Retail market evaporates as Foreign Investors dominate Equities market

Sunday, April 15, 2012 /Festus AKANBI, Thisday (**) / Additional comments by Proshare

Analyst Summary/Comments: 1. Local Investors role in the NCM drops by 60% from 2008 levels 2. Foreign investors influence since 2008 increased by 53% 3. 81% of the market now controlled by foreign investors 4. Risk quotient for volatility in market rises to raise fears over long term sustainability 5. Retail market/local participation is almost negligible at this time. 6. Pursuit of a growth inclusive economic model becomes imperative After making a quick getaway from the Nigerian stock market between 2008 and 2009 at the peak of the global financial crisis, foreign institutional investors have increased their dominance of the market, accounting for 81 per cent of total value of traded stocks in 2011. In its March report on the Nigerian economy, Financial Derivatives Company (FDC) http://www.proshareng.com/reports/4716 indicated that despite the negative returns from the stock market, foreign investors have continued to take advantage of the low valuations to make returns.

INVESTOR MIX IN THE EQUITIES MARKET

Type of Investors International Local
Source: NSE/Thisday

2008 53% 47%

% of Total Value Traded 2009 2010 30% 49% 70% 51%

2011 81% 19%

Change since 2008 53% -60%

FDC showed that though 19 per cent of local investors who accounted for total value of trades in 2011 were also primarily institutional investors, the company predicted that this is certain to change when the National Pension Commission gives pension fund administrators (PFAs) the green light to increase investment in equities to 50 per cent of their asset mix.

PFA Asset Mix

Asset Class % Contribution Equity 9.34 Money Market 25.80 FGN Securities 50.96 Corporate Bonds 0.03 Open, Close-End and Hybrid Funds 0.009
Source: NSE/FDC/Thisday

% Limit 40.0 35.0 50.0 42.5

25.0

The increase in equity contribution by PFAs, the company stated, will boost liquidity in the stock market and increase the volume and value of traded stocks by local investors relative to foreign investors. Market analysts, however, cautioned that the dominance of foreign investors could prove fatal in the likelihood of a global economic downturn like the type witnessed in 2008-9 or at the first sign of political instability in the country. According to one market analyst, Foreign investors are rather fickle and are the first to exit the market to cover their exposure in the event of a global meltdown; they also flee once there is any form of political instability in Nigeria.

The outcome of this is the negative impact on the equities market, so it is important that more local investors begin to take major positions in the Nigerian stock market to reduce foreign dominance. Hopefully, with the review being undertaken by PENCOM on the asset mix, PFAs will be able to provide liquidity for the market, Currently, as a proportion of their asset mix, PFAs investment in equities stands at 9.34 per cent, in comparison to 50.96 per cent in government securities, 25.8 per cent in money market instruments, 0.03 per cent in corporate bonds, and 0.009 per cent in open, close-end and hybrid funds. FDC added that improved performance of banking stocks in the first quarter of 2012, the return of bargain hunters to the market in search of low valuations, a drop in real returns on fixed income yields as interest rates decline, would also likely boost market performance in the months ahead. The company noted that in the first quarter of 2012, 67.57 per cent of all stock trades was dominated by 10 stock broking firms, led by Rencap Securities firing on all cylinders as the most active broker/dealer. Rencap's performance was attributed to the new and dynamic leadership in the firm.
(**) -This story was originally titled as Foreign Investors Dominance in Equities Rises to 81% and was authored by Festus Akanbi of Thisday. Proshare has reproduced to highlight the challenge facing the local market as it strives to re-invigorate the market, premised on the activities of foreign investors. The lessons of hot-money propelled growth therefore becomes instructive here. Reference: http://www.thisdaylive.com/articles/foreigninvestors-dominance-in-equities-rises-to-81-/113756/