Drought of Foreign Investors' Dollars Pushed Return On Nigerian Stocks' to Brink

By Ronald Adamolekun

Inflows of Foreign Portfolio Investment (FPI) for the 11 months to November totalled N189.42 billion, the lowest since 2013.

The prospect of many Nigerian stocks getting their latent value unlocked and their prices further appreciating through more patronage from overseas investors failed to materialise in 2021 as trade volumes lagged way behind their levels before the pandemic erupted.

Africa's largest economy, 90 per cent of whose foreign exchange proceeds come from oil, has been at the mercy of a dollar crunch since about April 2020 after crude prices struck record lows in the heat of global Covid-19 lockdowns.

It meant earnings would now come in trickles or much more depressed quantities as oil struggled to find buyers.

That created a scarcity of the greenback in and, in turn, uncertainty around the ease of converting investment into the foreign currency at will, the type of news investors from abroad don't like to hear.

The implications of the trend for stocks were not immediately clear that year when, surprisingly, yield of securities tumbled on the fixed income side of the capital market but turned the tables for equities and helped dampen shocks from weak foreign participation.

Fund managers were compelled to bet the bulk of the pension fund in their care, previously invested in bonds and treasury bills, on shares, which turned out to be more attractive.

The splurge helped Nigerian stocks gain 50 per cent for the year, according to Bloomberg, which ranked it the best performance of the 93 stock indexes it tracked across the world.

Closing more than eight times lower in 2021 at 6.07 per cent, the stocks have had the pace of growth in their market value partly slowed by decline in foreign participation.

But Timchang Gwatau of Meristem Securities Limited, an investment bank and brokerage based in Lagos, feels yield on Nigerian stocks had reached a crescendo at the end of 2020.

Diminishing returns then followed in the year that just went by through price correction, forcing yield to as low as 6.07 per cent, the research associate told PREMIUM TIMES.

Mr Gwatau said the yield level for 2021 surpassed the forecast of Meristem's analysts.

Inflows of Foreign Portfolio Investment (FPI) for the 11 months to November 2021 totalled N189.42 billion, according to the Nigerian Exchange Limited (NGX) data, the lowest when compared to every other year since 2013. And the figure for December is not likely to alter the situation when the official figures for the month are issued.

Also, the gap in the proportion of domestic inflows to foreign inflows has been widening steadily since 2019 in such a way that the latter is at the narrow end, accounting for only 22.93 per cent of the total investment for the first eleven months of last year.

The weak FPI suggests the market is being starved of the liquidity needed to stoke price appreciation with a greater force and analysts have stated that the outlook for 2022 will be gloomier, given its character as a pre-election year.

"... when you ex those major stocks (including telcos and Seplat), you will see that the market underperformed in 2021," Ayodeji Ebo, who heads the retail investment unit of Chapel Hill Denham, told CNBC Africa last month.

"2022 is a pre-election year and we expect that there will be more volatility and there will be less participation from foreign investors. We know the quantitative easing in the global space will also reduce flows to emerging and frontier markets, so what we pitch to investors is they need to come in in tranches."

Except the market finds a major force to counter the fast-depleting yield, return on Nigerian stocks this year could be tipped into the negative.

Mr Gwatau noted that the tremendous possibility that domestic inflows will shape the course the market will take this year could be a test of sustainability for such an investment source and the dependability it can provide where foreign capital is lacking.

New listings and prospects

The year saw just two entrants getting quoted on the exchange although intimations were made of more debutants joining soon.

The bourse received telecom firm Briclinks Africa to its Growth Board - the listing segment for small-cap and growth-focused companies - in February.

Towards year end, Ronchess Global Resources, whose offering encompasses traffic solutions as well as procurement and construction services, was also admitted to the Growth Board.

BUA Group, which last year disclosed plans for a consolidation of its five food units and its ultimate listing in Lagos, finally announced its listing of BUA Foods on Wednesday.

The NGX has affirmed its intention to overhaul the regulations guiding Initial Public Offering (IPO) to attract tech unicorns over.