Foreign portfolio investments rise by 63%

FOREIGN investors grew their investment portfolio in the Nigerian Exchange Limited (NGX) in August by 63.3 per cent to N25.4 billion from N15.53 billion recorded in July. 

This brought to an end a three-month consecutive decline in the value traded by foreign investors. 

According to the recently released Domestic and Foreign Portfolio Investment (FPI) report by the Nigerian Exchange Limited (NGX), total activity level was down marginally by 0.39 per cent to N89.4 billion in August from N89.8 billion recorded in July 2021. 

The marginal decline in value traded was driven by reduced activities among domestic investors, which went down 13.7 per cent to N64.1 billion in August. 

FPIs generally consist of securities and alternative foreign financial assets that are passively held by foreign investors. This involves an investor purchasing foreign financial assets, such as; equities, bonds, derivatives, mutual funds, and guaranteed investment certificates, among other instruments. 

Foreign portfolio investment (FPI) has risen to become the main growth driver of capital inflows to Nigeria. Reports indicated that foreign inflows in August totalled N10.72 billion, while outflows were higher by 3.92 per cent at N14.64 billion, while analysis of the numbers showed that Year-to-Date, foreign inflows hit N123.46 billion, 23.46 per cent lower than N161.31 billion pumped into the local bourse by foreign investors in the corresponding period of 2020. 

Foreign outflows in the equities, however, amounted to N139.39 billion YTD, 54.97 per cent lower than N308.89 billion recorded as of August 2020, indicating tepid movement in capital flight. While illiquidity in the FX market remained a major deterrent to foreign investors, there seemed to be a level of optimism that the receipts of US$4 billion from the Eurobond issuance may help the CBN clear existing FX backlogs, providing a basic impetus for inflows. 

While analysts see the nation’s inability to build a buffer of foreign reserves despite the rise in the international prices of crude oil as a deterring factor for foreign portfolio investment (FPIs) inflow into the country, there seems to be renewed hope that the recently issued Eurobond would pique foreign investors’ interest in the nation’s capital market. 

The Debt Management Office announced enthusiasm towards the Eurobond issuance which was oversubscribed, thus placing additional $1 billion to the initial $3 billion. According to the DMO, this demonstrated investors’ confidence in Nigerian economy. 

“This exceptional performance has been described as ‘one of the biggest financial trades to come out of Africa in 2021 and an excellent outcome.” 

Analysts are, however, not confident persuaded that this would sustain investors’ confidence in the Nigerian market if there are no pointers to clearer economic policies. 

Ambrose Omordion, Chief Financial Analyst at InvestData Consulting Limited, believed that despite the slight increase in the FPI transactions in August, investors’ confidence is still low, as the government is yet to address insecurity in the country. 

“Lack of clear economic policies and rising insecurity challenge in the midst of weak capital formation as major sectors of the economy are not driving expansion or capacity building. Despite the seeming economic recovery, productivity and supply side are declining,” he noted.

He believed that the nation’s economic managers should review some of their policies and address the in- security problem to attract foreign direct investment after which foreign portfolio investors would follow. 

Kato Mukuru, Managing Director/Head of Frontier Markets Research at EFG Hermes, a Lagos-based financial services company, believed that though the upcoming $6.2 billion Eurobond issuance in addition to the expected injection of $3.4bil- lion from the SDR allocation may fuel new adjustment round the naira, it might not create enough excitement to attract foreign investors without clear evidence of build up in the reserves. 

“However, we do not think the move would create much excitement if it is not followed by clear evidence of a build-up in reserves in order to attract portfolio inflows, which remain the key foreseeable source of FX supply, in addition to oil. The lack of this is, clearly, weighing on investor confidence,” he said. 

A look at the Domestic and Foreign Portfolio Investment report for August showed that foreign inflows dropped to N123.46 billion from N161.31 billion in 2020 year-to-date (ytd) while foreign outflows stood at N139.39 billion from N308.89 billion in 2020. The report indicated that as at August 31, 2021, total transactions at the nation’s bourse fell marginally by 0.39 per cent from N89.77 billion in July 2021 to N89.42 billion in August 2021. 

The performance of the current month when compared to August 2020 figures revealed that total transactions decreased by 5.33 per cent. 

Also, in August 2021, the total value of transactions executed by domestic investors outperformed transactions executed by foreign investors by 44 per cent, as domestic inflows for the month under review stood at N33.82 billion while outflows stood at N30.24 billion.

In the same vein, foreign inflows and outflows stood at N10.72 billion and N14.64 billion respectively. Further analysis of total transactions executed between July and August revealed that domestic transactions fell by 13.71 per cent from N74.24 billion in July to N64.06 billion in August 2021. However, total foreign transactions increased by 63.30 per cent from N15.53 billion to N25.36 billion between July 2021 and August 2021. 

The report also indicated that institutional investors outperformed retail investors by 0.44 per cent as the comparison of domestic transactions in the current and prior months (July 2021) revealed that retail transactions dropped by 15.16 per cent from N37.59 billion in July 2021 to N31.89 billion in August 2021. 

Similarly, the institutional composition of the domestic market decreased by 12.22 per cent from N36.65 billion in July 2021 to N32.17 billion in August 2021. Meanwhile, the All-Share Index (ASI) YTD loss moderated to 2.6 per cent in August from 4.3 per cent in July 2021, which analysts believed was reflective of the release of favourable earnings and announcements of interim dividends by some sector bellwethers, which propelled buying activities in the local bourse. 

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