Nigerian investors’ patronage for foreign stocks surges, the Securities and Exchange Commission, SEC, has announced a tighter regulatory oversight of local brokers aimed at cooling off demand for foreign stocks.
The apex regulatory body in the nation’s capital market now plans to register brokers selling stocks of foreign companies as more Nigerians pile into the assets to hedge against inflation and currency weakness. An earlier effort last month met local resistance, backfiring after warnings alerting people of risks and threats to sanction local traders.
“The commission plans to actively monitor the local market in foreign stocks in furtherance of our mandate of ensuring investor protection and market transparency,” the executive commissioner for operations of the SEC, Dayo Obisan, said in an interview.
The regulator wants to draw a curtain on a period that saw legions of young Nigerians turn to online platforms to invest in stocks and digital currencies. The need to protect savings took on more urgency after the Central Bank devalued the local currency three times within a year while inflation accelerated at the fastest pace in four years.
Before now, the online platforms could connect high net-worth individuals without an independent license. The SEC now wants to regulate them directly over concerns they’re targeting retail investors that require protection.
The All-Share Index, Nigeria’s benchmark equity gauge has retreated 2% this year, compared with a gain of about 11% in the S&P 500 Index.
At least 400,000 Nigerians poured funds into foreign stocks through online brokers in the past 18 months, Obisan said.
Nigerians actively trading or holding foreign equities now exceeds those investing in local collective investment schemes or mutual funds, according to the regulator. About 70% are between the ages of 18 and 40, a demographic that’s shunned the local stock market, whose total active investor base is less than a million. “There is an increasing interest among the younger population and this is of concern to the commission primarily because it creates an avenue for exploitation,” Obisan added.
Nigerians have been accumulating foreign currencies to protect their wealth from naira volatility and surging inflation, according to a research paper in a journal published by the Central Bank of Nigeria. “Higher real-exchange rate volatility is associated with an increased level of currency substitution,” Central Bank economists including Isaiah Ajibola, Sylvanus Udoette, Rabia Muhammad and John Anigwe said in the paper available on the Central Bank’s website.
There is a need to contain “exchange-rate volatility and inflation as a way of curbing the spate of currency substitution in the country,” they said.
One measure of currency substitution, the ratio of foreign cash deposits to naira deposits on demand in the banks exceeded the International Monetary Fund’s 30% threshold from 2009 following the global financial crisis, the researchers said. It hit a peak of 98.2% in 2014 before declining to 83% in 2018. A broader measure of foreign currency in banks to naira savings, demand and term deposits, stayed largely within the IMF limit over the study period from 1995 to 2018.