With GDP, forex earnings, interest rates, returns from other segments of the economy down, many are curious to know why the equities market is on the rise. Uche Uwaleke, a Professor of Capital Market offers reasons in this interview with BusinessDay.
ln spite of the COVID and the inclement economic conditions, the All Share Index as at October 23, 2020 closed in on the January level at over 28,000 basis points. What, in your view is driving the market? Does it have anything to do with sound policies, events or some things we are doing well?
I would attribute the recent bullish trend in the stock market to the gradual easing of uncertainties in the Nigerian economy on account of several factors including the stability in international crude oil price, the drop in the incidence of COVID-19 cases in Nigeria, the easing of restrictions and lockdowns as well as gradual restart of the economy. This much has been confirmed by Fitch Rating Services in its recent affirmation of B rating and stable outlook for Nigeria. Another factor i see is portfolio rebalancing by Fund managers who are migrating to equities following the crash in returns from fixed income securities. So, the gradual return of confidence in the economy is contributing to the positive market sentiment.
I also think some policy measures and actions of the government and the CBN are partly responsible for the momentum. First, the various interventions by the government have put a lot of liquidity in the economy some of which are finding their way to the stock market. Second, some monetary policy measures by the CBN have spurred credit to the real sector while others have crashed money market interest rates. The loan to deposit ratio as well as the reduction in the minimum interest rate on savings account to 10% of MPR including the recent MPR reduction by 100 basis points are good examples one can cite.
It is important to mention here that much of the appreciation have been driven by top banking stocks such as Stanbic, Zenith and Guaranty as well as some premium stocks such as MTN and Dangote Cement that are considered to have good fundamentals despite the pandemic. Although in the last few days, we are beginning to witness in these stock prices what could be regarded as market correction in the form of profit taking. That is normal of investors’ behaviour.
READ ALSO: Nutrition part of our MTNDP, Nigeria Agenda 2050 – FG
Are there some opportunities in the Nigerian Securities market that could stimulate job creation and poverty alleviation?
Obviously. The Nigerian Securities markets, both money and capital markets, provide huge opportunities for issuers and investors alike. As you know, Issuers are either corporate organizations or the government that have opportunities to raise capital. Long term capital raised by companies either through issuance of shares or bonds for expansion purposes will create jobs in the process and reduce poverty. A number of companies have also issued securities such as Commercial Papers in order to meet short term financing needs. Similarly, the federal government has been using both short and long term fixed income instruments to raise funds to finance the budget. These include NTBs, FGN Savings Bonds and FGN Bonds, Green Bonds and Sukuk. Take the 2021 budget proposal for example, the government is projecting new borrowing of over N4 trillion the bulk of which will come from the domestic market. Most of these loans are expected to be used for infrastructure projects which would stimulate jobs in the process. I am also aware that some State governments have accessed the capital market for funds by issuing bonds.
I also think good opportunities exist in the Nigerian securities markets for investors to create and grow wealth. Investment in fixed income securities for instance offers an opportunity for more conservative investors, who prefer low risk, to generate regular income on their investment portfolio. To the best of my knowledge, the federal government has never defaulted in the payment of interest and principal due to investors. Thus the default risk is negligible. Interestingly, the interest income earned on bonds and NTBs are tax free. For equities, investors in companies with track record of dividend payments often enjoy both dividends and capital appreciation. Collective Investment Schemes such as Mutual Funds as well as FGN Savings Bond in the fixed income space are veritable vehicles for savings and investments especially for low income earners which i strongly recommend.
What are your views in crypto asset trading because we see Nigerians rushing into it almost unrestrained? For example, there is one by inksnation.org.
I am happy you asked this question. As a Professor of capital market, my antenna is usually raised whenever I encounter such propositions. The reality is that most blockchain offerings are no different from Ponzi schemes that present only the sweet side of the grape fruit. Genuine investment proposals must disclose both return and risks. The one you mentioned and several others do not.
This particular one in question advertises what it calls living node packages involving an investment of N100,000 or $300 in return for monthly salary of N240,000 or $686 worth of ‘Pinkoin’ for the gold category. Who are the owners of the company and what is their reputation? What is the company structure, management, Board? How liquid is the crypto market? How easy is it to exit without incurring losses? What is the investment strategy that guarantees such mouth-watering returns in a period of global economic slowdown? What fundamentals are driving such performance? Is the company registered by the Securities and Exchange Commission? Is the market regulated in any form? Questions after questions!
A golden rule in finance is that the higher the return the higher the risk. The truth is that investing in crypto assets can fetch handsome returns but it is at the same time a highly volatile market reserved for speculators and not for savers. Even at that, not all platforms can be trusted. I am happy that the Securities and Exchange Commission is rising to the occasion with its plan to bring crypto-asset trading under regulation. In relation to investments generally the caveat is: If it sounds too good to be true, don’t touch with a long pole. The popular saying that there is no free-lunch in Freetown is quite apt in this case.
Going by no of participants and volume, could you further explain what you meant in your last interview that NASD has lived up to expectation?
I was basically referring to the company’s modest growth especially in terms of the number of participating institutions since 2013 when it began operations. Again, considering the very challenging environment in which the company has operated over the years, a modest profit after tax of about N45 million recorded at end of last year as disclosed in its financial report points to a well-managed company in my view.
Would you like to give details on the advantages and working of NASD Enterprises Portal, NASD Venture ramp, FMDO, AFEX, NCX, and LCFE, which you talked about in the last interview?
All these platforms you mentioned have become part of the capital market infrastructure in Nigeria, a clear sign of progress as opposed to when it was only the Nigerian Stock Exchange. The NASD, as i pointed out in my previous discussion with you, is an OTC trading platform for unlisted public securities. Basically, it provides an opportunity for investors in unlisted securities to trade their holdings transparently in a formal and orderly manner. I am aware that the company’s services also include an online portal known as NASD Enterprise Portal (NASDeP) that allows high growth companies to release structured information about their operations and performance to a select group of venture capital, private equity and other investors seeking investment opportunities. That way, these companies can raise capital easily. There is also a crowdfunding portal known as NASD VentureRamp which provides an opportunity for enterprises to source funds for a project by collecting money from a large number of people via the online platform.
Just like NASD, FMDQ is also an OTC securities exchange that has become well known as a platform for trading fixed income securities. Considering its average annual market turnover which is in billions of dollars, i think the company has done relatively well since it formally entered into the Nigerian financial markets space in 2013. I am aware that FMDQ provides an array of services including listings, clearing and settlement of financial market transactions.
The other three Exchanges you referred to namely the NCX, AFEX and the LCFE are largely commodity Exchanges. As you know, a commodity exchange connects buyers and sellers of physical commodities, a role that is particularly useful in enhancing market efficiency by helping to match supply and demand of commodities across time and geographic distances. The commodity trading ecosystem is supposed to help support the non-oil sector, diversify the country’s export base and make the economy less vulnerable to external shocks. Through the provision of price transparency including better access to market, the income of farmers and their living standards is expected to be enhanced. If this happens, agribusiness becomes more attractive creating investment and employment opportunities in the commodities value chain with positive multiplier effect on the nation’s economy.
Whereas AFEX Commodity Exchange registered in 2014 and the newest entrant, the Lagos Commodity and Futures Exchange, are privately owned and operating against all odds, the much older government-owned Nigeria Commodity Exchange (NCX) is still struggling to find its feat due, in part, to lack of supportive government policies and institutional infrastructure. I suggest that the government, through the Federal Ministry of Agriculture, should channel every effort, in partnership with the private sector, to unlock the potentials of the Nigeria Commodity Exchange including through putting in place adequate funding arrangements
From our study YtD are more positive with low priced stock/ penny stocks than the blue chips. For example, as at Sept 8, African Prudential has YtD of 11.25%; AIICO 25%; Beta Glass 2.97%. Same for United Cap; FTN Cocoa, NCR etc. In the other hand, Zenith has YtD of -9.6%. Dangote Cement, Dangote, Sugar, Nestle, GTB, Seplat, UBA etc are negative. First, what does YtD connote and why are the low priced stocks doing better?
To begin with, YtD which stands for Year-to-Date is the return on an investment from the beginning of the year till a particular day. It represents the percentage change in the All Share Index over the period. With regard to the performance of low priced stocks vis-à-vis the high caps, i would like to attribute the higher growth rate of the former to what I call the ‘’base effect’’. Because an index which measures a percentage change in return over a period is calculated from a base, high-priced stocks with a higher base tend to be disadvantaged compared to low-priced stocks. Look at it this way: if a stock’s price moves from N1 to N1.50 over a period of time; that is a 50% increase.
For a high-priced stock such as Nestle that was about N1,000 at the beginning of the year to gain the same 50%, it needs to appreciate by as much as N500. So, the reason can be found in the base effect. It is not as though the low priced stocks outperformed the high-priced stocks in terms of fundamentals. It is for the same reason that developing countries tend to record higher GDP growth rates than developed economies.
How satisfied are you with Government strategies in addressing current economic downturn? Could you suggest some antidotes?
Fairly satisfied. As you well know, the current economic downturn was brought about largely by COVID and i do not think anybody is in denial of the fact that the government’s interventions have helped to cushion the negative impact of the pandemic on the economy. The interventions in the real sector by the CBN in particular, something in the region of N3.5 trillion as disclosed by the CBN Governor in the September MPC communique, is contributing to reduce the size of the economic contraction. In order to tackle the economic challenge, the government has come up with the Economic Sustainability Plan in which are outlined some bold measures including mass agriculture, housing, solar energy and a raft of social intervention schemes many of which have been captured in the 2021 budget proposal.
With this plan in place, the antidote, to borrow your word, would be to ensure it is implemented substantially especially now that more funds would be freed-up following the removal of the petroleum subsidy. I also think the government can get more money through privatization of its enterprises especially the NNPC. In my view, what the NNPC requires going forward is not just commercialization as the new PIB Bill canvasses, but part privatization through the Nigerian Stock Exchange just like Equinor of Norway, Saudi Aramco of Saudi Arabia and other successful national oil companies.
Finally, talking about the 2021 budget proposal, how will it affect the capital market?
I think the 2021 Appropriation Bill if passed in good time will be positive for the market. That of course depends on the extent to which the proposed budget, which draws a lot from the government’s Economic Sustainability Plan, is implemented. Which is why i am delighted that the leadership of the National Assembly has promised to expedite action on the document. It is common knowledge that budget delays affect implementation and creates uncertainties for investors who tend to sit on the fence until they can fathom the direction of government policies. The government plans to borrow heavily from the domestic market to part-finance the budget deficit of over N5 trillion. So, the debt capital market will be quite active. Huge allocations to Works and Housing, Power and Transport, if they materialize, will mitigate the harsh economic environment for listed companies and firms operating in the country in general. Other factors remaining same, this should improve their financial performance with salutary effect on stock prices. Let me also say that the passage of the Petroleum Industry Bill by the National Assembly and assent by the President brightens the outlook for the petroleum industry and promises to engender capital flows into the country. Overall, the impact of the about N13 trillion 2021 budget on the capital market will be positive ceteris paribus. In particular, the stock market performance in 2021 is most likely to be much better than that of this year. So, for investors, as opposed to speculators, interested in beating the market, or who seek alpha as we say in finance, this is the time to take positions in stocks, especially penny stocks, with good fundamentals.
