Is Nigeria an Interesting Market for International Stock Investors? Empirical Evidence on Risk and Return 2010 - 2024

Abstract

This study investigates the attractiveness of the Nigerian Stock Exchange (NGX) for international investors, particularly those whose operational currency is the U.S. dollar. The study provides empirical evidence on risk and return from 2010 to 2024, using the Nigeria All Share Index and the 30 most capitalized stocks on the market to explore the dynamics that may appeal to global investors. Recognizing the significant impact of currency fluctuations, the findings are presented in both Naira and U.S. dollars. The research adopts a comprehensive quantitative approach, including sub-period analysis, to assess the influence of key economic events on market performance. Annual returns and standard deviations are calculated to evaluate the reward and risk associated with each asset, while the Sharpe ratio is employed to gauge risk-adjusted returns. Regression analysis is utilized to examine the relationship between the Nigerian stock market and global markets, as well as the influence of macroeconomic factors such as exchange rates, crude oil prices, interest rates, inflation, and GDP growth. Portfolio construction is carried out using Excel-based solver solutions, allowing for strategic diversification and risk management. The findings reveal that the performance of the Nigerian stock market is significantly influenced by the exchange rate between the Naira and the U.S. dollar. Market performance tends to decline with consistent Naira depreciation, while periods of exchange rate stability, as observed from 2020 to 2023, are associated with better market outcomes. The analysis also shows that the NGX has low correlation with global financial markets, indicating that its risk is predominantly unsystematic. Exchange rates and crude oil prices emerge as the primary macroeconomic predictors of market performance. The study suggests that portfolio diversification, with certain restrictions, and a focus on high-liquidity assets may offer viable strategies for international investors looking to mitigate risks and optimize returns. This research contributes to the understanding of the NGX's potential as an investment destination, offering valuable insights for global investors seeking to navigate the complexities of the Nigerian stock market.