At 88.52%, Domestic Investors Dominate Equities Market In 2023

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Domestic investors controlled about 88.52 per cent of the total N3.56 trillion transactions in the equities market and dominated activities on the Nigerian Exchange Limited (NGX) in 2023, leaving a paltry 11.48 per cent to the foreign investors.

The NGX in its “Domestic and Foreign Portfolio Report, disclosed that the total transactions in the local bourse recorded in the 2023FY is a 53.9 per cent year-on-year (y/y) increase over the N2.32 trillion transactions recorded in 2022.

In 2022, foreign investors’ participation was 16.32 per cent of the N2.32 trillion transactions, leaving the domination of the stock market to local investors that comprised retail and Institutional.

On a month-on-month (m/m) basis, total transactions rose to a six-month high, expanding by 14.4 per cent m/m to N343.90 billion in December (November: N300.67 billion).

The improvement was mainly due to a 29.1 per cent m/m increase in domestic transactions to N296.03 billion (86.1 per cent of total transaction value).

In November 2023, foreign investors cut down on local investors dominating the equities market, contributing about 23.74 per cent while domestic investors traded 76.26 per cent.

The 23.74 per cent increase in November 2023 from 15.10 per cent in October is on the backdrop of Federal Government policy on Foreign Exchange (FX) unification.

Meanwhile, foreign inflows remained weak, as foreign transactions declined by 32.9 per cent m/m to N47.9 billion (November: N71.40 billion) due to the effect of lingering FX liquidity constraints.

President Bola Tinubu had expressed that he could have chosen to keep the previously multiple foreign exchange system and benefited from it, but instead, he decided to unify the official and parallel market rates to save the country from financial crisis.

On June 14, 2023, the Central Bank of Nigeria (CBN) announced the unification of all segments of the foreign exchange (FX) market, implying that the exchange rate will rise or fall based on supply and demand in the market.

The World Bank in its Africa’s Pulse report — a bi-annual publication, said the decision of the CBN to remove trading restrictions on the official market weakened the naira and warned Ethiopia, Ghana, Nigeria, and other countries with two-digit inflation rates to avoid unorthodox interventions that might render their monetary policies ineffective.

The Bretton Wood institution warned against such interventions which include, “…monetarization of the fiscal deficit, direct lending interventions, untargeted subsidy programs, or foreign exchange controls”.

“If monetary and fiscal actions are not adequately coordinated to bring down inflation, the risk of de-anchoring inflation expectations would fuel further inflation, accelerate interest rate increases, and exacerbate the deceleration of economic activity,” the report said.

The CBN governor, Olayemi Cardoso, at the recent Chartered Institute of Bankers of Nigeria (CIBN) 58th Annual Bankers’ Dinner and Grand Finale of the Institute’s 60th Anniversary in Lagos, disclosed to banking sector executives that the apex bank was responding to foreign exchange scarcity in the market with payments made to 31 banks to clear the backlog of foreign exchange forward obligations.

“We have been subjecting these payments to detailed verification to ensure only valid transactions are honored. In a properly functioning market, it is reasonable to expect significant foreign exchange liquidity, with daily trade potentially exceeding $1.0 billion. We envision that, with discipline and focused commitment, foreign exchange reserves can be rebuilt to comparable levels with similar economies,” he said.

He assured Nigerians that the apex bank’s monetary policies would aim to achieve price stability, foster sustainable economic growth, stabilize the exchange rate of the naira, and reduce interest rates to facilitate borrowing and investments in the real sector.

“To ensure the proper functioning of domestic and foreign currency markets, clear, transparent, and harmonized rules governing market operations are essential. New foreign exchange guidelines and legislation will be developed, and extensive consultations will be conducted with banks and foreign exchange market operators before implementing any new requirements,” the CBN governor said.

Analysts at Coronation Asset Management in a report titled, “Investment Opportunities from FX Liberalisation”, said foreign investors were still a significant factor in the Nigerian equity market in 2017; much less now, although recent data showed a net inflow of foreign investment into the stock market.

They noted that the monetary authorities were also able to engineer market interest rates above the rate of inflation, something to which investors usually respond positively “This begs one question about the second half of 2023. Which way are interest rates going to move?

“A liberalised foreign exchange rate points to elevated interest rates to make it worthwhile holding money in naira. Fuel subsidy removal, effective May 31, 2023, suggests that cost pressures will push inflation upwards, which also argues for elevated interest rates. Against this, the All Progressives Congress (APC) manifesto proposed low-interest rates to encourage economic growth. We do not know, at this stage, how the  APC administration and the Central Bank of Nigeria will resolve this critical area of policy.

“On the bright side, the removal of fuel subsidies and the liberalisation of the naira foreign exchange rate are historic events, and will themselves straighten out much of the dysfunctional economic behaviour we have become accustomed to,” the analysts from Coronation Asset Management stated.

They supported the reforms by the President Bola Tinubu administration, stating “they are good for the economy and in the long run, good for markets”.

Analysts at Cordros Research said, “We expect domestic investors to continue to dominate the domestic equities market over the short-to-medium term, even as higher fixed-income yields may constrain buying activities.”

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