The cloud of uncertainties in the global markets has made emerging markets like Nigeria and risky assets like quoted equities unattractive to foreign portfolio investors.
FXTM Senior Research Analyst, Lukman Otunuga, said trade disputes among major advanced economies, Britain’s move to exit the European Union and other political and economic concerns have reduced global investors’ appetite for emerging markets and risky assets.
Foreign portfolio transactions in the Nigerian stock market had reduced from N906.86 billion in the first eight months of last year to N594.46 billion in comparable period of this year. Foreign portfolio investors (FPIs) play major roles in the Nigerian stock market, where they account for nearly half of total transactions.Total transactions at the Nigerian equities market had also dropped from N1.88 trillion in eight-month period ended August 2018 to N1.32 billion in similar period of the year.
Nigerian equities closed at the weekend with a negative average year-to-date return of -15.85 per cent as selloffs continued to force the market down, despite a near consensus on undervaluation of several Nigerian stocks.
The International Monetary Fund (IMF) last week downgraded global growth forecast for 2019 to 3.0 per cent, the fifth downward review from its initial 3.9 per cent forecast in mid-2018. This implies that global growth is expected to be at its slowest since the 2008 crisis.
Otunuga said risk-aversion due to global uncertainties will flow back to the Nigerian equities market noting that Nigeria’s dependence on crude oil also makes the country susceptible to global oil shocks.
He urged the Economic Advisory Council (EAC) constituted by President Muhammadu Buhari to focus on measures to diversify Nigeria’s revenues in order to mitigate possible oil shocks, pointing out that the global outlook for crude oil remains bearish despite current upswing.
Otunuga said the managed-float foreign exchange system of the Central Bank of Nigeria (CBN) remains the most viable option for Nigeria given the economic structure.
He said economy as it stands now cannot successfully run a free float foreign exchange system, noting free float policy could have adverse effect on the economy.
According to him, Nigeria needs a combination of a strong foreign exchange reserves and economic stability to absorb possible pressures from free floating of Naira.
He noted that Nigeria’s external reserves has considerable influence on the stability of the Naira.
“I am an apostle of free float but that is not feasible now because the external reserves is not strong enough. Recently, the reserves have been experiencing downturn. At $42.5 billion, the external reserves have been experiencing negative trajectory and with this and coupled with the state of the economy, I will say that free float is not desirable now,” Otunuga said.
He added that before the currency could be allowed to free float, there should be assurance that it will withstand the initial shock that usually accompany free float.
FXTM Nigeria General Manager Abiola Akinyele said the firm is committed to empowering Nigerian investors and traders through adequate knowledge and cutting-edge know-hows.
He said FXTM Nigeria organises educational workshops and seminars for its clients to ensure they remain abreast of global developments and how such impact on the domestic economy.
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