The ongoing consultations by the MSCI Frontiers Markets Index that could potentially result in Nigeria being removed from the index Frontier Market Index and Frontier Market 100 Index is bad for the country’s equities market, financial analysts have said.
Late last week, MSCI announced the results of its annual market reclassification review.
MSCI includes in its indexes stocks that have a relevant float and are also liquid – that is, investors can easily buy and sell a reasonable volume of such stocks without significant loss of value.
There are nine stocks in MSCI Nigeria. They are DANGOTE Cement; MTN Nigeria Communication Services; Nestle Foods Nigeria, and Zenith Bank Plc. Others are Seplat Energy; GUARANTY TRUST HLDG CO; Nigerian Breweries; STANBIC IBTC HOLDINGS and BUA Cement.
MSCI is proposing to remove Nigeria from the MSCI Frontier Markets index, where the country currently has the seventh-largest country weight of about 5%.
MSCI’s reason for the planned action is that since March 2020 there has been low liquidity in Nigeria’s foreign exchange market, with a significant gap between the official and parallel exchange rates, resulting in FX conversion and repatriation issues for international investors.
The action is coming at a time when the naira is exchanging at the official market at about N412/dollar, versus an exchange rate of about N610/dollar at the parallel market.
In July 2014, Nigeria’s weight peaked at 19.7%, when it had the second-largest country weight in MSCI Frontier Markets Index, and has since then steadily lost relevance in the index, many a time due to the illiquidity of the foreign exchange market and policy uncertainties.
If Nigerian stocks are removed from the Frontier Market Index, fund managers who currently invest in Nigerian stocks due to their tracking of the index would have to divest from such Nigerian stocks and as a result, potentially cause a bearish run on the floor of the Nigerian Exchange.
It would be “bad” for the stock market, says one analyst who prefers not to be named. Nothing good will come out of it, he pointed out.
“It will lead to a sell-off on the Nigerian stocks tracked in the MSCI Frontier Market Index, especially by foreign portfolio investors,” who are already underweight on Nigeria, he noted. Investors who currently hold the Nigerian stocks as a way of mirroring the MSCI Frontier Index basket will sell and exit the market.
Asked if there is anything Nigeria can do now to avert the removal, the financial analyst said categorically: “No. It’s almost too late,” as he added it’s unfortunate this is “CBN-induced and of course avoidable”. Unfortunately, it may put further pressure on the Naira because when foreign investors sell those stocks, they still need dollars to repatriate their proceeds.
“This further reinforces analysts’ call for a change in the current FX management approach, especially as it is important for the Central Bank to rebuild investor confidence in the liquidity of the naira and the ability of the apex bank to meet all genuine demands, including those of foreign portfolio investors,” said Isaac Olorungbon, Managing Director of Deeptrust Asset Management Limited.
Interestingly, analysts at Tellimer, an emerging market-focused investment bank believe foreign investors are already underweight on Nigeria and that the removal of the country from the index, though it would undermine the recovery of foreign portfolio investments into the country, would have a marginal impact.
Hasnain Malik, Strategy and Head of Equity Research at Tellimer, noted that the move will be muted for four reasons: it will have a modest impact on share prices; FX issues are not new in Nigeria; any foreign investors still remaining in the local market are either committed or trapped because they have not been able to repatriate their money, and investors who track Frontier Markets funds are now small.