The Nigerian Stock Exchange (NSE), kicked off the year with a blistering start, even though the gains seem to have tapered off a bit. Year to date, the All-Share Index is up 10.50%, while market capitalization is ₦15.1 trillion.
Data from the exchange’s Domestic and Foreign Portfolio reports for 2016 and 2017 show that foreign investors comprised 44.95% and 47.49% of the entire market respectively. In 2014 and 2015, foreign investors were dominant in the market, comprising 57.52% and 53.70% respectively of all transactions.
Here is a look at the factors that may have led to this, and how this can be changed going forward.
Some of the biggest companies on the Nigerian Stock Exchange are multinationals, some dating back to Nigeria’s pre-independence era, or acquired after then. These include firms like Unilever, PZ, Guinness and Nigerian Breweries. Their parent companies continue to maintain significant stakes in them.
Emerging markets like Nigeria offer much more robust returns for foreign investors, compared to their home countries that give single-digit returns.The NSE All-share Index was up by 40% in 2017, one of the best performing in the world.
Exchange rate differential means these investors are able to devote a smaller fraction of their portfolio.
Indigenous companies, such as GT Bank and Access, also have foreign investors holding significant stakes in them.
Ignorance and Apathy by of domestic investors
Domestic investors remain hurt by the 2008 stock market crash which saw them lose billions of Naira. Many also remain largely unaware of what goes on in the stock exchange. Rogue stockbrokers in some cases have swindled investors of their hard-earned funds.
Companies with poor corporate governance have failed to deliver robust returns to investors both in terms of dividends and price appreciation.
Where are the young lions?
In advanced markets like the United States, tech giants like Facebook, Amazon, Apple, Netflix, and Google (FAANG) are listed on the stock exchange. These are easily recognized by the country’s millennial who use their services on a daily basis.
Tech firms on the Nigerian Stock Exchange are largely laggards and in some cases, are not known by the average millennial here.
Downside of having foreign investors as key stakeholders
Foreign investors tend to take off at the slightest signs of difficulties leading to capital flight. This happened during the months leading to the 2015 election and in 2016 when Nigeria was battling with a foreign exchange crisis. Investments like this are called hot money because of their fickle nature. Sudden withdrawals of such funds can often lead to pressure on foreign exchange reserves.
The Nigerian Stock Exchange as part of its 2018 target, plans to create a retail coverage department that will create publicity for simple retail products.
Some analysts have also suggested that firms operating in strategic sectors such as telecommunications should be compelled to list on the exchange. This would encourage domestic investors to buy in and deepen the market.