Trading by foreign investors in the market fell to its lowest point in the past three months as concerns mounted over the worsening foreign exchange (forex) crisis.
Foreign portfolio investment (FPI) trade data released over the weekend indicated that foreign transactions fell successively over the past two months to hit a three-month low; its second weakest performance this year.
The report showed that foreign transactions decreased by around 30% or N29.68 billion in July 2022; continuing the descent of 45.30 billion naira in May 2022 and 42.19 billion naira in June 2022.
Most analysts attributed the low appetite of foreign investors to the forex crisis, as investors feared being trapped in the forex cycle of scarcity and uncertainty.
Bismarck Rewane’s Financial Derivatives Company (FDC), in its latest weekend economic review, said currency demand pressures will persist; a view shared by most analysts.
“We expect a further decline in external reserves due to central bank intervention in the foreign exchange market and continued shortfalls in government revenue relative to expenditure. Therefore, the central bank’s ability to stabilize the currency is at risk. to be weakened,” the FDC said.
Analysts say forex liquidity remains tight and as such the official naira exchange rate could be devalued by around 5%, while the parallel market rate could fluctuate between 675 naira per dollar and 690 naira. per dollar.
“Headline inflation is expected to remain elevated due to lingering monetary pressures in the system. Inflation will soar further in August before moderating in September. Nigeria’s oil production will remain subdued in August as ongoing vandalism issues pipelines, oil theft and operational challenges continue, therefore oil revenue is expected to remain below budget,” the FDC said.
Afrinvest Securities said the naira is expected to trade in a similar range across forex segments “even though the mismatch between forex supply and demand persists.”
Cordros Capital analysts noted that while the CBN has enough liquidity to support the foreign exchange market in the short term, it is not viable in the medium term given the state of foreign inflows.
Analysts pointed out that given the small increase in reserves given the low level of crude oil production and the high under-recovery costs of premium automotive gasoline (PMS), foreign portfolio investment will be needed to maintain medium and long-term forex liquidity levels.
“Therefore, we believe that further adjustments to the naira/dollar peg closer to its fair value and exchange rate flexibility would be important in attracting foreign entry into the market,” Cordros Capital said.
The report also indicated a generally weak appetite for Nigerian equities, with total transactions by foreign and domestic investors falling to its lowest level this year in July 2022. Total transactions on the Nigerian Stock Exchange (NGX) fell to a low of N101.18 billion in July. 2022 from a high of 607.45 billion naira in May 2022. Total transactions had fallen to 156.52 billion naira in June 2022.
The FPI report, coordinated by the Nigerian Stock Exchange (NGX), included transactions from almost all custodians and capital market operators and is widely regarded as a credible measure of the FPI trend. The report uses two key indicators, inflows and outflows, to gauge the mood and participation of foreign investors in the stock market and the economy. While inflows and outflows indicate the direction of portfolio transactions, total REIT measures momentum and level of participation.
However, a seven-month year-to-date analysis showed that total REITs stood at N273.16 billion in July 2022, compared to N237.49 billion registered in the comparable period of 2021. Total transactions at NGX also increased to 1 naira. 76 trillion in the first seven months of this year, compared to 1.12 trillion naira in July last year.
The seven-month analysis reflects the performance of the first half, which was supported by the optimism recorded at the start of the second quarter. Total transactions by foreign portfolio investors in the first half of 2022 increased by 9.7% to 243.48 billion naira from 221.96 billion naira recorded in the first half of 2021.
The report states that foreign inflows increased from 105.24 billion naira in the first half of 2021 to 120.51 billion naira in the first half of 2022. Foreign outflows however also increased from 116.72 billion naira to 122.97 billion naira. Meanwhile, a proportional analysis indicated faster growth in inflows than outflows, despite the fact that the base numbers are almost in the same range. While foreign entries increased by 14.5%, foreign exits slightly exceeded one third with a growth of 5.36%.
The first half report represented a recovery for the market after a successive period of decline.
The FPI report for the first quarter of 2022 had shown a decline in both the real value and the proportionate participation of foreign investors in the Nigerian stock market. Net participation by foreign investors also remained negative with more outflows than inflows, although the gap narrowed.
Total transactions by REITs during the first quarter ended March 31, 2022 amounted to N128.91 billion, 14.2% or N21.3 billion below recorded N150.23 billion during the comparable period of 2021. The proportional participation of REITs in the Nigerian stock market fell by almost four percentage points, from 22.21% in the first quarter of 2021 to 18.62% in the first quarter of 2022.
A breakdown of REITs indicated a deficit for the country, although the gap between inflows and outflows narrowed considerably. Total REIT inflows stood at N55.33 billion compared to outflows of N73.58 billion in the first quarter of 2022. These compare to N60.11 billion and N90.12 billion registered respectively as entries and exits in the first quarter of 2021.
Meanwhile, trading on the stock exchange remained on the rise. Total transactions in the first half of 2022 stood at N1.66 trillion, compared to N1.03 trillion in the first half of 2021. Market turnover was driven by local investors, maintaining a trend of backward integration in recent years. Domestic investors accounted for 1.42 trillion naira in the first half of 2022 compared to 812.5 billion naira in the first half of 2021.
The Q1 2022 report had shown a similar trend, with the total number of transactions increasing from 676.53 billion naira in the first quarter of 2021 to 692.20 billion naira in the first quarter of 2022.
Total domestic investor transactions increased from N526.30 billion in Q1 2021 to N563.29 billion in Q1 2022. Individual retail investors accounted for N265.62 billion in Q1 2022 from 229 .79 billion naira in the first quarter of 2021 domestic institutional investors accounted for 215.19 billion naira in the first quarter of 2022 compared to 296.51 billion naira in the first quarter of 2021.
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REITs in the Nigerian stock market have fallen consecutively to the lowest levels in recent years. REITs had fallen 40.4% in 2021 to their lowest level in five years. The active participation of foreign investors in the Nigerian market decreased by 11 percentage points, from around 34% of total market transactions in 2020 to around 23% in 2021.
The annual FPI report had also shown a significant deceleration in FPI transactions and this was the main reason for the 12.4% drop in turnover from activities on the Nigerian Stock Exchange in 2021.
Total foreign trades in Nigerian equities fell to N434.50 billion in 2021 from N729.20 billion recorded in 2020. As a result, the percentage of REIT participation in total market transactions fell from 33.63% in 2020 to 22.88% in 2021.
The report had, however, shown an admirable improvement in the overall REIT deficit, with the gap between inflows and outflows having narrowed significantly in 2021 compared to 2020, although the country remains with a negative flow of REITs.
Inflows and outflows of REITs amounted to N204.88 billion and N229.62 billion respectively in 2021, indicating a deficit of N24.74 billion. These compare to inflows and outflows of N247.27 billion and N481.93 billion respectively in 2020, and a deficit of N234.66 billion.
REITs had also declined by 22.64% to a four-year low to close 2020 at N729.20 billion from the N942.55 billion recorded in 2019. The decline in REITs in 2020 counteracted the overall increase of the dynamics of the activities of the Nigerian stock. market, which recorded an increase of 12.45% in the total value of turnover.
The FPI’s reports had shown a wider gap between foreign portfolio inflows and outflows, implying that foreign investors surrendered more than two kobo for every kobo invested in 2020, the worst shortfall in recent years.
Total REITs rose from N1.208 billion in 2017 to N1.219 billion in 2018, before falling by 22.72% to N942.55 billion in 2019.
The FPI reports showed a continued negative trend in the combination of inflows and outflows, with more outflows than inflows, implying that foreign investors were selling more of their investments than they were buying more. This is called the FPI deficit.
Nigeria recorded a REIT deficit of 234.66 billion naira in 2020, an increase of about 125% from the 104.3 billion naira recorded in 2019. This implied that foreign investors sold more than two kobo for every kobo invested in 2020. FPI’s deficit was 66 naira. 3 billion in 2018.
Reports had also shown that the amount of transactions by foreign investors relative to total transactions in the Nigerian market had increased from around 49% of total activity in 2019 to around 34% in 2020. amounted to N247.27 billion. against outflows of 481.93 billion naira in 2020. Inflows and outflows stood at 419.13 billion naira and 523.42 billion naira respectively in 2019.
The Nigerian REIT had turned negative with a net deficit of 66.2 billion naira in 2018 after a world-leading stock market rally left the country with a surplus of 336.94 billion naira in 2017. The total foreign entries in 2018 stood at N576.45 billion. against outflows of N642.65 billion. Foreign inflows had in 2017 exceeded outflows at 772.25 billion naira and 435.31 billion naira respectively.