Equities lost N330bn to corporate, FGN bonds

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INVESTORS in the Nigerian capital market appear to have shifted interest to the bond segment as the equity (stock) market lost N330 billion in the first quarter of 2017 (Q1’17).

The Nigerian Stock Exchange, NSE   market capitalisation which represents the total value of the investments in the nation’s stock market dropped 3.6 per cent   to N8.828 trillion at the close of Q1’17 trading last   weekend, 31st  March, 2017,   from N9.158 trillion it opened at the first trading day of January this year.

The NSE All Share Index which shows movements of all the prices of equities traded on the Exchange declined 4.1 per cent or 1,100.55 points to 25,516.34 points from 26,616.89 points it opened at the first day of trading in January, 2017.

Financial Vanguard’s quarterly review of the market performance shows that there was higher decline in both market capitalisation and All Share Index in the first quarter of 2016 when compared to the 2017 performance.

Both market capitalisation and All Share Index dropped by 10.8 per cent in Q1‘16.

Stakeholders and market operators who spoke to Vanguard said that the Federal Government is making the equity market less attractive and bond more attractive given the high yield attached to the various bonds.

The Chairman, Progressive Shareholders Association of Nigeria, PSAN, Mr. Boniface Okezie said “it pays the government to borrow internally than externally and this must have informed the continuous issuance of bonds by the Federal Government. However, it must be cautious in this continuous issuance of bonds as this can crowd out the private sector from sourcing funds from the capital market.

Continuing, he stated: “The equity market is dropping almost on weekly basis as investors are shifting their tentacle to the bond segment of the market.   This is because the bond market, especially the FGN bond is secured and backed by guarantee.   Both corporate and FGN bonds are better than equities as prices of equity continues to slide. I advise government to moderate the issuance of bond to allow the equity to compete and be attractive. It is the equity market that should sustain the capital market because bond has tenure.”

The former Secretary General of Nigeria Shareholders Solidarity Association, NSSA, Chief Robert Igwe, in his own reaction said “the continuous issuance of FGN bonds has taken a heavy toll on the fortunes of the equities sector. As you see the equity market has lost N300 billion in the first quarter of this year. The preference for the bonds arises as a result of the fact that returns on debt instrument are guaranteed for the fixed period of their tenure, unlike stocks which are exposed to heavy risk and depends on market forces.”

Retail investors

The Chairman of Proactive Shareholders Association of Nigeria, PROSAN, Mr.   Oderinde Taiwo said “the Federal Government has become the biggest competitor to the private sector with the continuous issuance of bonds in the market. The bonds are competing with the equities and are not really good for market development. Though, we the retail investors are getting higher yield from these bonds, but looking from the perspective of market development, it does not augur well for our nation.”

Continuing, he said “the unrestricted floating of FGN bonds has rechanneled funds needed to stimulate activities in other sectors to the government authorities. I think corporate bonds would have been better as funds raised by companies would be used for productive activities.”

The President, Nigeria Shareholders Solidarity Association, NSSA Chief Timothy Adesinya said  “the FGN bond is good, but it should be moderated. When it is moderated, investors will have a mixed of investments in the market. As it is now investors are shifting their interest in the bond market at the expense of equities. Government should not crowd out private sector because this sector requires cheaper fund to boost productivity.”

The chairman Concerned Shareholders Association of Nigeria, Mr. Segun Owolabi, in his own submission said “the issuance of FGN bonds in recent time is meant to support various ventures of the government but this must be abused since it has the tendency of crowding out the private sector. Just within this quarter of the year the government has issued various forms of bonds, the latest being the savings bond that will cost the equities market greatly if not moderated.”

Commenting on market development,  Dialectic Africa Analyst said “the NSE leadership has a different opinion. Retail investors should be pushed to invest indirectly in the marketplace by investing in mutual funds instead of directly purchasing equities into their own accounts.   Some mutual fund companies were even engaged by the NSE to do investor education (of course marketing their funds) to retail investors to drive this agenda. I have been and will remain adamant that the Nigerian stock market needs retail investors to en masse return to the stock market with whatever amount they have in their possession if the market wants to be even keeled.   The Nigerian stock market achieved its highest index value in March 2008; this is also when foreign investor participation peaked.”

DMO disagrees with equity investors: Meanwhile, Director General, DMO, Dr Abraham Nwankwo had debunked the claim that the FGN bonds will crowd out private sector, saying “Federal Government would ensure that government debt instruments does not take away much needed funds required to boost the equities market. The federal government is gradually shifting the mix from government borrowing to external borrowing in order to create more space for the private sector.”

He said that the current spate of government borrowing was empowered by the 2010 policy direction to develop the domestic bond market and that government pioneered the move by issuing sovereign bond in order to create the enabling environment for the private sector to come into the scheme.

It will be recalled that the Debt Management Office, DMO listed Nigeria’s first Foreign Exchange denominated bond on March 2, 2017, followed by another FGN Savings Bond last week.

Specifically, they listed $1 billion (FGN Eurobond issued under Nigeria’s newly established Global Medium Term Note programme on the floor of the Exchange on Thursday, March 2, 2017. The 15-year Sovereign Eurobond issued at a coupon of 7.875 per cent per annum is the first foreign currency denominated security to be listed and traded in the Nigerian capital market.

Commenting on the listing, Nwankwo said that “the listing of domestic Sovereign Eurobond reinforces FGN’s commitment to deepen and grow the Nigerian capital market. Developing the domestic market can help bridge the infrastructure deficit constraining economic growth”.

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