• Thursday, July 25, 2024
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Investors on edge over rising equity risk premium


Equity investors may have to further their wait-and-see stance on buying Nigerian securities given a rising risk premium currently attached to the country.

Total equity risk premium of Africa’s largest economy by GDP size has risen from 11.15 percent in January 5, 2015 to 18 percent, according to Moody’s risk premium report. This is high compared to other emerging markets like Brazil (11 percent) and India (12 percent).

Equity risk premium is the excess return that an individual stock or the overall stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of the equity market. The size of the premium will vary as the risk in a particular stock, or in the stock market as a whole changes; high-risk investments are compensated with a higher premium.

“The question is this: What are the risk premium drivers? Who are the marginal investors and what is their perception of Nigeria’s risk? The marginal investors is he who sets prices in the market,” asks Aigboje Aig-Imoukhuede, president, council of the Nigerian Stock Exchange (NSE).

“Imagine a hedge fund investing where there is high premium in the time of volatility, the hedge fund will exit because they cannot get their returns”, Aig-Imoukhuede further told participants at the one-day dialogue on “The Capital Market and the 2015 Federal Budget” in Lagos.     

“Oil affects less that 5% of the capital market but between 10 to 15% of GDP. Government depends on oil revenue to finance spending” Aig-Imoukhuede said.

Currently, domestic investors who would have helped reduce volatility in the market following from their lack of foreign currency exposure, have become less significant in Nigeria’s equities market, while foreign investors who dominate the market are very fickle.

Capital market operators at the event where unanimous in their submission that current developments in the oil market and their impact on the forex market further justifies the call for the diversification of the economy.  “A lot of firms have significant dollar denominated liabilities”, said Toyin Sanni, group CEO, United Capital plc.

Tola Mobolurin, chairman, NASD plc said, “The steps taken by the Federal Government do not reflect the gravity of the situation”.I shudder to think what will happen in the next few months”, he said.

The Federal Government revised Nigeria’s budget benchmark to $65 per barrel, against crude oil output of 2.27 million barrels per day. The official rate of the naira/$ is 168.

“The exchange rate of N168 to a dollar is good but not for this time. After, we might see a more realistic level. Some of these figures will have to be revised later,” Mobolurin said, noting that “Nigeria cannot afford the oil subsidy because it limits investment in the oil and gas industry.

“Until we do that, we won’t see investment in petrol and petrochemical,” he further said.

Victor Ogiemwonyi, chairman, Association of Issuing Houses of Nigeria (AIHN) said “We have insecurity, rising unemployment. These hinder productivity. Without productivity, the naira cannot appreciate. Let us support privatisation so that we can reduce government recurrent expenditure. ”    

Albert Okumagba, president/chairman of council, Chartered Institute of Stockbrokers (CIS) urged the Federal Government to put the capital at the centre of its activities as a critical part of Nigeria’s development. “Projects that go through the capital market tend to be more transparent,” he said.

Iheanyi Nwachukwu, Bala Augie & Edozie Ifebi