LAGOS – Analysts are worried that buying activities in the equities market will likely be constrained by elevated yields in the fixed-income market following the MPC’s tight monetary policy stance.
Besides, they expect foreign exchange liquidity constraints and naira volatility to limit foreign investor participation in the equities market if the trend continues.
They said that for domestic investors to continue to contribute the bulk of total transaction value, apex authorities must improve foreign exchange liquidity and carry trade must improve to ensure sustainability.
According to the National Bureau of Statistics (NBS), capital importation into Nigeria declined by 22.9% q/q to USD2.60 billion in Q2-24 (Q1-24: USD3.38 billion).
The slowdown in capital importation reflects weaker foreign investor confidence induced by unfavourable macroeconomic conditions and lingering foreign exchange liquidity constraints.
Accordingly, the breakdown shows a broad-based contraction across foreign direct investment (-75.0% q/q to USD29.83 million), foreign portfolio investment (-32.3% q/q to USD1.40 billion) and other investments (-1.0% q/q to USD1.17 billion).
However, on a year-on-year basis, capital importation rose substantially by 152.8%, primarily driven by a low statistical base effect from the corresponding period of 2023.
According to the domestic and foreign portfolio report of the Nigerian Exchange (NGX),total transactions in the domestic equities market declined by 22.8% m/m to NGN379.52 billion in August (July: NGN491.61 billion).
Cordros Securities Researchers in their Weekly Economic and Market Report, stated that: “if local FX liquidity and carry trade improve, and investors can easily repatriate capital, then foreign capital inflows may increase over the short-to-medium term.
“We think the lower participation in the local bourse reflects the dual impact of, higher yields in the fixed-income market and, lingering FX liquidity constraints”
They argued that: Parsing through the breakdown provided, we highlight that domestic transactions (84.9% of gross transactions) dropped by 25.8% m/m to NGN322.05 billion (July: NGN434.09 billion) following contraction of 33.5% m/m and 12.9% m/m across inflows from retail and institutional investors respectively.
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Besides, collections from foreign transactions (15.1% of gross transactions) edged lower by 0.1% m/m to NGN57.47 billion in August (July: NGN57.52 billion), signaling the third consecutive month of contraction.
“While we expect domestic investors to continue to contribute the bulk of total transaction value, buying activities will likely be constrained by elevated yields in the fixed-income market following the MPC’s tight monetary policy stance.
“On the other hand, we expect FX liquidity constraints and naira volatility to limit foreign investor participation in the equities market”.
Mr Adewale Oyerinde, Director-General, Nigeria Employers’ Consultative Association, (NECA),in a chat with Daily Independent, insisted that Foreign Portfolio Investors (FPIs) who have exhibited a lacklustre interest for domestic equities are likely to remain on the sidelines due to sustained foreign exchange liquidity constraints and elevated interest rates in advanced countries.
He implored the Federal Government to initiate policy direction towards improving and sustaining contribution of non-oil sectors by addressing resultant high cost of production linked to the massive infrastructural deficit, which compels investors to provide required infrastructure at their own expense, multiple taxation, frequent changes in government policies, low government patronage of Made-in-Nigeria goods.
He added: “Only fiscal, monetary pro-business policy will make domestic investors dominate market performance, even as buying activities will remain constrained by elevated yields in the fixed-income market.
“This is because the performance of the non-oil sector proved the relevance and importance of the sector in driving the path of growth and sustenance of the economy”.
Dr. Muda Yusuf, the Founder/CEO of the Centre for the Promotion of Private Enterprise (CPPE), told Daily Independent that the slowdown in capital importation reflects weaker foreign investor confidence induced by unfavourable macroeconomic conditions and lingering FX liquidity constraints
He warned that: “If local FX liquidity and carry trade improve, and investors can easily repatriate capital, then foreign capital inflows may increase over the short-to-medium term.
He foresaw a situation where investors will maintain a cautious trading approach, with sentiments likely skewed towards the bearish side as they monitor activities in the fixed-income market which may result to intermittent profit-taking to persist. However, this could be balanced by bargain-hunting activities as investors prepare for the upcoming Q3-24 earnings season”.
An executive director of a new generation commercial bank, who craves anonymity, told Daily Independent that only pro-business responses by the fiscal, monetary authorities will drive a real positive effect of growth to the economy, most especially key sectors that will boost GDP growth like agriculture, healthcare among others.
He said: “The Federal Government can only meet its expenditure targets in line with historical precedence amid increased spending on vulnerable groups if pro-business policies are strictly adhered to in the short run.
“For domestic investors to continue to contribute the bulk of total transaction value, buying activities may likely be constrained by elevated yields in the fixed-income market following the MPC’s tight monetary policy stance resulting to FX liquidity constraints and naira volatility that will limit foreign investor participation in the equities market”.
