Fixed Securities Yields Crash, Equities Investments Set to Boom

• Fixed Securities Yields Crash, Equities Investments Set to Boom

The Nigerian equities market is expected to record huge gains largely on the back of fast-declining yields on fixed income securities (Treasury bills and Federal Government bonds). Relatively lower prices of value stocks and positive macroeconomic fundamentals are also expected to contribute to the equities’ uptick.

The latest Domestic & Foreign Portfolio Participation Report by the Nigerian Stock Exchange showed that total domestic and foreign transactions on the bourse grew positively by 28.50 per cent to N272.48bn.

In particular, the total foreign transactions increased at a faster pace of 58.87 per cent to N132.21bn, than the 8.88 per cent uptick in domestic transactions at N140.27bn.

However, domestic investors remained dominant players on the Exchange, contributing 51.48 per cent of total transactions. Net foreign flows remained positive at N7.21bn following increase in foreign inflows (55.29 per cent) and outflows (63.06 per cent) to N69.71bn and N62.50bn, respectively.

Recent developments in the local bourse are not the true representation of the market stance in the medium to long-term, analysts say.

For the month of April, investors remained bearish in the equities market, as the NSE All-Share Index dropped for the third consecutive month by 0.57 per cent, following 11 sessions of losses (accumulating 4.41 per cent loss) and nine sessions of gains (accumulating 3.87 per cent gain).

Most sessions as at the end of last month were relatively quiet, as reflected in the lower volume (-14.01 per cent month-on-month) and value (-22.02 per cent month-on-month) of trades at 8.46 billion units and N106.11bn, respectively.

According to analysts at Cordros Capital, the loss recorded in the benchmark index during the month of April largely reflected an extension of the market correction following the strong gains recorded in the second quarter of 2017 (15.48 per cent) and January this year (15.95 per cent).

Three of the five major sectoral indices closed in the red. The industrial goods, insurance and banking indices shed 5.21 per cent, 3.57 per cent and 0.16 per cent, respectively

The fourth month of the year saw Treasury bill yields contract by 3.50 per cent on the average to 11.24 per cent.

Sentiment was bullish on the back of surplus system liquidity, reduced supply of bills at the primary market auctions, expectations of a rate cut at the April Monetary Policy Committee meeting, and excess demand at the Central Bank of Nigeria’s Open Market Operation auctions, Cordros Capital said in its monthly report.

Notably, the average yield dropped across all ends (short: 4.03 per cent decline, mid: 3.48 per cent decline, and long: 3.04 per cent decline) of the curve, with the 17 May 2018, 30 August 2018 and 15 November 2018 noted recording significant contractions of 6.42 per cent, 4.41 per cent and 4.25 per cent, respectively.

The NSE had said its efforts for 2018 and beyond would be directed at satisfying customers, boosting domestic retail segment and enhancing the organisation.

The Chief Executive Officer, NSE, Oscar Onyema, stated, “Indeed, to some extent, political activities and currency movements will have some effect on the market, but we expect that such impact will be short-lived and the performance of the underlying business activities will ultimately determine market performance.

“We will leverage available opportunities to reinforce the position of the NSE as a sophisticated bourse, energise the Nigerian capital market ecosystem, and showcase Nigeria as an attractive destination, among others.”

The FSDH Research believes the yields on Treasury bills may drop further from the current levels. However, its analysts said, “As we approach the approval of the proposed 2018 budget, yields on the FGN bonds may gradually increase from the current levels as the Federal Government starts to increase its borrowings to fund the budget. Thus, a strategy to sell down a part of the current bond position may increase profit for investors. They can buy back later when the yields increase.

“Investors may sell down a fraction of their bond investment portfolio to buy back later when the yield increases.”

The FSDH analysts expect the equities market to appreciate in the second quarter based on historical performance. The following factors, according to them, should drive the performance of the equity market: Investors taking positions in the market following the sell down in March; further drop in yields on Treasury bills; stability in the foreign exchange market; and the release of corporate earnings and actions.

To this end, the Chairman, Association of Stockbroking Houses of Nigeria, Chief Patrick Ezeagu, said the stock market presented huge opportunities for both local and foreign investors given the current trend of activities in the market in terms of operation and regulation.

“Once people are assured that they can come into the market and exit whenever they like in an orderly manner, they will develop confidence and patronise the market,” he stated.

Analysts at Afrinvest Securities said most remarkably, foreign portfolio inflow data had reflected the attraction of foreign investors into the Nigerian equities market, with inflow into equities accounting for 29.7 per cent and 49.6 per cent of the total capital and the FPI flows, respectively, resulting in a 42.3 per cent equities market return in 2017, with the NSE All-Share Index as the eleventh best-performing index in the world and second in Africa.

The equities market rally of 2017 post-foreign exchange market liberalisation saw investors taking advantage of cheap and attractive valuations, which were previously jettisoned due to demand paucity from foreign investors.

Particularly, tier-1 banking stocks as well as premium consumer goods and industrial goods stocks drove the positive sentiment. In line with historical trend, domestic investors joined the bandwagon towards the fourth quarter, especially after the gradual moderation in fixed income yields following the Federal Government’s decision to restructure the debt portfolio and the CBN’s cessation of long-dated OMO bill offerings.