiting. While Nigeria may be immune from exchange rate pressures, due to robust external reserves, the stock market could come under pressure.
September has shown signs of being an even more bearish month. The index is down 1.24% three days into the month. Year to date losses are now at the 10% mark.
Foreign Portfolio Investors make up a large proportion of the Nigerian stock market and have been steadily reducing their activities over the last few months. Foreign sector participation in the NSE declined sharply from 54.5% in June to 24.7% in July.