NAFEX watch forces MSCI to delay Nigeria’s index reclassification

The Central Bank of Nigeria’s (CBN) introduction of the investors/exporters FX window popularly referred to as NAFEX and the consistent supply of FX to the market, which has significantly improved liquidity across major segments of the foreign exchange market may have influenced the postponement of the Morgan Stanley Capital International’s (MSCI) Frontier Market Index reclassification for Nigerian equities.

The decision on the potential removal of the MSCI Nigeria Index from the MSCI Frontier Markets Index was delayed to November 2017.

According to Morgan Stanley, the postponement was to “allow more time for international institutional investors to better assess the effectiveness of the new FX trading window introduced by the Central Bank of Nigeria.”

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 FX market.

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 by June 20 2017, Morgan Stanley had earlier said.

The MSCI index essentially captures large and mid cap representation across 34 Frontier Emerging Markets countries. It allows investors easing tracking of stocks for possible investment decisions.

However, the performance of the naira at the various segments of the foreign exchange market may have swayed the decision Tuesday with postponement call till November 2017.

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 as at May, 2017.

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 NGN365/USD Monday, June 19, 2017

Moreover, in recent weeks, the equity market has witnessed a rebound and has returned 16.7% Ytd following increased foreign participation (now at 45.84% vs. 40.83% in 2016 Ytd).

The postponement may also be a response to calls by analysts for retention in the MSCI Frontiers Market Index.

“We are optimistic that Nigeria will be retained in the MSCI Frontier Markets Index when a decision is finally announced later this month,” researchers at CardinalStone Research said early June.

The postponement could set the stage for a further rally in the equities market, considering that many of the funds that track the index may still be underweight.

Nigeria’s stock market has responded positively in the last one month, following investor confidence on the back of forex liquidity championed by the CBN.

There are 16 Nigerian stocks in the index and a total number of 14 funds worth $969 million currently track the MSCI Frontier Index according to data from Bloomberg.

Investors in Nigeria are said to be applauding the Investor and Exporter foreign-exchange initiative that started in April which allows them to repatriate funds or value their naira holdings at rates more closely aligned to the informal market.

Analysts had made 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.

“Using the official rate means that MSCI is overstating year-to-date performance of their Frontier Market Index by about 1 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.”