London-based Simon Kitchen, an analyst at EFG Hermes, an international investment banking group, says the current persistent bearish mood of the Nigerian Stock Exchange (NSE) is the result of skepticism among foreign investors.
This is why, he noted in a report, Nigeria Strategy Note, dated October 23, 2019, and titled “Macro Strategy Report,” foreigners have remained net sellers for much of 2019, totaling $106m year-to-date, apart from the month of August when they were net buyers of $16m when telecommunication giant- MTN Nigeria was added to MSCI indices.
Over the period, he expressed surprise that local pension funds are not investing new money in the market, as they “have kept cutting their exposure to equities after a regulation change in early 2019 that eliminated minimum allocations to variable return assets.
The falling equity portion in pension Asset Under Managements, he continued, is not just about poor market performance, judging by the profiles of equity AUMs and total returns from the benchmark index of the Nigerian Stock Exchange (NSE).
A study of the index, Kitchen continued, suggests that Nigerian pension fund managers are either allocating no fresh funds to stocks, despite strong N681bn flows into pension funds in the 12 months ending June 2019; or underperforming the local index by a wide margin.
Analysts at EFG Hermes, he continued, understand the reluctance by foreigners to engage, adding, however, that “even given high yields on government paper, we are surprised that locals with LT NGN liabilities are shying away from inexpensive stocks that offer good dividend yields and the potential for LT capital gains. We believe this could be because current incentives for pension funds do not reward managers for outperformance.”
The report linked the decline in the country’s foreign reserves to $40bn in mid-October, which is the equivalent of a nine-month of imports, a $4bn decline from 2019.
This “fall in reserves seems only partly due to portfolio outflows: CBN data shows foreign holdings of CBN OMOs – the main carry trade vehicle – down just $600m, from their July high of $17.23bn at end-August, though anecdotal evidence hints at a bigger outflow (of about $2bn.
“We had wondered if the CBN was allowing USD swaps with local banks to lapse, contributing to the reserve burn, but the recent drop in banks’ NFAs appears to rule this out. Recent reserve and NFA declines likely to have as much to do with the falling trade balance (latest 12m sum down to $10bn in July 2019 from $18bn a year previously.”
The report expects that portfolio flows may remain a challenge in the near term with $15.4bn in OMOs maturing in the current quarter, around $5.3bn of which may be foreign-owned (using August CBN data as a guide to total foreign OMO holdings).
“Maturing OMOs will have to be financed with rollovers or reserve/NFA drawdown. We note that previous stock market rallies have been associated with NFA growth (Fig. 8) and significant pressure on reserves and/or NFAs could mean another leg down for this already-inexpensive market,” Kitchen stressed.