Foreign investment outflows from Nigerian stocks rose in November to the highest level in nearly three years despite reforms that spurred a rally in the market last year.
The total amount of stocks offloaded by foreign investors rose to N36.6 billion from N19.7 billion in October, according to data from the Nigerian Exchange Limited (NGX). Foreign inflows increased to N34.8 billion from N13.62 billion.
The outflow in November is the highest since February 2021, when stocks worth N39.1 billion were sold by foreign investors.
“This is not devoid of the fear of a sudden depreciation of the naira before the end of the fourth quarter of last year, which could have reversed the impressive share price appreciation so far in the year, especially for investors who were still grappling with how to net off the losses already recorded on FX exposure,” Temitope Omosuyi, investment strategy manager at Afrinvest Limited, said.
He added that foreign investors may have anticipated that after the bullish run that started in May and firmed up in October, market participants would be tempted to aggressively take some profits, thereby reversing some of the gains.
Analysis of the NGX All-Share Index that tracks the general market movement of all listed equities showed that the main index rose to 71,365.3 basis points on November 30 from 69,231.2 bps in October 31.
Ayorinde Akinloye, a Lagos-based investor relations analyst, said looking at the trend last year, a lot of foreign investors have been pulling their funds from the stock market.
“The large amount in November was slightly because of the share prices which were very high. So, there was a strong rally in the market. Most of them use that opportunity to largely reduce their exposure in the market since prices were high,” he added.
He said the outflow might have reduced in December but it does not mean that investors will not continue to pull back their funds.
“If you look at the trend throughout the whole year, out of the 11 months of the year, about nine or 10 were a net outflow.”
The NGX data also revealed that as at November, total transactions at the nation’s bourse increased by 34.1 percent from N220.9 billion (about $243.9 million) in October to N300.7 billion (about $319.2 million) in November.
It said the performance in November last year when compared to the same period a year earlier revealed that total transactions increased by 188.3 percent.
“In November, the total value of transactions executed by domestic investors outperformed transactions executed by foreign investors by circa 52 percent,” the NGX said.
A further analysis showed that total domestic transactions increased by 22.2 percent from N187.6 billion in October to N229.3 billion in November.
Total foreign transactions increased by 113.9 percent from N33.4 billion (about$36.8 million) to N71.4 billion (about $75.8 million).
Foreign investment in Africa’s biggest economy dropped to $654.7 million in the third quarter of last year, the lowest level since the National Bureau of Statistics (NBS) started collating the data in 2013. It declined for the second straight quarter by 36.5 percent from $1.03 billion in the previous quarter.
The instability in the exchange rate and lack of liquidity in the foreign exchange market are scaring away investors, said Johnson Chukwu, managing director of Cowry Asset Management Limited
“When an investor comes into the country and there are these two elements, there is exposure to the risk of capital loss, in the sense that if the return on the instrument that the investor has made is lower than the rate of devaluation, it would result in a loss. So, this is a risk that investors will not take on Nigeria,” he said.
Analysts at KPMG Nigeria said in a recent report that capital importation figures show continuous quarterly decline, suggesting persistent challenges of investor confidence in the economy.
“Recent persistent dominance of trade credits, loans, and related forms of short-term capital inflows with portfolio and especially foreign direct investment slowing is a major concern,” they said.
They added that while there is an urgent need to restore external investor confidence, Nigeria needs to strike a balance between attracting foreign capital and promoting domestic development (thereby reducing its reliance on foreign capital).
President Bola Tinubu, who took the helm of Africa’s most populous nation in May, stoked foreign investors’ interest with some of his actions including the removal of petrol subsidy and the start of foreign exchange reforms.
A few weeks after taking office, he hosted several major companies including Airtel, ExxonMobil, Shell Petroleum Development Company and Bank of America as part of efforts to drive up investments in the country.
The reforms have worsened inflation, currently in double-digits and at the highest level in 18 years. The rising inflationary pressures have weakened the purchasing power of consumers, even as businesses grapple with higher operating costs.
According to the NBS, the country’s inflation rate rose to 28.20 percent in November from 27.33 percent in the previous month.
Data from the latest monthly Purchasing Managers’ Index by Stanbic IBTC Bank show that the headline index dropped to the lowest in eight months of 48.0 in November from 49.1 in the previous month, marking the second straight month of contraction.
The naira has continued to depreciate against the dollar and other major foreign currencies since then.
The official exchange rate fell from N463.38/$ to N 907.11/$ as of December 29. At the parallel market, the naira depreciated to 1,205/$ from 762/$.
BusinessDay reported in December that at least five multinationals announced plans to exit Nigeria in 2023. They are GlaxoSmithKline Consumer Nigeria, Equinor, Sanofi, Bolt Food and Procter & Gamble.
Omobola Adu, an economist at BancTrust & Co, said the decline in capital importation will affect FX supply in the economy since it is one of the main sources of FX.
“So, if that number goes down, the pressure on the naira might still be remaining, especially if other sources are not coming in as much to complement the decline in capital importation.”
There are expectations that the rally seen in the stock market last year for the first time in an election year since 2007 will continue in 2024 but at a slower pace.
Analysts at Afrinvest Research pointed out that the country’s equities market raced to a 15-year high in 2023 “fuelled by market-friendly reforms by the current administration and resilient corporate performance”.
“We expect the equities market to sustain the positive momentum through 2024, though at a modest pace. Our model forecasts a 14.8 percent return for the year (base case), premised on improved macroeconomic conditions, anticipated growth in foreign portfolio investments, and a more stable FX environment,” they said in their outlook report.