Investors on the Nigerian Exchange Limited (NGX) have experienced a significant setback, with a total loss of N757 billion over a span of just two days. This sharp decline in market value comes in the wake of FTSE Russell’s decision to downgrade the Nigerian market from frontier to unclassified status. FTSE Russell, a subsidiary of the London Stock Exchange Group (LSE), made this decision in light of Nigeria’s ongoing foreign exchange challenges, which have introduced a new wave of negative sentiment that threatens to trigger a mass sell-off on the stock market.
As of last week, the Nigerian stock market was valued at N37.295 trillion. However, in just two days, it saw a 2.07 percent decrease, resulting in a staggering N757 billion loss, bringing the market’s total capitalization down to N36.538 trillion. This downturn was further reflected in the NGX All Share Index (NGX ASI), which experienced a 2.03 percent drop, shedding 1,383.14 basis points to close at 66,760.20 basis points on Tuesday, compared to the 68,143.34 basis points it held at the end of the previous week.
The NGX banking Index, which had witnessed substantial foreign investor participation, also suffered a notable decline, plummeting by 8.54 percent over the course of two days, from 714.16 basis points at the start of the trading week to 653.15 basis points. This downturn in banking stocks contributed significantly to the overall market decline.
Despite the fact that local investors dominate the Nigerian stock market, accounting for 94 percent of market participants, foreign investors still play a crucial role. As of July 2023, foreign investors comprised six percent of the market, and the FTSE Russell’s downgrade has clearly had a noticeable impact on their sentiment, with many displaying negative reactions to the report.
David Adnori, Vice President of Highcap Securities Limited, attributed the stock market’s poor performance to the FTSE Russell report and its consequences, particularly the frustration experienced by foreign investors who have faced difficulties repatriating dividends for several years.
FTSE Russell, a renowned division of the London Stock Exchange Group, is known for producing, maintaining, licensing, and marketing stock market indices, including the FTSE 100 Index and Russell 2000 Index. Nigeria’s downgrade, which has already been ratified by the FTSE Russell Index Governance Board, will take effect on September 18, 2023.
This downgrade will result in Nigerian index constituents being removed from five FTSE Russell equity indices, including the FTSE Frontier Index Series, FTSE Frontier 50 Index, FTSE Ideal Ratings Islamic Index Series, and FTSE/JSE All Africa Index Series, among others. These constituents will be deleted at a nominal value of 0.0001 NGN.
FTSE Russell’s decision to downgrade Nigeria is based on its assessment of the country’s foreign exchange situation. Despite Nigeria’s adoption of a floating exchange rate regime for the naira in the Investors & Exporters’ (I&E) FX Window, which now operates on a “Willing Buyer, Willing Seller” basis, the lack of liquidity in this window continues to hinder international institutional investors’ ability to replicate benchmark changes.
FTSE Russell stated that the suspension of index changes for Nigeria within its equity indices since September 2022, coupled with no improvement in the ability of international institutional investors to repatriate capital at a foreign exchange rate used in FTSE Russell equity indices, made the downgrade inevitable.
Nigeria will, however, be retained in the FTSE ASEA Pan Africa Index Series, with certain corporate events suspended until further notice.
The downgrade by FTSE Russell has undoubtedly sent ripples through the Nigerian stock market, and market participants are now closely watching the local dynamics to assess the impact of this significant development on their investments.
