Local investors sustaining stock market after foreigners’ exit – Ex-CIS president

The Managing Director/CEO of Arthur Stevens Asset Management Limited and a former President of the Chartered Institute of Stockbrokers, Olatunde Amolegbe, speaks with OLUWAKEMI ABIMBOLA about the impact of the forthcoming polls on the capital market and other issues

The 2015 and 2019 election cycles witnessed a dip in the market but the market closed positive in 2022. What led to this?

Market cycles or market movements are determined by a lot of factors. One of them, of course, is demand and supply by investors. Another factor is the macroeconomic circumstances of the environment at that time. Another factor would be the sociopolitical environment. And typically, what we have seen is the era of violence and other issues that surround our election period in Nigeria, investors tend to be fidgety in participating in the market during an election period.

That was what we saw in 2015 and 2019. You know the normal investors’ apathy during the election period because of fear of violence and other election-related risks. And during the 2015 and 2019 election cycles, the participation of investors was predominantly foreign investors, so when the foreign investors became skittish and limited their participation in the market, that was why we saw the dip we saw during those election cycles.

However, things seem to have changed a little bit in the last few years, because foreign investors have exited and participation by local retail investors has increased significantly in the last few years. What you saw in 2022 was a situation where local retail investors were more confident in the country. You are not seeing that flight to safety that you saw in the last two elections. Because local investors are already here anyways, mostly they are Nigerians. They are more likely to have confidence in their own country, and economy than foreigners and that is why you are not seeing the kind of volatility that we saw in 2015 and 2019.

The percentage of participation of local investors in the market in the last few years has increased significantly. In fact, it has surpassed the participation of foreign investors. So, the volatility has been reduced because the risk appetite of the local investors in the Nigerian economy is higher than foreign investors, who tend to run at any sign of chaos. But local investors tend to take it as a case of ‘It is just a normal thing, it will come and it will pass.’ They (local investors) do not panic the way foreign investors panic and that is what we are witnessing in the market now.

Do you think the investor behaviour seen so far will be sustained?

 Most likely. Even if we do not see a significant upswing in market indices, we are really unlikely to see a significant dip due to these election issues due to the reasons I have given earlier…mostly local investors participate in the market.

What are your concerns for the market following economic disruptions witnessed thus far in the year?

 No investor will see the sorts of things we are seeing now in terms of socio-economic instability and will be bullish about investing. Having said that, the hope will be that issues of fuel scarcity, naira scarcity and other issues we are having right now will be temporary. Investors tend to be forward-looking. While they are seeing what is going on now, they are hoping that the elections would eventually still go on and we would see a smooth transition. And the hope is that the new government, whoever comes in, will come up with better policies that will address some of the issues affecting the market. Investors tend to be optimistic people.

 While they might not be opening their wallets at the moment, they will still be keeping their eyes on the fact that an election is coming and hopefully whoever wins will come up with better issues to address whatever issues we are grappling with right now. And there will always be the hope of resolving any issues that are there right now. Investors are nothing but optimistic.

The inflation rate in January hit 21.81 per cent. Is it likely to go higher and what are the drivers?

 The issues driving them are issues that have been with us for a while. Food inflation, insecurity, etc. While we can argue that the monetary policies that the CBN has put in place have slowed the rate of movement in the inflation rate, clearly, we are still seeing that the rate is going up.

 Our expectation is that the rate will slow but we might not see a deceleration in the inflation rate very soon because of the other issues that are still with us.

We expect that while we still see an increase in the growth rate of inflation, it might not move as fast as it was previously. We saw a deceleration two months ago before we saw a reversal this month. The expectation is that we will probably remain on this trajectory for a few more months before we actually start seeing a consistent deceleration in the inflation rate.

You said that the drivers of this inflation have been with us before now. What are these drivers?

Principally, we can see food inflation driven by the flood we are seeing in different parts of the country and insecurity, of course. Issues that have not only affected production but also affected the route to the market for food.

Food inflation is a primary item in that basket. Then, we have energy inflation too with all these increases in energy costs that both companies and individuals have had to cope with. This inflation tends to have a pass-on effect across the board. If energy costs were to go up, you will find that the prices of products will go up because the manufacturers of these goods would normally factor in the cost of the energy into the pricing of their goods.

 If the prices of essentials go up, the prices of virtually every other thing go up.

Your firm predicted an inflow of foreign portfolio due to the positive close of the market in 2022. Are you still standing by that prediction?

 The prediction is predicated on a few assumptions one of which is a smooth transition. Safe elections and a smooth transition to the new government. That is one. Number two is what is happening in the global economy as a whole. You know foreign investors; foreign portfolios are looking for the best risk-adjusted returns.

 Given that the interest rate has gone up significantly in Nigeria, also given the fact that Nigerian stocks have been delivering positive returns, if there are changes that make the foreign investors come to the conclusion that on a risk-adjusted basis, there are competitive returns to be had in Nigeria, then we expect that more of them will flow towards us here. Other things being equal, i.e., getting our insecurity situation under check, if the macroeconomic indices start to look good, if the foreign exchange is constant or improves markedly, then we should expect that foreign investors will be looking to the country.

 Our forecast is clearly based on a lot of assumptions and we expect if all those assumptions were to fall in line, there should not be any reason why we should not see a better foreign investment inflow than we have had in the last few years. In a few years, we have seen more of an outflow than an inflow. So, we have a relatively low base to operate from.

 If all these assumptions we have stated fall in line, then there should be an improvement in terms of foreign investment in the country.

 What has been the role of local investors in the market?

 I don’t have the figures at hand now but I do know that the participation of local investors in the market has increased significantly, and both retail and institutionalised (investors) have increased significantly in the last few years. The truth of the matter is that local investors have carried and sustained the market in the last few years and their participation continues to grow just as we see the exit of the foreign investors. It has certainly grown in the last few years.

Fuel subsidy removal is being proposed for the middle of the year. How will that impact the market and the economy?

The removal of fuel subsidy will have multiple impacts. On the financial planning aspect, it is expected to increase the revenue inflow and retention to carry out developmental projects. If we are spending N1tn a year on fuel subsidy alone, that is clearly, given our budget, that is clearly unsustainable. So, the removal of fuel subsidy should improve government revenue inflow and should enable the government to carry out some of its projects easier than what is happening now.

 On the other hand, the removal of fuel subsidy could engender further inflation within the economy. So, while government revenue is expected to increase, the government will also have to find a way to ameliorate the expected inflation that the removal of the fuel subsidy is expected to bring to the populace.

Which sectors do you think will lift the market in 2023?

 Naturally, you know the market is dominated by the financial sector. So, they will participate in one way or the other in terms of market growth. But my expectation this year is that the main drivers most likely be the telecoms companies, MTN, Airtel and others. They are essentially in a business with an inelastic market. So, regardless of what is happening in the environment, they are expected to grow.

 The demand for the products of telecom companies is essentially inelastic. Because of that the companies are expected to grow. The quoted telecom companies are expected to grow and do very well as they did last year.

 Industries such as the building materials sector are also expected to do well this year simply because they have the capacity to pass on inflation costs to their consumers. Again, because the demand for their products is essentially inelastic.

 Those three industries; finance, telecoms and building materials will naturally have an edge in terms of the industries we expect to outperform the market this year.