As recent developments in the oil market continue to take a toll on Nigerian equities, many institutional investors have routed to assets classes that are less risky.
Investors’ recent wisdom to stay safe in assets with minimal risks prompts increased asset allocation into money market, fixed income and related products with guaranteed returns.
This trend is evident in the level of liquidity seen at the Nigerian Over-The-Counter (OTC) market for Foreign Exchange (FX), Treasury Bills (T.Bills), Bonds, Money and Derivatives which recorded an overall turnover in 2014 of approximately N104trillion.
BusinessDay trend watch shows that in the first half of 2014, dealing members at FMDQ OTC market achieved an overall turnover of N45 trillion and by the end of December 2014, this rose to N104 trillion, with the top 10 dealing members accounting for over 70% of this turnover.
“The level of liquidity within the system currently is not hostile, which in turn is having a positive impact on activities in the fixed income space. In an uncertain equities market, it makes investment sense to stay safe in assets that are less risky,” said Abiodun Keripe, research and strategy analyst at Elixir Investment Partners.
The analyst believes market participants are rotating out of equities due to the extended bearishness which has seen the NSE ASI plummet nearly 35% since 2014.
The broader economy remains exposed to crude oil price shocks, lower government revenue and spending in 2015. On this backdrop, analysts foresee increased activities at the short-end of the fixed income market (TBills, Repos).
“We expect T-Bill yields to range 12.5% to 14% by 2015 year-end. However, we think bonds might see less activity which should leave yield higher at a range of 13.2% to 15.5% by year-end,” according to the analyst at Elixir Investment Partners.
At the OTC market, FX (including FX derivatives) was the most actively traded product, accounting for the largest share of the market turnover at 37.5%, followed by T-Bills and Repos/Buy-Backs with a share of 25.4% and 22.8% respectively.
The bond market accounts for only 7.7% of the market turnover, an area which analysts expect FMDQ to boost in 2015, through market development initiatives.
“This turnover represents trades executed between Dealing Members, Dealing Members & Clients, and Dealing Members & the Central Bank of Nigeria (CBN). It excludes primary market auctions in T-Bills, Bonds and FX,” FMDQ said.
Abiola Rasaq, Head, Research and Strategy, Associated Discount House Limited, said, “Interestingly, the yield curve remains attractive and thus justifying the relatively high trading activity in the OTC market.
“In my view, the increase in trading activity on the FMDQ-OTC platform reflects increased investor confidence in the transparency of the OTC market, which is one of the cardinal objectives of the management and board of the bourse. More so, relatively high interbank market liquidity has been positive for trading activity in the OTC, especially on treasury bills, which present a compelling attraction to risk averse investors, ” he added.
He noted that banks would be relatively conservative on loan creation through the election cycle, “thus reinforcing our expectation on the liquidity of Sovereign instruments, which are ‘risk-free’ alternative asset class for banks.
“We will continue to engage in initiatives that will make the Nigerian OTC market globally competitive, by working with the stakeholders to improve liquidity, transparency, governance and efficiency in the OTC market.
“With new initiatives and activities planned for 2015 – listings and quotations of Bonds, Commercial Papers and Short Term Notes, product diversity, fixed income indices, systems integration to achieve straight-through processing, trading systems enhancement, price discovery solutions, stakeholder education, membership diversification etc –we are optimistic about the year and expects a resultant increase in secondary market activity,” said FMDQ.