August 24, 2018/InvestmentOne report
Risk off sentiment weighs on foreign investor inflows
· On Tuesday, the National Bureau of Statistics released the Q2 2018 Capital Importation report, which, as expected, showed a decline in foreign portfolio investor (FPI) inflows into the country.
· Total capital importation fell by 12.5% quarter-on-quarter (q/q) to US$5.5billion as a result of a 9.8% q/q decline in FPI inflows to US$4.1billion and a 24.1% q/q slide in other investments to US$1.1billion. On a positive note, while Foreign Direct Investment remained less than inspiring, it inched up 6.0% q/q to US$261.4billion.
· We opine that the gradual decline in capital importation, particularly FPI may not be unconnected with the bearish sentiment exhibited by foreign investors towards emerging and frontier markets, such as Turkey, Argentina and Nigeria to name a few, in Q2 2018.
· While we expect a slow down to continue, if not worsen in H2 2018 as foreign investors maintain a ‘risk off’ sentiment, we believe the potential for increased political risk in H2 2018, could also form a deterrent to FPI inflows.
· However, on a year-on-year (y/y) basis total importation spiked 207.6% largely due to low base effect of Q2 2017, although this was the quarter in which the Investors’ & Exporters’ foreign exchange window was established.
· Nonetheless, we should see the y/y performance slow if not decline in H2 2018 due to the previously mentioned drivers.
· Consequently, we believe capital importation into Nigeria may be swayed by foreign investor sentiment as well as political risk which may cloud the relatively attractive yields in the fixed income space and valuations in the equities market.