At present, foreign investors control over 70 per cent of transactions in the Nigerian capital market. Does this have any implication on the market? UDEME EKWERE analyses the situation from operators’ perspectives

During the global meltdown of 2007 and 2008, a lot of global and local firms were negatively affected. In Nigeria, the worse hit sectors were the financial sector, the manufacturing sector and the capital market.

That year alone, the capital market lost huge funds, as the Nigerian Stock Exchange’s All-Share Index fell from a height of 66,000 basis points in March 2008 to less than 22,000 points by January 2009.

Also, over N8tn or 70 per cent of the total market capitalisation of the exchange was wiped out during this period.

Analysts have said that one of the major causes of the crash in the Nigerian capital market in 2008 was the massive exodus of foreign investors from the equities market.

An analysis of the trend has shown that foreign participation in the market stood at 55 per cent in 2008 and fell to 32 per cent the following year as a result of massive pull out by the investors. In 2010, the foreign participation increased slightly to 40 per cent and rose significantly in 2011 to 82 per cent. It stood at 70 per cent at the end of 2012.

Investors have expressed worry over the seemingly rising interest of foreign investors in the Nigerian market in the last few years, which according to them, was not shared by local and retail investors, adding that any sudden exit of these foreign investors from the Nigerian market may lead to another downturn in the market.

Early last year, the Chief Executive Officer, NSE, Mr. Oscar Onyema, had stated that the Nigerian capital market lost foreign investments worth over N313bn by the end of 2011.

He noted that while a total of N479bn came into the capital market via foreign investments in the year under consideration, N313bn represented the amount that left the market.

  “Foreign investors were faced with a number of challenges from their own countries and the Eurozone, a factor, which led to the huge outflow of foreign portfolio investment and a consequent decline in the value of transactions in the capital market. Of course, we also had our own local challenges, he said.

 Analysts say that increased foreign participation in the Nigerian market may be a blessing to the market, adding that regulators should try to attract more local participation.

The Director-General, Securities and Exchange Commission, Ms. Aruma Oteh, had advised local and retail investors to return to the market, stating that it was important for local investors to take advantage of the market which seems to be attracting the interest of foreign investors.

The Chief Responsibility Officer Value Investing Nigeria, Mr. Seye Adetunmbi, notes that usually, if international investors express interest in the market, it is a good development and signals that the market is relatively stable.

He adds that for foreign investors to see the need to invest in a market shows that the market was recording improved activities and increased returns on investment.

He says, “Professionally and technically speaking, if foreign investors are interested in your stock market, it signals positive tiding, which means the market is performing and returning considerable competitive yield on investment, or at least, has the capacity of capital growth worth the investment criteria of international investors.

“It also depicts a safe investment haven, and in essence, it challenges the local players to explore the market better. Competition in an open market economy is healthy for the market.”

According to Adetunmbi, the regulators are left with the function of ensuring that activities go on the market as they should, without any form of collaboration and manipulation of the prices of shares.

He adds that there is free entry and exit for investors in any market, and if an exit is not deliberately done to pull down the market or as a result of market manipulation, then there is no problem for the market.

He says, “If foreign interest in the market is to manipulate the share prices with local collaborators and fleece as we experienced in the past when insider dealing was perpetrated with reckless abandon is what is at play, then the regulators need to be at alert and concerned. However, if it is in response to good market fundamentals, there should not be cause for alarm. Most rational investors would not leave a safe investment haven on a sentimental note.

“And for as long as an exit is not borne out of market manipulation, which arose due to scenario that led to the meltdown of 2008, be assured that there will be investors to take over from the departure point of a divesting investor, all other things being equal. This could be absorbed by the market as a going concern or the market makers can step-in appropriately.”

On his part, the Managing Director, Lambeth Trust and Investment Limited, Mr. David Adonri, says for anyone to play in the market, he should be aware of the inherent risks and benefits, adding that investors may choose to exit the market at any time for reasons best known to them.

He notes that owing to this, it is essential for investors to have a game plan and a time-frame when investing in the market, to ensure that they do not get their fingers burnt.

He says, “On foreign investors dominance of transactions in our market, the Nigerian economy stands to gain, especially due to the concomitant inflow of hard currency, and so, more foreign investment should be encouraged.

“Having said this, it is essential that all participants in the market should understand the inherent risks, when investing in equities. For various reasons, investors, whether domestic or foreign can exit the market at any time, and dumping of shares hardly threatens the liquidity, profitability and safety of stocks with good fundamentals and intrinsic values.”

However, if an exit is massive, it could provoke a sharp decline in prices, which is why investors should not overstay their positions in over-valued stocks.

Adonri adds that if market makers perform their roles effectively and monetary authorities take proactive measures to prevent overheating of financial markets, sudden exit of foreign or domestic investors will have minimal impact on the capital market.

The Managing Director, Crane Securities Limited, Mr. Mike Ezeh, notes that even though foreign investors’ exit contributed largely to the near-collapse of the Nigerian capital market during the meltdown in 2008, their interest in the Nigerian market should be encouraged.

He says, “It’s important to note that ours is a market that is internationalised and such, there is very little any organisation can do towards limiting the level of foreign involvement in the activities of our local market.

 ÃƒÂ¢Ã¢â€šÂ¬Ã…“Even though it is a fact that these foreign investors played a pivotal role in the near collapse of our market in 2008, we cannot also discountenance their role in the expansion and growth of the same bourse since 1997 when our market became globalised, as the market has actually grown in leaps and bounds.”

 He, however, states that the Federal Government and the regulators of the capital market have a duty to ensure that more local interest is generated in the Nigerian market.

He says, “The regulators are left with a duty to ensure that local investors who really constitute and dominate the retail sector of the market should develop more interest in the market and begin to play their own part by taking as much risk as the foreign investors.

“This is because capital market investment is all about speculation and in speculation, there is high level of risk. Foreign investors are aware of the attendant high benefits associated with risky ventures which the platform of a capital market affords; however, our local investors seem not to be aware of this.”

Source: Punch (written by Udeme Ekwere)