Morgan Stanley to reclassify Nigeria indexes from frontier to standalone markets status

MSCI Inc, a leading provider of critical decision support tools and services for the global investment community, has announced that the MSCI Nigeria indexes will be reclassified from frontier markets to standalone markets status in one step coinciding with the February 2024 index review.

This is as a result of foreign exchange (FX) illiquidity and the widening chasm between the official and parallel naira exchange rates, which, according to MSCI Inc., have led to FX conversion and fund repatriation problems for foreign investors in the Nigerian equities market.

Initially formed as a division of Morgan Stanley, MSCI Inc. became an independent company to focus on developing and managing indices that serve as benchmarks for investors worldwide.

This conclusion follows feedback received from market participants from its recent extended consultation on a market reclassification proposal for the MSCI Nigeria indexes.

However, analysts from Coronation Research have given reasons they think the MSCI Inc. action will have limited impact on the market and economy in general.

According to the research firm, since the beginning of 2018, around N439.43 billion ($1.04 billion at today’s rate) of foreign investor money has left the NGX Exchange.

“Foreign investors only account for around 13 percent of trading on the exchange compared with a long-term average of around 42 percent. The foreign funds remaining are either unable to withdraw or remain committed to the Nigerian investment case for the long term.

“Second, although it is difficult to estimate the total amount of money benchmarked to MSCI FM indices, we know it is substantially lower than it was in 2016. Many funds have abandoned the benchmark or switched to broader benchmark indices, example, the MSCI Frontier Emerging Markets Index.

“As of April 2022, Nigerian stocks made up only 4.7 percent of the MSCI Frontier Markets (FM) Index, a far cry from March 2016, where Nigerian stocks made up 11.7 percent of the MSCI FM Index,” it stated in a note to clients.

Coronation Research analysts further observed that they have studied the factsheets of the remaining FM Exchange Traded Funds (ETF) and some of the largest dedicated FM equity funds and found that if they were to sell their entire remaining holdings in Nigeria, this would account for just $150.0 million (N63.1 billion) of foreign equity selling.

Since March 2020, liquidity challenges in the Nigerian FX market have consistently affected the accessibility of its equity market, leading to ongoing capital repatriation concerns and a significant gap between the official and parallel exchange rates for the Nigerian naira.

This has caused international institutional investors to face recurring challenges with index replicability and investability of the MSCI Nigeria indexes and other indexes they are part of.

On June 22, 2023, MSCI announced that feedback from market participants obtained as part of the initial consultation conducted from June 2022 to June 2023 suggested that the limited accessibility of the Nigerian equity market would warrant the removal of the MSCI Nigeria indexes from the MSCI Frontier Markets Indexes.

However, MSCI extended the consultation period to September 29, 2023 to allow more time for the liquidity situation in the Nigerian FX market to stabilise following measures announced by the Central Bank of Nigeria on June 14, 2023.

No significant improvements in FX liquidity were observed by market participants during the extended consultation period, confirming that the ease of capital inflows and outflows in the MSCI Nigeria indexes is not to the standards expected from Frontier Markets. This has led to MSCI’s decision to reclassify the MSCI Nigeria indexes.

In order to facilitate index replicability at the time of the reclassification, MSCI will delete each Nigerian security from the MSCI Frontier Markets Indexes at a price that is effectively zero as of the close of February 29, 2024.

It says more information on this and other details related to the implementation of the reclassification will be shared at a date closer to the reclassification.

 

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