A multinational market analyst and Index provider, MSCI Inc. declared it will retain Nigeria in its benchmark frontier-index and precluded Nigeria from a review for potential reclassification to Standalone status1 in line with our earlier view2.
According to MSCI, the Investors’ & Exporters’ Window (IEW), improved currency market conditions for investors and paved way for its decision to remove Nigeria from the review list for potential reclassification to standalone status.
A recall from proposition to reconsider Nigeria’s status in the index first emerged in April 2016 when CBN’s restriction on FX sales created an impediment in the process of foreign capital repatriation—violating a critical provision for countries in the Frontier index.
MSCI sheds light on naira equities
In our view, MSCI’s latest decision is positive for naira equities with the implied impact likely to consolidate gains from higher foreign portfolio index(FPI) inflows. Precisely, considering that approx. $1 billion worth of funds currently track the MSCI frontier index (according to estimate) with Nigeria’s weighting at 7.9%, the decision implies $79 million (N29 billion) is no longer in danger of leaving Nigeria’s equity market.
For context, the implied sum under consideration (N29 billion) is about 65% higher than the average monthly net foreign portfolio investment(FPI) flow to Nigeria’s equity market from January through August. In addition to this, the sum also approximates B of mean monthly net FPI inflows since the introduction of the Investors’ and Exporters’ Window (IEW).
By the materiality of the current decision therefore, we expect naira equities to positively respond to the decision in coming periods. This said, we believe other investors would continue to look into fundamentals for direction and therefore restate that the track of crude oil price, domestic macro, FX liquidity, fiscal policies, and pension reforms will remain crucial to equity market performance.
Furthermore, with alternative yield-paying investment outlets such as treasuries set to become relatively unattractive in line with our expectation for yield downtrend, we expect investors to pay greater attention to equities.