NGX: Domestic investors extend dominance as total portfolio investment hits N2.8trn in 8 months

Onome Amuge

Domestic transactions on the Nigerian Exchange Limited (NGX) have seen a significant uptick in the first eight months of 2024, surging to an N2.82 trillion. The notable increase in domestic activity stands in sharp contrast to the comparatively low level of foreign transactions, which only reached N655.47 billion over the same period.

The latest August 2024 Domestic and Foreign Portfolio Investment report released by the Nigerian Exchange Limited (NGX), indicated that domestic investors are taking centre stage in the Nigerian capital market, with transactions outpacing foreign investor activity by N2.16 trillion in the first eight months of 2024.

This substantial increase of 330.23 percent highlights the growing dominance of local investors over their foreign counterparts, demonstrating a strong appetite for investment in the Nigerian market among domestic participants.

According to analysts, the marked disparity in investment activity between domestic and foreign investors in the Nigerian capital market can be largely attributed to the declining confidence of foreign investors in the face of economic volatility.

Heightened uncertainty, driven by a range of factors including currency fluctuations, inflationary pressures, and broader macroeconomic instability, is seen to have  eroded foreign investor confidence in the Nigerian market. This diminished confidence has resulted in a scaling back of investment activity, as foreign portfolio investors adopt a more conservative approach to risk-taking.

The current economic turbulence in Nigeria has reinforced a historical pattern among foreign portfolio investors, who tend to steer clear of markets characterised by instability.

In particular, foreign participation in the Nigerian capital market has been lacklustre, as investors’ concerns about the volatility of returns and the risks of currency devaluation drive them towards safer, more stable investment destinations.

The perception of unpredictability in the Nigerian market, combined with the spectre of potential devaluation of the naira, is believed to have contributed to a general reluctance among foreign investors to make significant commitments to Nigerian assets.

The Nigerian bourse saw a significant decline in total transactions in August 2024, falling by 22.80 percent to N379.52 billion from the previous month’s total of N491.61 billion.

While this month-on-month drop is notable, the overall performance in August 2024 reflects a 44.55 percent year-on-year increase when compared to the same month in 2023, when total transactions amounted to N262.56 billion.

August 2024 saw domestic investors maintain their stronghold in the Nigerian capital market, accounting for approximately 70 percent of total transactions. This dominant position, coupled with the waning participation of foreign investors, reflects the ongoing impact of economic uncertainty and regulatory challenges on foreign investor sentiment.

With capital control measures in place and broader economic instability persisting, foreign investors have been cautious in their approach to the Nigerian market, leaving domestic investors to shoulder the responsibility of driving activity in the country’s capital market.

The dynamics of the Nigerian capital market, as highlighted by the recent trends in domestic and foreign participation, paint a telling picture of the current state of the economy and its potential trajectory.

The diminished presence of foreign investors, coupled with the sustained activity of domestic participants, suggests that unless there is a marked improvement in economic conditions and investor confidence, foreign investment in Nigeria’s capital market may remain subdued.

Examining the total transactions executed in August 2024 in comparison to the prior month (July 2024) reveals a significant decrease of 25.81 percent in total domestic transactions from N434.09bn to N322.05bn.

At the same time, total foreign transactions experienced a marginal decline of 0.09 percent from N57.52 billion to N57.47 billion between July 2024 and August 2024.

Despite a decline in domestic transactions for both retail and institutional investors in August 2024 compared to the prior month (July 2024), retail investors managed to outperform institutional investors by 12 percent.

A closer look at domestic transactions revealed a 33.54 percent decrease in retail transactions, dropping from N271.92 billion in July 2024 to N180.72 billion in August 2024.

Similarly, the institutional component of the domestic market experienced a decline of 12.85 percent, with transactions falling from N162.17 billion in July 2024 to N141.33 billion in August 2024.

Meanwhile, over a period of 17 years, from 2007 to 2023, the Nigerian capital market has witnessed a decline in both domestic and foreign transactions.

Domestic transactions decreased by 10.94 percent, dropping from N3.556 trillion in 2007 to N3.167 trillion in 2023. Foreign transactions also declined significantly over the same period, decreasing by 33.28 percent from N616 billion in 2007 to N411 billion in 2023.

In 2023, the Nigerian capital market witnessed a significant concentration of activity among domestic investors, who accounted for 89 percent of total transactions. By comparison, foreign investors only contributed 11 percent of total transactions in 2023, reflecting a relatively diminished role in the Nigerian market.