Nigerian stocks risk downgrade on naira value as MSCI reclassifies markets

The value of Nigeria’s local currency, the naira, could be a strong factor in Morgan Stanley Capital International’s (MSCI’s) index decision whether to downgrade Nigeria from a frontier nation to a standalone market or not. The index provider is set to release the result of its annual peer review Tuesday, June 20.

Earlier in June, Morgan Stanley Capital International (MSCI) increased the weighting assigned to Nigerian Stocks in its Frontier Markets Index to 7.9% from 6.5% previously with the standalone decision pending.

The increase in the weighting followed the move of Pakistan from the Frontier Markets Index to the Emerging Markets Index.

The decision to review Nigeria’s status to “Standalone”, from the Frontier Markets Index, came on the heels of the liquidity issues that plagued the country’s foreign exchange market.

According to Morgan Stanley, the introduction of restrictions on foreign currency trading in the first half of 2015 as well as the huge scarcity of the green back resulted in a deterioration of market accessibility, and thus consultations with market participants would be held until a decision is taken and announced Tuesday June 20, 2017.

However, following the Central Bank of Nigeria’s (CBN) consistent supply of foreign exchange to the market, liquidity has improved significantly across the market’s major segments – the interbank, the newly introduced investors/exporters FX (NAFEX) window and the parallel market.

According to FMDQ, total value of transactions at the NAFEX window is about $1.9 billion with average daily value of trades around $80 – $100 million. Also, the parallel market has appreciated significantly compared to the period prior to the CBN’s FX intervention, from NGN520/USD as at February to NGN367/USD this week.

Nigeria stock market with other stocks market of the world’s developing economies would change significantly as the outcome of the report is expected to set the tone for the reclassification of their activities.

Investors in Nigeria are currently giving thumbs up to the Investor and Exporter foreign-exchange window that started in April, which allows them to repatriate funds or value their naira holdings at rates more closely aligned to the informal market.

Investors are however making case for MSCI to use the price of the naira on the Investors and Exporters window to value stocks instead of the tightly controlled interbank rate.

According to industry source,” BlackRock Inc, Allan Gray Ltd. and Frontaura Capital LLC have already started using the new rate”.

“Using the official rate means that MSCI is overstating year-to-date performance of their Frontier Market Index by about one percentage point,” said Tom Egbert, an analyst at Frontaura. “MSCI should switch its valuation away from the official rate, which is now unobtainable and irrelevant to investors.”

MSCI had noted in a statement on its website that some of the world’s biggest and best-performing equity markets with assets totaling almost $9 trillion are poised for reclassification.

Nigeria’s stock market is struggling to restore investor confidence in the Nigerian currency and has seen its benchmark stock index lose more than 30 percent in dollar terms over the past 12 months.