Nigerian investors dump fixed income securities for equities

T-bills and bonds have been knocked off their perch. Equities are now coming increasingly into fashion – a healthy step for the Nigerian economy


Fixed-income securities such as T-bills and bonds, which have sucked up a good deal of investment over the past five years, have now been knocked off their perch. Equities are now coming increasingly into fashion – a healthy step for the Nigerian economy, says Michael Nwadike

For the past five years, Salif Abdulsalam, an Abuja-based entrepreneur, has continually invested in fixed-income securities with yields in the double digits.

With 18% returns for a large part of 2018, yields from fixed income securities were enough of an incentive for him to invest a substantial segment of his life earnings  in T-Bills and government bonds, given that such investment is secure.

But for the first time in five years, that approach no longer pays off. Yields on T-bills have dropped to between 2-5%, forcing Abdulsalam to rethink his investment plan and switch to equities. The equities market has this year returned 10.2%, as at 23 January.

Abdulsalam has now moved his N5m ($13,831) investment in T-bills to stocks. He has also taken $1,000 from his savings account, where he got 2% interest, to invest in equities.

Many other investors – individuals, civil servants and private sector employees, commercial banks and asset management firms – are also looking beyond T-bills and bonds, a development that is impacting positively on the stock market.

By 23 January, the All-Share index climbed 45 basis points to 29,591.29 points, while market capitalisation advanced $198.48m to $42.04bn, from $35.82bn at the start of the year.

The Central Bank of Nigeria (CBN) had in the second half of 2019 segmented the T-bills market, excluding domestic corporates and individuals from purchasing Open Market Operation (OMO) bills, cutting down the yields.  On 23 January, the stop rates for T-bills were 2.95%, 3.95% and 5.09% for the 91-day, 182-day and 364-day notes respectively.

Cut-down will affect banks’ profits

Olakunle Ezun, head of the currency unit at Ecobank Nigeria, said government usage of T-bills and bonds to raise funds for key infrastructural projects will suffer with the new development. He said the cut-down on T-bill purchases will adversely affect banks’ profits.

Ezun added that many investors, including banks, had been motivated to invest in the fixed income market because of attractive yields and now that the yields have dropped, it could affect their shareholders’ returns.

Market will be slightly positive

Adetoun Dosunmu, president of the Financial Market Dealers Association of Nigeria,  said the equities market will be slightly positive in 2020. She said that after closing down for two consecutive years (-18% in 2018 and -14% in 2019), the market is likely to close up by around +10% in 2020.

She listed the supporting catalysts as depressed equity valuation, which is supportive for most stocks, adding that almost all the names are cheap, with most of them trading near or close to their trough price.

She explained that the restriction on OMO Bills meant that there will be some asset class rotation into equities as investors search for higher yields.

In an emailed note to investors, United Capital Limited, the investment and research firm, said the outlook for emerging markets and frontier market equities will remain positive, on the back of expected doveish global monetary policies.

“Specifically, for Nigeria, interest in equities will remain fundamentally driven, as the heavyweight market movers – foreign portfolio investors – continue to look for bold economic reforms as fundamental reasons for buying equities,” stated United Capital.

“From all indications, the only justification for an uptick in the equities market is the lower yield environment, supported by increased local currency liquidity. However, this will not be enough to trigger a major rally in the absence of the demand from foreign portfolio investors,” it added.

The right step

Richard Obire, former bank director at Keystone Bank Limited, said the T-bills also played a key role in ensuring that inflation stayed low and in mopping up excess liquidity. He said the lowering of the yields for government securities was the right step in ensuring that banks lend more to businesses rather than simply investing in government securities.

“We have seen cases where banks simply move huge funds to T-bills and bonds and declare dividends at the end of the financial year. But I also expect the CBN to watch out for a possible rise in inflation, which we are already seeing,” he said.

Obire said investments in T-bills and bonds have for years delivered improved yields for investors, making them more attractive than investing in manufacturing, agriculture or solid minerals.

“The investment in fixed securities has created a serious crowding-out effect on private sector credits. Even the financial institutions would rather invest in T-bills and bonds rather than lend money to small businesses. This condition has been created by the high cost at which the government borrows – the high yield on T-bills and bonds,” he said.

Drop in lending rates?

Okechukwu Unegbu, a Lagos-based economist, said the shift to the equities market is a good development that should lead to a drop in lending rates. 

“Forget T-bills and bonds and invest in equities – that is my advice to investors. The capital market should wake up and do more to boost investor confidence. It also shows that the economy is in a positive swing,” he said.

Unegbu said the new rule will help the Nigeria capital market to do better. “Globally, capital markets focus on the purchase and sale of long-term debts and equities, helping companies and governments to access a pool of cheap funds for investment purposes instead of borrowing from commercial banks at higher interest rates.

“In Nigeria, the sale of debts is dominated by the governments, with banks and other financial institutions, like insurance, trust and investment companies, being the principal purchasers,” he said.

He explained that although the potential economic benefits of equities and bonds as sources of business finance are well known, the low depth of the Nigerian capital market and policies that govern it make it difficult for the country to fully take advantage of such gains.

Good governance and effective management are a must

Mary Uduk, Securities and Exchange Commission (SEC) acting director-general, said good governance and effective management are a must for companies to be profitable and sustainable.

She said shareholders and investors need to be certain that their companies are well governed under the appointed managers. “With the scorecard which now allows the commission to assess compliance, investors are now better off.

“The companies are complying and that is boosting investor confidence, we are seeing at present. The companies now disclose their level of compliance to corporate governance practices, which enhances transparency,” she said.

Uduk said the SEC was encouraging more issuances, and looking at listing time to market. “We are ensuring that the time that issuers come to the market to raise funds, is comparable to the time that they go to the banks to also raise funds. Whether you like it or not, the capital market and banks are direct competitors.

“We try to ensure that issues do not spend more than two weeks from the time they enter the market to the time the funds are raised. We try to ensure that the turnaround time is very fast,” she stated.

She said the Commission will continue to implement most of its initiatives, as laid out in the Capital Market Master Plan, including the e-dividend, direct cash settlement, financial literacy, and commodities ecosystem projects. 

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