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Michael Olafusi

Things Might Get Worse For Our Stock Market

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I have been reading up on the frontier markets, which Nigeria falls under, and came across a worrying fact.

There are three categories of equity market to the global investor: Developed Markets, Emerging Markets and Frontier Markets. According to S&P Dow Jones Indexes Country Classification System:

  • Developed markets are the most accessible to and supportive of foreign investors. Generally, there is high degree of consistency across these markets.
  • Emerging markets generally have less accessibility relative to developed markets, but demonstrate some level of openness.
  • Frontier markets are typically much less accessible to foreign investors, exhibit notable limitations in their regulatory and operational environments, and support a smaller investment landscape. Markets tend to be much less robust and in the earlier stages of development.

According to CNBC Africa, there are about $500 million foreign investors money in our stock market and a large portion of them are from index funds like the MSCI Frontier Markets ETF, Guggenheim Frontier Markets ETF and Global X Next Emerging & Frontier ETF. And the non-index ones often rely on the market classifications in allocating their investment funds.

 

The bad news is that many of the global bodies that create these market classifications are reviewing Nigeria's inclusion in the Frontier Markets category. The most popular bodies are the MSCI, FTSE and S&P Dow Jones Indices. And one of them, MSCI, is set to make its final verdict in two months. MSCI and FTSE, last year, cited the foreign exchange market restriction as the main worry, making it difficult for investors to repatriate their capital. And as the situation hasn't improved since they placed Nigeria on the watchlist last year, there is a high likelihood that we will be evicted from the Frontier Markets into what they term a Standalone Market (the equivalent of no classification).

 

If they kick us out then things are going to get worse for our stock market. The sell-off will cause a big drop in the market value/capitalization. Bank shares will probably be the hardest hit as most foreign investors target our financial sector first and then the consumer goods industry. 

 

If you are trying to get into the stock market you might want to wait out this period of uncertainty about our status in the global investment community.

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