Foreign investors bet on fixed income securities against equities

Foreign portfolio investors who have been moving massive funds into the Nigerian economy in recent times are not investing as much in equities as they do in fixed income securities where returns are more guaranteed in this uncertain political times, business a.m. has learnt.

In 2018, total capital importation into the country stood at $16.8 billion compared to $12.2 billion capital imported in 2017, according to the National Bureau of Statistics. Quarter on quarter, however, the capital importation during the fourth quarter of 2018 stood at $2.1 billion, representing a decrease of 25 percent compared to quarter three of 2018.

The largest amount of capital importation by type was received through portfolio investment, which accounted for 70.20% ($11,802.27m) of total capital importation, followed by Other Investment, which accounted for 22.69% ($3,815.53m) of total capital, and then foreign direct investment FDI, which accounted for 7.11% ($1,194.67m) of total capital imported in 2018.

By sector, capital importation by shares, which is closely related to equity investment (FDI and portfolio investment) dominated 2018, reaching $10,425.18 of the total capital importation in 2018.

However, since the dawn of 2019, both the Nigerian Stock Exchange’s all share index and market capitalization have been falling, with the all share index now below 30,000 points (29,202.54 points), while market capitalization dropped below N11 trillion (at N10.97 trillion) where it settled for the whole of 2018.

The Central Bank of Nigeria attributed the falling indices (all share index and market capitalisation) at the nation’s capital market to global sentiments in portfolio rebalancing from equities to fixed income securities.

In the communiqué issued at the end of the Monetary Policy Committee’s meeting at the end of March 2019, the CBN said the portfolio rebalancing reflects the perceived risk at the long end of the yield curve.

“The committee (MPC) noted that in spite of the recent upsurge in capital inflow into the economy, the All-Share Index (ASI) and Market Capitalization (MC) continued to decline, reflecting global sentiments in portfolio rebalancing from equities to fixed income securities. This generally reflected the perceived risk at the long end of the yield curve,” the CBN explained.

The equities segment of the Nigerian capital market which comprises about 52 percent of the entire market, contracted by two percent in the month of March.

This led to investors losing a total N156.3 billion in value as sell pressure was consistent across the trading weeks for the month.

An analysis of trading activities carried out by business a.m. showed that of the 168 stocks listed on the Nigerian Stock Exchange (NSE), 68 stocks recorded price depreciation spurring the negative performance.

The All Share Index (ASI) which opened the month at 31, 718.70 points was down to 31,041.42 as at close of trading on Friday 29th March 2019. Market capitalisation which measures investor’s worth similarly dropped by 1.6 percent to N11.67 trillion from N11.83 trillion at the beginning of March, representing a decline of N156.3 billion

In March, 79 stocks recorded no change in price movement during the month, this was higher than the 72 out of 168 listed companies on the NSE that recorded no change in value in the course of February’s trading activities. Majority of these stocks are however listed on the main board and the Alternative Securities Market (ASeM) of the NSE.

According to Ologbon-ori Taiwo, head equity research analyst at Cashcraft Capital Ltd, the recent negative trend in the market shows that investors are being sceptical about the entire capital market.

“If you look at the fixed income market, you see that despite the fact that position of yield are going down investors are still pumping money into that market. However, the dynamics of the Nigerian equities market which shows it comprises of 60 percent foreign investors and 40 percent domestic investors implies that when the foreign segment is inactive, our market tends to perform poorly,” he explained.

Taiwo in a telephone chat with business a.m.’s correspondent said that “for foreign investors to start active participation, they want prices to go lower than it currently is.”

A market analyst,  Ambrose Omorodion, attributed the development to investors disappointment over the outcome of the elections. Omorodion explained that smart investors that took a position earlier in the market ahead of the presidential election and earnings seasons were disappointed.

He said that the outcome of the election failed to meet their expectations with many of them resorting to profit taking and movement of funds to the fixed income market with high interest and lower risk. According to him, investors are dumping their shares in spite of impressive earnings reports and high yields. He said that apart from the outcome of the elections, everything was against the stock market, ranging from delayed budget, expiration of the tenure of CBN governor by June.

“The only factor for the stock market now is this earnings season, because nothing will happen between now and May 29,” Omordion said. He said that 2019 budget implementation would likely commence in July and the Central Bank of Nigeria governor tenure likely to expire in June, contributed to the current trend. Omorodion said that the trend might likely continue unless there was a change in economic policies and reforms by the president re-elect.