Nigeria: Oritsejafor - Domestic Investors Will Continue to Dominate Equities Market

4 August 2021

Managing/Chief Executive Officer of United Capital Securities Limited, Mr. Bawo Oritsejafor in this interview with Goddy Egene speaks on the Nigerian capital market and prospects for investors among other issues. Excerpts

What in your opinion was the driver of the stock market in the first half of (H1)-2021?

The driver of the equities market in H1-2021 was been the reversal of yields in the fixed income and treasury markets. The market kicked off 2021 relatively strong carrying over the bullish momenta from 2020, gaining 5.3 per cent in January-2021. However, towards the end of January we began to see investors navigate from equities into fixed income assets as it became obvious that the government was on an intense debt spiraling program.This was recently evident in the latest budget implementation document released by the government which showed the height of the borrowing at the start of the year. So, we will say that has been the biggest driver in the market thus far in 2021. Thus far (Jan-2021 - May-2021), the segmented breakdown of equity market participation in 2021 shows that domestic investors primarily drove the market in H1-2021.

Total transactions in the market were split 77.8 per cent vs. 22.2 per cent, in favour of domestic investors. Domestic investor activity in the market was N658.2 billion, as of April-2021, while international investor activity was N178.2 billion. Going forward for the rest of 2021, we do not expect to see any fundamental changes in the segmentation of foreign investors, considering the state of the economy and broad market expectations.

What are your expectations for the current earnings season?

Going into the current earnings season, we have a broadly positive outlook for listed Nigerian companies particularly in the real sector of the economy. The elevated inflationary environment has given consumer and industrial goods companies room to raise prices on their products. In addition, as the economy continues to stage a rebound from the recession in 2020, we expect to see a resurgence in consumer demand although the average consumer continues to remain pressured. That said, we expect to see a significant rise in cost for these companies considering the global rebound in commodity prices, devaluation of the Naira and the high inflationary environment. All in, we expect the impact of revenue growth on bottom line will outweigh the drag from a surge in costs. Thus, we project a decent growth in profitability for fast moving consumer goods (FMCGs), brewers, food processors and cement companies. In addition, we have a similar sentiment for Telecoms companies as accelerating broadband penetration would continue to drive data revenue growth while the resumption of SIM registration would further support subscriber base. For banking stocks, we maintain a lukewarm position on outlook for their earnings. First, for interest income, we expect a decent improvement considering the fast-paced reversal in the fixed income environment. However, the tighter system liquidity is expected to weigh on their cost of funds given the spike in fixed deposit rates. Thus, we expect to see pressure on the net interest margin (NIMs) of banking stocks. As a result, growth in net interest income can only be supported by expanding loan book. On Non-interest income, we expect significant declines on the trading income of banks with heavy long positions in the fixed income market. However, we expect recovery in Fee & Commission income could help compensate for the dip in Trading income. Lastly, cost management in this high inflationary environment will be critical for profitability for banking stocks. Thus, overall, we have a not too shiny outlook for banking earnings in H1-2021.

How soon do you expect foreign portfolio investors (FPIs) to return to the Nigerian equities market?

In our opinion, we expect foreign investors to stay away from the Nigeria equity market until at least 2023, simply because traditionally in a year like 2022, which is a pre-election year and 2023, the actual election year, foreign investors are bound to adopt a rather stand-off stance towards Nigerian equities, going by precedence. Also, since the turn of the year, other frontier and emerging equities markets have received massive inflows from international markets. Yet, the flow of foreign funds into Nigerian equities has remained hugely limited, despite our foreign reserves mainly remaining stable and the rebound oil prices. The market perception around the CBN continued attempts to adopt measures to stop the onslaught on foreign exchange reserves by limiting outflows from the capital accounts has dampened investor sentiment in the Nigeria equities in the last year. Moreover, the investment environment remains currently unattractive to FPIs in the short term, due to our stagflation and currency uncertainties.

What are your views on the developments in the debt market and where do you see yields moving in the next half of the year?

In line with our expectation for a strong reversal in the yield environment, the fixed income market has witnessed rapid acceleration in the yield environment through H1-2021. To give perspective, average yield across the yield curve has climbed 624bps yesr-to-date(YTD) to 11.4 per cent as at Jun-2021, from 5.1 per cent at the end of 2020. Consequently, Nigerian sovereign bonds underperformed peers in emerging markets, as the S&P/FMDQ Nigeria Sovereign Bond index has lost 21.1 per cent YTD, compared to YTD loss of 2.9 per cent on the JP Morgan EM Government Bond index. In the primary market, for NT-bills primary market auction, stop rates on the 91-day, 182-day and 364-day bills rose to a peak of 2.0 per cent, 3.50 per cent & 9.75 per cent respectively, from 0.04 per cent, 0.5 per cent & 1.21 per cent at the last NT-bills auction in Dec-2020. For the bonds market,marginal rates on the short-tenor, mid-tenor, and long-tenor instruments peaked at 13.1 per cent, 14.0 per cent and 14.2 per cent at the May-2021 auction, from 8.0 per cent, 8.7 per cent and 9.0 per cent in Jan-2021 auction.

Looking ahead, we expect investors' liquidity to improve in H2-2021, creating stronger demand for fixed income assets in the period. The improved liquidity is also expected to relieve liquidity pressures faced by banks in H1-2021. However, we think the CBN would resume CRR debits given the amount of liquidity that is expected to hit the financial system via bond maturities and coupon flows. Furthermore, we expect the FG's financing needs to remain elevated albeit with huge dependence on the external debt market. In addition, sovereign debt managers would continue deploy financial repressive tactics with a view to managing the precarious cost of debt for the Federal government. Having highlighted these factors, we project interest rates will be volatile in H2-2021 with a lot depending on the timing of heavy liquidity inflows into the financial system. Thus, while we believe the yield environment has peaked and the overall trend of the yield environment points towards a decline, we expect to see periods of oscillation in yields throughout H2-2021.

So, what is your outlook for the financial market going forward?

Looking ahead, our outlook for stocks for the rest of 2021 is broadly bearish. Despite the expectation of moderation in the yield environment, we do not expect the yield environment to significantly dip such that it ignites investors' interest in the equities market. That said, we expect the yearly hunt for dividend yield will present opportunities for investors to exploit in H2-2021. Thus, we expect the performance of the equities market in months where earnings scorecard is announced will show decent gains as investors take positions in stocks expected to deliver the numbers, raising chances of improved dividend payments. For the debt market, the overall outlook for the yield environment in H2-2021 is biased towards downward movement from current levels albeit with periods of volatility. Our research team believes yields in the fixed income market will continue to be shaped by a horde of factors including financial system liquidity dynamics, and sovereign debt mangers' market guidance.

What is your recommended investment strategy going forward?

Looking ahead, we believe investors should be very active in managing their portfolios in H2-2021. We do not advise a buy and hold strategy in any of the segments of the markets as active management will help maximise their returns in the market conditions expected in H2-2021. In the equities market, we believe exposing your portfolio to stocks on track to record aggressive growth in revenue and profitability would provide the best returns considering we expect price upticks in stock to be driven by momentum bias from earnings release. We also believe proper timing relating to taking positions ahead of earnings release will be critical to outperforming the market. In the fixed income market, we recommend watching trends of expected liquidity inflows into the fixed income market will be critical to guide for entry and exit in the fixed income market considering we expect higher volatility in H2-2021.

As an organization, what are your plans to implement your Transformation Agenda/Strategy going into 2022, especially as it relates to the Securities Trading Business?

At United Capital Securities, we strongly believe that there is room for growth of securities trading business in Nigeria. In a country with an adult population of over 96 million, there are less than 10 million active CSCS account and lots of states within the country with limited access and knowledge on investing in financial markets. We are committed to supporting the regulators in deepening financial literacy and inclusion especially as it relates to the capital market. We intend to create more interesting products that suits the investment needs of diverse investors across the country and the African market. Leveraging on our robust digital platform, we would offer Nigerians a wide range of markets to invest in as well as enhance the understanding of financial markets in all the state of the federations through targeted campaigns and clinics for various segment of the market. Via these initiatives, we hope to broaden financial literacy and drive improved savings/investment culture in Nigeria as well as create sustained value for our shareholders.

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