Foreign patronage in equities dips by 73% in eight years

Foreign exchange (FX) crisis, insecurity, uncertainty and capital control by the Central Bank of Nigeria (CBN), which have kept many foreign investments trapped in the past few years have continued to dampen foreigners’ patronage in equities as total foreign transactions fell by 73.4 per cent in eight years.

Since the beginning of the previous administration in 2015, foreign patronage in equities has continued to wane, amid the nation’s macroeconomic challenges. This is even as domestic investors continue to jostle for stocks with improved earnings and high dividend payout in the market.

Before the previous administration, foreign investors dominated the market, however, foreign participation has dropped drastically as they control less than 20 per cent of total transactions in the stock market, owing to poor incentives, FX crisis, insecurity and an overall weak economy.

Precisely, total foreign transactions, which stood at N696 billion in 2015 plummeted to N185 billion in 2023 representing a 73.4 per cent drop. Also, within the period, total foreign inflow dropped from N334 billion in 2015 to N81.5 billion.

However, total domestic transactions rose from N588 billion in 2015 to N1.97 trillion within the same period. Similarly, the percentage of foreign investors in July 2015 dropped from 62.91 per cent to 11.70.per cent in July 2024 while domestic transactions rose from 37 per cent to 80.30 per cent.

Recall that foreign portfolio investors’ participation in the first 10 months of 2022 closed at N349.6 billion, lower than N1.730 trillion transactions recorded by local investors within the same period. During the period, domestic investors pulled transactions worth N1.73 trillion representing 83.19 per cent while foreign transactions were valued at N349.59 billion, translating to 16.81 per cent.

Although there seems to be an improvement in the foreign portfolio transactions this year, largely driven by the liberalisation of the foreign exchange market, which effectively made Nigerian equities significantly cheaper thereby attracting significant inflows into the market, operators said with current macroeconomic challenges, especially the issue of uncertainty and insecurity, foreign participation would continue to wane in the nation’s economy as capital will always seek for value in nations with the ‘right’ macroeconomic environment.

Head Equity, Planet Capital, Paul Uzum, said although most of the stocks are now very cheap, foreign investors still adopt a wait-and-see stance. Uzum pointed out that foreigners have been exiting the market since the previous administration due to capital control and the inability to access and repatriate their funds as the FX crisis persists.

“That is strictly a macroeconomic issue, capital will always seek value, but in nations with the ‘right’ macroeconomic environment (stable exchange rate, low inflation rate, high GDP growth rate); these essentials have disappeared from Nigeria since 2015.

“Many of those that came to invest in Nigeria for the long term got their fingers burnt, that’s why Nigeria was removed from the Morgan Stanley and JPMorgan index. Even with the devaluation and floating of the naira, they still do not trust our market and our economy.”

To attract more foreigners to the market, Head of Research, FSL Securities, Victor Chiazor, said there is a need for effective corporate governance, easy inflow and exit of capital into the market as well as a stable exchange rate, noting that these factors remain vital to the sustainability of these inflows.

An Investment Banker & Stockbroker, Tajudeen Olayinka, said foreign investors are more attracted to the high-yield environment in the fixed-income space and play less in equity, at this time.

He said that is the norm during a high interest rate regime and the reason for improved dollar liquidity in the foreign exchange market.He added: “So, foreign investors are here in their trickles but prefer to hang around with fixed-income instruments like FGN Securities, to prepare for an emergency exit.”