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STOCK MARKET CRASH Fixed income market rises by 27%

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2019 polls to determine market direction — Operators

By Nkiruka Nnorom

THE bearish market in the Nigerian Stock Exchange, NSE, in 2018 may have resulted in unprecedented rise in activities at the nation’s fixed income market during the year.

Financial Vanguard’s investigations show that as at December 31, 2018, turnover at the OTC fixed income and currency market rose by a significant 26.9 percent to N165.15 trillion against N130.17 trillion recorded in the corresponding period in 2017.

This came as activities in the equities market fell by -17.8 percent as the major indicator – the All Share Index, ASI, declined to 31.430.50 points at the close of last year’s trading from 38,243.19 points a year ago.


The floor of Stock exchange

Investment analysts are of the opinion that due to the heightened political atmosphere, most of the portfolio investors, who exited the equities market, pitched their tent in the fixed income market, leading to the gains recorded within the period. They explained that a guaranteed Return-on-Investment, RoI, in the fixed income market aided the increase in the level of activity in the market.

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They added that the outcome of the 2019 general election would play significant role in determining the direction of both the equities and the fixed income market this year. According to them, a positive outcome of especially the presidential election could sway activity back to the equities market as portfolio investors that took a flight to safety in the run up to the general election would find their way back to the equities market if the result of the election is accepted by all parties.

Consequently, the fixed income market may record liquidity flight towards end of first quarter 2019.

Fixed income volume  Activities in the fixed income and currency market showed that with the exception of unsecured placements/ takings and repurchase agreement, which fell by 48.3 percent and 8.1 percent respectively, other asset classes in the fixed income market registered impressive growth.

Data from FMDQ OTC Securities Exchange on activities in the OTC market showed that Foreign Exchange (FX) market transactions (spot FX and FX derivatives) appreciated the most, rising by 77.2 percent to N60.637 trillion from N34.217 trillion in the corresponding period in 2017. Bonds followed with 22.9 percent increase to close at N11.245 trillion from N9.150 trillion, while Treasury Bills, T-Bills, was up 17 percent to N65.667 trillion from N56.139 trillion in the same period in 2017.

Further breakdown showed that trading activities in T-Bills, contributed the most to overall turnover, accounting for 39.76 percent of the total market turnover.

FX market transactions, polled N60.637 trillion of the total transaction, representing 36.72 percent of the total turnover, while repurchase agreements (Repos)/Buy-Backs product categories, at N26.81 trillion accounted for 16.23 percent of the total market turnover. Bonds and unsecured placements/ takings pulled N11.25 trillion and N767.8 billion, representing 6.81 percent and 0.46 percent of the total market turnover respectively.

Operators views

Johnson Chukwu, Managing Director/CEO, Cowry Asset Management, explained that as foreign portfolio investors were exiting the fixed income market due to the uncertain political environment, their counterparts in the domestic space took their position, investing massively in secured instruments.

He stated: “Basically, activities in the fixed income market was driven by flight to safety. As election approaches, investors moved away from variable instruments to fixed income instruments, basically because variable assets have higher risks, while fixed income have assured return. Particularly, the major portfolio and fund managers as well as Pension Fund Administrators, PFAs, shifted away from equities to fixed income.

“If you look at it, the fixed income has better yield. As foreign portfolio investors were exiting the fixed income market, the position was taken up by local portfolio managers and PFAs. So, because of the higher risk associated with equities, we saw a decline in yield in return on equities. At some point, the All Share Index was trading at 20 percent below its opening position. So, investors moved away from equities and that is why you saw a lot more activities in fixed income instrument, particularly, T-Bills and bonds.

“The same reason is why there was such huge decline in equities because portfolio investors took off, while local investors were not interested in taking that position because of heightened political risk within the environment. So, we saw that the out-gone year witnessed a lot of political activities starting from the ruling party’s primaries.”

Chukwu added that the performance of the economy shouldn’t have been responsible for the slump in the equities market as the latest figure (2018 index return) shows that its performance has not been in consonance with the macro-economic development.

He added: “Looking at the history of the market for the past three years, you will realise that 2016 when the Nigeria economy slumped by 1.5 percent, the market declined by 6.17 percent. The following year being 2017, the economy recovered by only 0.82 percent, whereas the capital market gained 42 percent. However, in 2018, the Gross Domestic Product, GDP, growth rate averaged +1.7 percent, but the market slumped by more than 17 percent. What this means is that beyond the performance of the economy, the decline in equities is largely tied to the political environment which was tense in 2018 which also led to investors’ preference for fixed income instrument instead of variable income assets like equities.”

Corroborating, Charles Fakrogha, Stockbroker/Chief Relationship Officer at Foresight Securities, said: “Both markets operate in the same economy, but return in the equities market is high and so also is the risk, but the fixed income market has some sort of assured return. So, in advance, investors can actually determine the return they will get unlike in the equities market. So, the risk profile of an investor will determine which market he will play in.

“It just goes to show that investors have different markets they can invest in. The development is healthy, it is okay. However, it is just left for portfolio managers to do a balancing.”

Contributing, Ariyo Olushekun, Vice Chairman/CEO, Capital Asset Limited, noted that a lot of people who are apprehensive of the outcome of the upcoming election are shifting their portfolio away from equities to fixed income instrument. “It is normal in any market that if people are leaving one market, they go where they think is safe. No matter what happens, you get some returns in fixed income. So, that is why people are leaving the equities market.

“If you look at the price/book ratio and earnings of the quoted companies as well as their profit after tax, they appear impressive. So, that will tell you the companies are doing well. The only reason why prices went in the equities market is that people are apprehensive of the election,” he said.

2019 outlook

Speaking on the outlook, Chukwu said that the trend should continue for the first half of the year depending on the outcome of the 2019 elections. “If the election is successful and all the parties accept the outcome, we will witness an immediate recovery in the second quarter of the year in the equities market. Should the outcome of the election be doubted or disputed, then the equities market will continue to suffer up to the third quarter of the year, and the fixed income market will continue to benefit from investors’ decision to under-weight their portfolio in equities and overweight in fixed income.”   Going into 2019, Olushekun of Capital Asset said that he expects prices to resume upward movement in the equities market after the election. He added that as the equities market begin to go up, investors, especially institutional investors, who moved to the fixed income market will most likely exit the market and return to stock market.

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