• Sunday, May 19, 2024
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Equities attraction grows as bond yields fall


At current valuations, Nigerian equities are fast becoming attractive, as fall in emerging market – dollar and local currency – bond yields is pushing investors seeking real inflation adjusted returns into stocks.

Currently, the country’s 10-year bond yields at 11.7 percent are only 2.98 percentage points higher than inflation rate of 8.6 percent, and much lower than the 15.4 percent spread between the year to date gains in equities and inflation.

“Our base case is that the dollar bond bubble would force investors into emerging market equities,” Charles Robertson, global chief economist at Renaissance Capital, said in a note released last week.

“This reinforces the case to own equities. Dividend yields are getting increasingly attractive, relative to government bond yields. DCF models should require higher equity valuations, as bond yields are now falling below headline inflation, and equities offer some (but not total) protection against inflation.”

Nigeria’s inflation rate eased to 8.6 percent in March from 9.5 percent in February, the National Bureau of Statistics (NBS) said on April 17.

Equities have risen by 24 percent year to date, beating total returns in Nigeria’s bonds which have gained 4.15 percent in the same period, according to May 8, 2013 data from Access Banks FGN bond index.

Some evidence of a dollar bond market bubble include Rwanda’s 10 year debut bond which was issued below a 7 percent yield (despite its single B rating), and Nigeria’s 2021 dollar bond yields at 4 percent, according to Robertson.

“What we are now getting very close to is a local currency bond bubble too. My base case has been we’ll know we’re in a bubble when local Nigeria debt is in single-digits and when SA 10-year yields start with a 5 (just another 30 basis points to go),” Robertson said.

Yields on Nigerian debt due 2022 have dropped ten basis points, or 0.10 percentage points, to 11.58 percent since the beginning of the year, according to May 8th data compiled on the Financial Markets Dealers Association (FMDA), website.

Supporting the continued backdrop of falling yields, is the United States Federal Reserve which is keeping policy loose and will likely continue to do so until Bernanke’s term expires in the second quarter of 2014, most analysts say.

Quantitative easing by central banks in the U.S., the U.K. and Japan “all point to a likelihood of strong capital flows to emerging and frontier markets” that may benefit Nigeria, Central Bank Governor, Sanusi Lamido Sanusi said May 7.

Gross portfolio inflows to Nigeria of $13.4bn in 2012 were nearly three times the 2011 total of $4.51bn. Monthly inflows for January 2013 were $2.38bn, a two-year high, according to the Central Bank.

The flows which have pushed up the prices of Nigerian bonds and equities in recent months may gradually shift to equities, as bond yields fall and returns fade.

The bull market in Nigerian equities continued last week, as money moved into stocks.

The NSE all share index ASI briefly crossed the 35,000 mark and market capitalisation hit a four year high of N11.1 trillion as most companies reported better-than-estimated earnings.

The share of trading activity by foreign investors in the NSE is a substantial 55 percent, with domestic investors controlling 45 percent, according to the most recent data from the NSE.

Asset managers such as Pension Fund Administrators, may also be changing their asset allocation mix to benefit equities.

Nigeria increased equity investment limits for pension funds to 50 percent from 25 percent, to help boost trading in the stock market, Ehimeme Ohioma, head of investment supervision of the Nigerian Pension Commission, said in November.

Pension funds have N3 trillion ($19 billion) of assets, according to Ohioma.