Frail Naira: Reserves Threaten Recovery of Capital Market

The major obstacles to the return of foreign portfolio investors to Nigeria are persistent pressure on the naira and the country’s diminished foreign reserves as well as declining earnings a development that is hampering the recovery of the capital market recovery following the conclusion of the general elections, experts disclosed.
A lot of factors, including the fading fortunes of the naira, spurred by the oil slump, and uncertainty about corporate future of the country ahead of the general elections, had made some foreign portfolio investors to trade warily with many others exiting the Nigerian capital market.
 Foreign portfolio investors pulled out over N700bn from the stock market in 2014, forcing the Nigerian Stock Exchange All-Share Index to close the year with a negative return of 16.14%. Between January 1 and February 28 this year, they pulled out additional N132.53bn and brought in N100.38bn.
 Apart from a historical 8% rise on March 30 and a very positive week right after the presidential election, the market has only flattered to deceive.
According to professionals, the reason for this is that the foreign investors, who dominate the market, are not in a rush to come back because the economic fundamentals still remain the same.
Mr. Johnson Chukwu Managing Director and Chief Executive Officer, Cowry Asset Management Limited noted that political risk had been moderated. He disclosed that the major challenge the market is facing is the lack of magnetism to foreign portfolio investors because of the FX pressure. As it stands, foreign investors will not be very bullish about Nigerian equities and you know that foreign investors account for more than 50% of the market activities.
In his statement, with the stumpy crude prices and declining production, which means less earnings for the country, foreigners will not be willing to invest in the country.
He said, “Now, when they come in and your currency depreciates further, even when they make capital gain, that capital gain will be eroded by exchange losses. So, they want to come in when they think your exchange rate has bottomed out.
“However, if your earnings are declining; then, they are not sure the exchange rate has bottomed out. So, they are really particular with your reserves and foreign exchange earnings. That is what gives them the assurance to come in.”
The major obstacles to the return of foreign portfolio investors to Nigeria are persistent pressure on the naira and the country’s diminished foreign reserves as well as declining earnings a development that is hampering the recovery of the capital market recovery following the conclusion of the general elections, experts disclosed.
A lot of factors, including the fading fortunes of the naira, spurred by the oil slump, and uncertainty about corporate future of the country ahead of the general elections, had made some foreign portfolio investors to trade warily with many others exiting the Nigerian capital market.
 Foreign portfolio investors pulled out over N700bn from the stock market in 2014, forcing the Nigerian Stock Exchange All-Share Index to close the year with a negative return of 16.14%. Between January 1 and February 28 this year, they pulled out additional N132.53bn and brought in N100.38bn.
 Apart from a historical 8% rise on March 30 and a very positive week right after the presidential election, the market has only flattered to deceive.
According to professionals, the reason for this is that the foreign investors, who dominate the market, are not in a rush to come back because the economic fundamentals still remain the same.
Mr. Johnson Chukwu Managing Director and Chief Executive Officer, Cowry Asset Management Limited noted that political risk had been moderated. He disclosed that the major challenge the market is facing is the lack of magnetism to foreign portfolio investors because of the FX pressure. As it stands, foreign investors will not be very bullish about Nigerian equities and you know that foreign investors account for more than 50% of the market activities.
In his statement, with the stumpy crude prices and declining production, which means less earnings for the country, foreigners will not be willing to invest in the country.
He said, “Now, when they come in and your currency depreciates further, even when they make capital gain, that capital gain will be eroded by exchange losses. So, they want to come in when they think your exchange rate has bottomed out.
“However, if your earnings are declining; then, they are not sure the exchange rate has bottomed out. So, they are really particular with your reserves and foreign exchange earnings. That is what gives them the assurance to come in.”

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