Foreign Portfolios Hit Three-month Low

Foreign investors’ transactions in the market have dropped to lowest point in the past three months as concerns mounted over worsening foreign exchange (forex) crisis.

Trading data on foreign portfolio investments (FPIs) released at the weekend indicated that foreign transactions dropped successively for the past two months to hit a three-month low; its second lowest performance this year.

The report showed that foreign transactions declined by about 30 per cent N29.68 billion in July 2022; continuing the descent from N45.30 billion in May 2022 and N42.19 billion in June 2022.

Most analysts attributed the low appetite of foreign investors to forex crisis as investors were wary of being trapped in the cycle of forex scarcity and uncertainties.

Bismarck Rewane’s Financial Derivatives Company (FDC) in its latest economic review at the weekend stated that forex demand pressures would persist; an opinion shared by most analysts.

“We expect a further decline in external reserve due to central bank’s intervention in the forex market, and continuous shortfalls in government revenue relative to expenditure. Therefore, the ability of the central bank to stabilise the currency is likely to be weakened,” FDC stated.

According to analysts, forex liquidity remains squeezed and as such the official exchange rate of the naira may be devalued by about five per cent while the parallel market rate may hover between N675 per dollar and N690 per dollar.

“Headline inflation is expected to remain elevated due to the persistent currency pressures in the system. Inflation will further soar in August before moderating in September. Nigeria’s oil production will remain subdued in August as the lingering issues of pipeline vandalism, oil theft and operational challenges continue. Therefore, oil revenue is expected to remain below the budget,” FDC stated.

Afrinvest Securities said naira is expected to trade within similar range across forex segments “even as the forex demand-supply disparity persists”.

Analysts at Cordros Capital noted that although the CBN has enough liquidity to support the forex market over the short term, it is unsustainable over the medium term given the state of foreign inflows.

Analysts pointed out that considering the tepid accretion to the reserves given the low crude oil production level and elevated premium motor spirit (PMS) under-recovery costs, foreign portfolio investments will be needed to sustain forex liquidity levels in the medium to long term.

“Hence, we think further adjustments in the naira/dollar peg closer to its fair value and flexibility in the exchange rate would be significant in attracting foreign inflows back to the market,” Cordros Capital stated.

The report also indicated a generally low appetite for Nigerian equities as total transactions by foreign and domestic investors dropped to its lowest level this year in July 2022. Total transactions at the Nigerian Exchange (NGX) dropped to a low of N101.18 billion in July 2022 from a high of N607.45 billion in May 2022. Total transactions had dropped to N156.52 billion in June 2022.

The FPI report, coordinated by the Nigerian Exchange (NGX), included transactions from nearly all custodians and capital market operators and it is widely regarded as a credible measure of FPI trend. The report uses two key indicators-inflow and outflow, to gauge foreign investors’ mood and participation in the stock market and the economy. While inflows and outflows indicate direction of portfolio transactions, total FPI measures the momentum and level of participation.

A seven-month year-to-date analysis, however, showed that total FPIs stood at N273.16 billion by July 2022 as against N237.49 billion recorded in the comparable period of 2021. Total transactions at the NGX also increased to N1.76 trillion in first seven months of this year compared with N1.12 trillion by July, last year.

The seven-month analysis mirrored performance in the first half, which was buoyed by upbeat recorded in the early second quarter. Total transactions by foreign portfolio investors during the first half of 2022 rose by 9.7 per cent to N243.48 billion compared with N221.96 billion recorded in first half of 2021.

The report indicated that foreign inflows rose from N105.24 billion in first half 2021 to N120.51 billion in first half 2022. Foreign outflows however also increased from N116.72 billion to N122.97 billion. Proportionate analysis meanwhile indicated faster growth in inflows than outflows, despite the fact that the base figures were almost within same range. While foreign inflows rose by 14.5 per cent, foreign outflows were slightly over a third with 5.36 per cent growth.

The first half report represented a recovery for the market after a successive period of decline.

First quarter 2022 FPI report had shown decline in both the actual value and the proportionate participation of foreign investors in the Nigerian stock market. Foreign investors’ net participation also remained negative with more outflows than inflows, although the gap narrowed.

Total transactions by FPIs during the first quarter ended March 31, 2022 stood at N128.91 billion, 14.2 per cent or N21.3 billion below N150.23 billion recorded in comparable period of 2021. The proportionate participation of FPIs in the Nigerian stock market dropped by nearly four percentage points from 22.21 per cent in first quarter 2021 to 18.62 per cent in first quarter 2022.

A breakdown of the FPIs indicated country deficit, although the gap between inflows and outflows narrowed considerably. Total FPI inflows stood at N55.33 billion as against outflows of N73.58 billion in first quarter 2022. These compared with N60.11 billion and N90.12 billion recorded as inflows and outflows respectively in first quarter 2021.

Meanwhile, trading at the stock market remained on the upswing. Total transactions during the first half of 2022 stood at N1.66 trillion compared with N1.03 trillion in first half 2021. The market turnover was driven by local investors, sustaining a backward integration trend of recent years. Domestic investors accounted for N1.42 trillion in first half 2022 as against N812.5 billion in first half 2021.

First quarter 2022 report had shown similar trend wiith total transactions increasing from N676.53 billion in first quarter 2021 to N692.20 billion in first quarter 2022.

Total transactions by domestic investors had risen from N526.30 billion in first quarter 2021 to N563.29 billion in first quarter 2022. Individual retail investors accounted for N265.62 billion in first quarter 2022 as against N229.79 billion in first quarter 2021 while institutional domestic investors accounted for N215.19 billion in first quarter 2022 as against N296.51 billion in first quarter 2021.

FPIs in Nigerian stock market had dropped consecutively to lowest levels in recent years. FPIs had dropped by 40.4 per cent in 2021 to its lowest level in five years. Active participation of foreign investors in Nigerian market declined by 11 percentage points from about 34 per cent of total market transactions in 2020 to about 23 per cent in 2021.

The full-year FPI report had also shown a significant deceleration in FPI transactions and it was the main reason for the 12.4 per cent decline in turnover of activities at the Nigerian stock market in 2021.

Total foreign transactions in Nigerian equities declined to N434.50 billion in 2021 as against N729.20 billion recorded in 2020. Consequently, the percentage participation of FPIs in total market transactions dropped from 33.63 per cent in 2020 to 22.88 per cent in 2021.

The report had however shown admirable improvement in the overall FPI deficit as the gap between inflows and outflows narrowed considerably in 2021 compared with 2020, although the country remains with negative FPIs flow.

FPI inflows and outflows stood N204.88 billion and N229.62 billion respectively in 2021, indicating a deficit of N24.74 billion. These compared with inflows and outflows of N247.27 billion and N481.93 billion respectively in 2020, and a deficit of N234.66 billion.

FPIs had also declined by 22.64 per cent to a four-year low to close 2020 at N729.20 billion as against N942.55 billion recorded in 2019. The decline in FPIs in 2020 counteracted the general increase in momentum of activities at the Nigerian stock market, which saw 12.45 per cent increase in total turnover value.

FPI reports had shown wider gap between foreign portfolio inflows and outflows, implying that foreign investors had divested more than two kobo for every kobo invested in 2020, the worst deficit in recent years.

Total FPIs had increased from N1.208 trillion in 2017 to N1.219 trillion in 2018, before dropping by 22.72 per cent to N942.55 billion in 2019.

FPI reports have shown continuing negative trend in the mix of inflows and outflows, with more outflows than inflows, implying that foreign investors were selling more of their investments than buying more investments. This is known as FPI deficit.

Nigeria recorded FPI deficit of N234.66 billion in 2020, about 125 per cent increase on N104.3 billion recorded in 2019. This implied that foreign investors divested more than two kobo for every kobo invested in 2020. FPI deficit had stood at N66.3 billion in 2018.

The reports had also shown that the quantum of transactions by foreign investors relative to total transactions at the Nigerian market decreased from about 49 per cent of total activities in 2019 to about 34 per cent in 2020. Foreign portfolio inflows stood at N247.27 billion as against outflows of N481.93 billion in 2020. Inflows and outflows had stood at N419.13 billion and N523.42 billion respectively in 2019.

Nigeria’s FPI had slipped into negative with a net deficit of N66.2 billion in 2018 after a world-leading stock market rally left the country with a surplus of N336.94 billion in 2017. Total foreign inflows in 2018 stood at N576.45 billion compared with outflows of N642.65 billion. Foreign inflows had in 2017 outpaced outflows at N772.25 billion and N435.31 billion respectively.