A significant contribution to the growth of Nigeria’s equities market recently was from domestic transactions, which comprise of retail investors.
As indicated by the Nigerian Stock Exchange’s Foreign Portfolio Investment (FPI) report for June, domestic transactions on the nation’s bourse, improved 240 per cent in May, from N32.5 billion to N110.42bn, whilst the total domestic transactions Year to Date (YTD) increased by 38.40 per cent from N279.11b to N386.29b. The report also indicated that domestic transactions outperformed foreign investors by 7.40 per cent.
However, in a recent engagement with the Managing Director of Hycap Securities, David Adonri, The Daily Times Capital Market Correspondent, Afolabi Adesola discovered retail investment in the equities market should be rather channelled to the fixed income market for capital preservation.
In this interview with Adonri, he also provided insight into the impact of the secondary market on the primary market among other capital market-related issues. Excerpts
Nigeria’s capital market is witnessing an upturn; and reports from the Nigerian Stock Exchange indicate that retail investors have begun to participate more in market activities. What is your reaction to this and how do you see this trend sustained till year end?
The equities market, which appreciated by almost 12 per cent in July, is a wonderful development. This means that this market is bouncing back from a long period of inactivity.
But the truth is that considering the risk profile of most of the retail investors, their exposure to the equities market ought to be minimal. That is why there are fixed income instruments that have been merged in the market to cater for their interests, as a lot of these products are actually in pursuit of the safety of retail investments.
For Instance, we have the Federal Government’s Savings’ Bond, which is targeted at retail investors; they should embrace it. Local investors also ought to be properly guided. Their portfolios and assets have to be allocated in such a manner that their capital will be preserved.
You know, since most of those retail investors, who were mercilessly wounded during the meltdown, the structure of the market changed, we now have more of institutional and foreign investors dominating the market, but from what we have been seeing recently, because the market has been recovering and prices have been appreciating, so many retail investors are pouring in again.
When the market is appreciating upbeat and there is a bull run, that is a period of selling, especially by the local investors. It is not when they are supposed to come to the market, it is when they are to exit. But the reverse is the case, we are seeing them pouring in now at almost the top of the market and their fingers may be burnt again.
Because the market cannot continue to appreciate, the nature of the market is a boom and bust, the cycle must be repeated and it must decline again.
What impact does secondary market’s performance has on the primary market?
The primary market has been dormant, but with the way, the secondary market is recovering that recovery may trickle down, very soon, to the primary market.
The primary market is the main reason the capital market exists because that is where capital is formed; and then, fund users use the capital to generate productive employment and create wealth. This is the main focus now, as to how what is happening in the secondary market now can translate into higher activity in the primary market.
Can you give more insights into the recovery of the market?
The factors that have driven the market so far show the economy has been recovering from stagflation. Generally, when there is an economic crisis, financial assets migrate from equities to fixed income, but when the economy is recovering from the crisis, the direction will reverse and financial assets will then flow from fixed income to equities. So, that is a major factor that is propelling the recovery of the equities market.
The Central Bank of Nigeria, CBN, came up with a monetary policy that gave a foreign exchange window to exporters and foreign portfolio investors, which increased foreign investors’ confidence in the economy and facilitated their re-entry into the equities market.
It was also the market hearsay that the Pension Fund Administrator’s (PFA’s) are increasing their positions in the equities market because they have seen the direction of the economy and they know that the financial crisis is gradually coming to an end. So, they want to position themselves quite early, now that most of the stocks are undervalued so that by the time the economy recovers fully their positions in equities will be firm and will give them good profit.
Also, some of the second quarter reports released recently were impressive; and that increased the demand for equities.
How sustainable is this recovery?
The market reacts to a price sensitive development or information, then after the information, momentum would decline until another price sensitive information hits the market to change the direction of the market.
So far, the market has reacted to those events that have impacted positively; we expect the market to be fatigued a little bit until perhaps we have information that can change the direction again.
You said the CBN’s special FX window for traders boosted foreign investors’ confidence and facilitated their re-entry into the equities market, The CBN also regularly intervenes through the supply of FX for ease of doing business, do you see these policies and interventions sustainable enough to bring the market to a positive close by year end?
The window for foreign investors and exporters is a transparent and market-driven window that does not involve the activities of the Central bank of Nigeria (CBN).
What was recommended to the monetary authorities when the economy was going into a tail-spin and entering stagflation, was that those administrative policies that the CBN had hitherto used to manage the foreign exchange of the country were part of the reasons why the economy moved into a stagflation, because of what was called structural rigidity, and that for the economy to move out of the recession, market-based policies must be adopted.
Looking at the petroleum sector, the partial deregulation of the prices of petroleum products eventually led to stability in that sector. People no longer queue for fuels even though the price has increased, having embarked on demand management policies.
So also were the CBN advised that they should stop the administrative policy of fixing the exchange rate that it will not take the economy out of stagflation. Meanwhile, you know what we are experiencing is more than a recession. It’s a combination of recession and high inflation, which is called stagflation, which is very difficult.
The CBN used all kinds of means to confuse the operators in the economy that they were gravitating towards market-based policies, but that was not done until this special FX window, and we have seen the impact. So, if they can actually extend it to the foreign exchange market as a whole, i.e. the monetary authorities should come up with a framework to organising a real market driven foreign exchange policy, wherein the value of the currency will be flexible; that it will be centred on forces of demand and supply. Then, the CBN itself, will be a participant as well, either a buyer or a seller. As it is now, the CBN is only a seller.
The slow recovery from the economic crisis will have been expedited if we had a real market-driven foreign exchange policy, which is still not so yet.
Also, like you expressed, the fear that the daily FX interventions by the CBN may not be sustained is correct, because as we can see, the international price of crude oil is coming down; and if the acting president had not graciously gone to the Niger Delta to make peace, the foreign exchange income would not have been possible.
But those things are transient, a more enduring thing, is a market-based policy, which the authorities are shying away from for one reason or the other.
However, the FX window established for exporters and investors should be maintained because that is market driven and people are confident that it is sustainable and to that extent, the market will continue to benefit from it.
Quote: “The CBN used all kinds of means to confuse the operators in the economy that they were gravitating towards market-based policies, but that was not done until this special FX window, and we have seen the impact. So, if they can actually extend it to the foreign exchange market as a whole, i.e. the monetary authorities should come up with a framework to organising a real market driven foreign exchange policy, wherein the value of the currency will be flexible; that it will be centred on forces of demand and supply. Then, the CBN itself, will be a participant as well, either a buyer or a seller.”