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Investors embrace debt instruments, ignore equities

 Nigeria Stock Exchange, Lagos

Nigeria Stock Exchange, Lagos

These are not good times for investors in the Nigerian capital market as in many other parts of the world.

The Nigerian equities market has been on a continuous nose-dive with occasional unsuccessful recovery-attempts since the end of March 2007.

For quite a while now, prices of shares have been falling and many investors are still counting their losses.

Consequently, most companies now resort to alternative means of raising capital, exploring opportunities in the bond market, shunning the equities market.

The dormant primary equities segment of the Nigerian capital market has prompted listed companies to rely on the market for fund raising while investors are withdrawing their equities for fixed income securities.

One of the compelling reasons for companies to list on the Nigerian Stock Exchange (NSE) is to have access to equity funding at rates lower than charged by banks.

Between May and July 2015, barely two months after President Muhammadu Buhari was sworn-in, investors in the stock market lost over N1.032 trillion which was attributed the development to slow pace of governance, lack of policy direction, high political risk, feud in the federal legislature and others.Since then, the lull has persisted.

Retail investors do not have confidence in the market any longer, arguing that the stock exchange would remain uninviting until government’s economic policy responded to the challenges currently rocking the domestic economy.

Some market analysts say the poor state of the capital market has made it impossible for companies to float shares successfully on the floor of the Exchange, thus leveraging the bond market as an alternative window to raise capital for operations.

They also express lack of confidence over some companies’ proposed plans to raise funds through the Nigerian capital market.

The rise in bond issuance was due to the relatively low interest rate environment in the economy at the beginning of the year, which made borrowing cheaper .

For instance, in a bid to shore up its capital, Sterling Bank said it has completed book building for a N35 billion bond sale for its first tranche of a debt programme.

The bank’s executive director, Abubakar Suleiman, said the bank will raise only 20 per cent of that amount to gauge appetite once it receives regulatory approval.

In a bid to plug the hole in its capital, Wema Bank obtained shareholders’ approval in May to issue bonds or preference shares to raise N20 billion in the first tranche of a N50 billion programme, but market conditions then deteriorated.

According to its Chief Finance Officer, Tunde Mabawonku, the bank plans to issue N20 billion in bonds this month.

As at the beginning of August, 2016, the Over-The-Counter FGN bond market witnessed sustained bargain hunting as investors in the fixed income security pounced on instruments worth less than their prices.

This led to the appreciation in bond prices for all the maturities.
For instance, 20-year, 10.00% FGN JUL 2030 bond appreciated by N0.61 (yield decreased to 15.23 per cent);10-year, 16.39 per cent FGN JAN 2022 paper gained N1.49 (yield fell to 14.81per cent); the seven years, 16.00 per cent FGN JUN 2019 bond gained N1.15 (yield decrease to 14.93 per cent); while the 5-year, 15.10 per cent FGN APR 2017 paper rose by N0.42 (yield declined to 19.52 per cent).

With the Central Bank of Nigeria(CBN) flexible policy, expectations were heightened that yields would remain attractive, on risk-adjusted basis, in the fixed income market in the current year.

Also, there were indications that rising domestic inflation and the need for the CBN to rebuild reserves amid weak oil prices will sustain the maintenance of a restrictive monetary policy throughout the year.

Stating reasons for the renewed interest in bonds and other debt instruments, the Chief Operating Officer of InvestData Limited, Ambrose Omordion explained that there is no liquidity in the equities market for any listed companies to achieve a successful fund raising.

He noted that investors are not patronising the market to buy stocks despite that the prices are currently cheap and very low.

“The market is a bit dull now, it is not a good time for companies to raise money.  There market needed liquidity. People are not buying stocks despite that the prices are cheap and all the results released so far are below market expectations.

“There is loss of confidence for IPOs and private placement now because they cannot make profit with the current situation in the market so they have to sought alternative window to expand their businesses.”

The Managing Director of Crane Securities Limited, Mike Eze, explained that the process of raising bond is at present, less stringent and cumbersome.

“Companies are shifting to bonds instead of coming to the market to raise money is because bond market is cheaper, quicker, less cumbersome and rigorous. The economic realities on ground have made these prospective companies advisers’ to become smart in their financial engineering.”

To reverse the trend, Eze said there is a need for review of charges and fees on prospective firms as well as the stipulated timeline for raising of fund in the stock market to make it faster and less rigorous.

Also, the President, Renaissance Shareholders Association of Nigeria, Olufemi Timothy, said bond is the only alternative open for listed companies because of investor’s apathy to equities.

“Investors see new opportunities in bonds for good returns, so that is where they invest. Companies will go to where they can get funds. Investors cannot play with their funds. Bonds are real.

“One cannot put his money where he does not get value for it. Our investments have been destroyed over the years. The regulators do not protect the retail investors. If retail investors’ investments were protected, then the market would be better. What the regulators chase is foreign investors who are only interested on return on investment and not market development,” he added.

Prior to this period, total new issues before 1989 were below N1 billion.

However, from 1989 to 1996, it hovered between N1 billion to N10 billion and crossed the N10 billion mark in 1997.

Between 1996 and 2001, a total of 172 new issues (securities of public companies amounting to N56.40 billion) were floated in the capital market. The total new issues were valued at N5.85 billion in 1996, but it rose by about 532% to N37.198 billion in 2001.

Total new issues were N61, 284 billion in 2002, N180, 079.9 billion in 2003; N195, 418.4 billion in 2004; and N552, 782 billion in 2005. It crossed the trillion mark in 2007 being N1.935 trillion that year but fell to N1.509 trillion in 2008.

Similarly, before 1988, the total market capitalisation was less than N10 billion from 1988 to 1994. It hovered between N10 billion to N57 billion. In 2003 it was N1,3593 trillion, N2.1125 trillion in 2004 and N5.12 trillion in 2006.

The market capitalisation recorded the highest value of N13.2294 trillion in 2007 which fell to N9.562 trillion in 2008 and has remained not improved till date due to the global financial meltdown.

Also, from 1961 to 1975, the yearly value of transactions on the NSE was below N100 million.

From 1976 to 1994 it was between N100 million and N600 million and in 1995, trading value crossed N1 billion and reached N120.70 billion in 2003, N225,820.5 billion in 2004 and N4,4 trillion in 2008.

The global financial crisis was triggered by credit crunch within the US sub-prime mortgage market and spread and to several countries around the world.

The Nigerian stock market tumbled to its worst performance in three years in 2015. Aggregate market value of all quoted equities on the NSE closed 2015 at N9.851 trillion as against its opening value of N11.478 trillion for the year, representing a loss of N1.627 trillion.

The All Share Index (ASI)- the benchmark index that tracks prices of all quoted equities, indicated a negative full-year average return of -17.36 per cent



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