The Chief Executive Officer, United Capital Plc, Mr. Peter Ashade, in this interview speaks on sundry capital market issues and the impact of the COVID-19 pandemic on Nigeria's capital market. Excerpts:
At the beginning of 2020, optimism was high among stakeholders about the market. But with the current macroeconomic headwinds, what is your projection for the market?
Clearly, at the beginning of 2020 no one was expecting a global shock of the magnitude of the novel COVID-19 pandemic which has sent most forecasts made earlier in the year, down the drain. Specifically, the twin economic shocks of the COVID-19 pandemic and a collapsing crude oil market have further weakened the case for investing in Nigeria, especially for the foreign investors. In terms of market projections, there is still a lot of unknowns about the novel virus and this can only reduce any numeric projections being made now to a mere guess.
Notably, from where we stand today, I believe the equity market will end the year in the red territory, especially if the country suffers a recession. However, we expect equity market activities to pick up towards the latter part of the year as economic activities gradually recover in second half (H2) of 2020. Also, we might not see a lot of primary market activities on the stock exchange in 2020 as share prices are expected to be grossly undervalued. Thus, the bulk of the market activities we are likely to see in 2020 will be tilted towards the fixed income market, as I expect corporates to take advantage of the relatively low interest rate environment to meet their liquidity needs.
Despite the bearish trend that characterised the capital market in the first quarter(Q1), the equity turnover was still higher than the value of transactions in Q1 of 2019. What do you think was responsible for this?
First, the value of transaction reflects activity (buying or selling) that have taken place on the exchange. Thus, in Q1-2020, the equity market turnover increased because there was increased activity at the exchange, as investors exited their positions in the market amid the twin economic shocks. Specifically, recall that the first month of the year, January, 2020 was a very bullish month and the Nigerian Stock Exchange (NSE) was one of the best performing in the world at that point, printing a month-on-month gain of 7.5 per cent during the period. Meanwhile, the outbreak of COVID-19 and the crude oil market crash marked a turn of events as foreign investors pulled out funds from Nigeria and other emerging market as well as frontier economies. Overall, Q1-2020 was characterised by increased activities as investors piled in Jan-2020 and exited in their droves in Feb-2020 and Mar-2020.
Given the impact of COVID-19 in global economy, most countries would be looking inwards for funds to finance economic recovery, does the Nigerian market has such capacity for our economy to recover?
While the Central Bank of Nigeria (CBN)'s marginalisation of local players from participating in the open market operations (OMO) market has continued to create excess naira inflows in the financial system, I do not believe these funds are enough to plug the country's overall fiscal deficit which has widened as a result of the twin shock.
Thus, like many developing and frontier economies, Nigeria cannot rely solely on local economy to meet its financing needs. It is important that we tap both local and foreign funds to finance our economic recovery. Also, I agree with the federal government on our current strategy of tapping concessional external loans (from the likes of International Monetary Fund IMF, World Bank, AfDB, China Exim Banks), rather the more expensive private loans (Eurobonds). This is as multilateral and bilateral lenders are known to be willing to forgive or restructure when the economy runs into problem. The $3.4 billion we recently got from IMF will further help to support our economic recovery even as we await the other decisions from World Bank and African Development Bank.
Domestic investors' participation in the capital market has been very low and it has been said to be one of the factors responsible for volatility in the market. How do you think this can be deepened to ensure some level of stability?
When you say domestic investors participation in the capital market have been very low, I want to believe you are referring to the equities market as activities in the fixed income market (excluding the OMO market) are largely dominated by the domestic investors. In my opinion, for Nigeria to see sustained increase in local participation at the stock market (a market that reflects the broader macroeconomy), doing business within the country must be perceived as friendly and policies to grow disposable income (lift people out of poverty and improve Gross National Income) must be put in place. More so, there is a need to increase the penetration of financial literacy and instill investor's confidence in the financial markets.
One of the best ways to encourage retail investors to participate in the market is through collective investment schemes, also known as mutual funds. Why do investors feel reluctant to embrace CIS and how can this be improved upon?
It is interesting to note that the attitude of Nigerians towards investing in collective investment scheme has greatly improved in the past few years. This is seen in the growth of the Net Asset Value of Mutual funds, which has grown by a whopping 330 per cent to about N1.2 trillion between 2016 and now. Clearly, there is still room for improvement and growth, as total investment remains below 1.0 per cent of the country's nominal gross domestic product (GDP). The major factors underlying modest interest in investing in mutual funds remains the low level of investor education, the question of trust and the money quick mentality that dominates the mindset of the uninformed investors. Despite high incidence of poverty rate in Nigeria, individuals that can afford to save and invest are often not aware of the available investment opportunities, or do not trust the system, especially as they might have fallen prey to fraudulent money doubling schemes. The best way to improve this is to promote financial literacy and educate the populace on the advantage of investing and the way they can reap the benefits through investing in mutual funds. Additionally, to solve the problem of lack of trust, the investment management firms must be very open with their operations and inform investors that they are regulated by Securities and Exchange Commission.
United Capital Plc has floated some mutual funds in the market in the past, how are they faring?
Our funds have grown significantly to become the fourth largest in the market. Both the United Capital Eurobond Fund and United Capital Money Market Fund have consistently provided the highest returns in the last three years as reported on the SEC website.
The Securities and Exchange Commission in February disclosed plans for capital market operators to be recapitalised. How would you react to this?
I think the recapitalisation of capital market operators is a good idea because there is a need to ensure that financial services company have a strong capital base as they are handling investors' money and lifesavings. When capital market operators have a weak capital base, the impact of the resulting mishap will be felt across the industry. Recall how the banking sector recapitalisation that occurred a few years ago has generally improved the efficiency of banks in Nigeria. That is exactly how to think about this.
As an investment banking group, United Capital Plc plays majorly in the capital market and in spite of the bearish trend in the market, the group reported improved results in the Q1 of 2020, how can you explain this?
United Capital is a diversified group serving various client segments with bespoke solutions that address respective financial and investment needs. In preparation for the 2020 financial year, we had begun prospecting key market segments that will present the greatest opportunities across all our businesses and devised action plans for exploiting those opportunities especially in terms of growth strategies within the domestic market. We also restructured our business to be more responsive to our clients. The improved Q1-2020 result was as a result of earnings growth across all our business lines and validates the effectiveness of the planning process and strengthened execution capabilities across Group. The operating environment in Q1 was quite challenging as highlighted but we were focused on creating value for all our clients. Our focus is always on the customer.
Considering the COVID-19 pandemic and its impact on businesses, how do you hope to sustain the Q1 performance going forward?
The COVID-19 pandemic has dealt a devastating blow to businesses and economies globally including our domestic operating environment. As a responsible organisation, our primary focus is on the safety of our staff while helping our clients to navigate these challenging times towards meeting their respective goals amid lockdown pronouncements by the government. We commenced virtual operations without significant impact on our service delivery to clients. Our digital platforms (InvestNow - mobile and web) continue to serve our clients globally from the comfort of their homes. In addition, we increased client engagements across digital platforms such as streaming investment clinics and other advisory services. All internal and external workplace interactions have been seamless in a virtual environment due to our improved technology capabilities.
Yet we recognise that the COVID-19 public health crisis has significantly disrupted activities across the country - creating new challenges and opportunities for us and our clients. We will be developing new competencies including propositions to exploit emerging opportunities identified while also creating buffers such as income earnings on long term investments. We are unwavering in our commitment to stakeholders and expect to remain profitable and competitive in the near term.