The Chief Executive Officer of Cowry Asset Management, Mr Johnson Chukwu, has explained how a combination foreign exchange crises have negatively impacted foreign investors’ sentiment in Nigeria’s equities market.

The analysis was in response to the recent Nigerian Stock Exchange’s Domestic and Foreign Portfolio Investment Report for January 2021, which showed that domestic participation in the equities market outperformed foreign transactions, as the latter could only account for 20% of the total market activities.

The report further indicated a downward trend in the share of foreign participation in the equities market, from about 51% in 2018 to 20% as at January 2021.

Reacting to the development, Mr Chukwu in an interview with Arise TV blamed the combination of FX liquidity crisis and instability of the Nigerian foreign exchange market as underlying causes for the downward trajectory.

He said: ‘’If you look at the trend in the past three years, you will observe that foreign portfolio investment into Nigerian equities market has been declining. In 2018, it was 51% of the entire market, so they actually trumped local investors. By 2019, it declined to 49%, implying that the local investors had trumped them. However in 2020, they only accounted for 34% of the entire market, it further came down to 20% by January 2020. Of course, we know those factors that are driving away foreign portfolio investment in the country, and until those factors are addressed, we are likely to see the trend continue.”

On how FX instability and illiquidity contributed to the decline, Mr Chukwu remarked that: “The main factor that drive foreign inflow into the economy is the liquidity in the FX market. Foreign investors want to be able to convert back to their foreign currencies when they want to exit. If there is no liquidity in the FX market, foreign portfolio investors stay away from the market. As you know, the Nigeria FX market witnessed locking of foreign portfolio investors who sold their investments and wanted to exit, but they could not access FX to exit. So because those people couldn’t exit, new investors couldn’t come in. You can’t really go into a market when people are trapped.

“Another factor that could influence them is the stability or predictability of the exchange rate. But the most important factor is the liquidity in the FX market. If you look at the year, these foreign portfolio investments were impressive, oil price was quite strong, for example in 2018, they brought in about N1.2 trillion accounting for 51% of the market activities.”

On the flip side, Mr Chukwu explained why local investors’ participation has been growing. He attributed the increase to the collapse of interest rates and the impressive returns posted by the NSE last year.

‘’The basic thing that happened was that because local interest rates collapsed last year and they remain very low even in January, , local investors particularly institutional investors are underweighting their portfolios in fixed income and overweighting them in equities. When interest rates are very low, investors will switch to the instruments that will give them high yield and in this instance, variable income assets like equities and that was what happened last year and is still happening now,’’ he said.

What you should know

• Nairametrics reported that despite a bullish run of the NSE in 2020, total investments in the Nigerian stock market as at January 2021 dipped by 13.7% M-o-M.
• Total foreign transactions as at the aforementioned period stood at N47.52 billion, while domestic transactions stood at N184.94 billion.