As the fixed income market started enjoying significant attention recently, there is need to sustain the enhancement of the sector. CHRIS UGWU writes
The fixed income market can be as active and liquid as the equity market is expected to be if the local investment community understands the critical role the market plays in the economy and, more importantly, the stability that the investment product provides to a managed portfolio.
This is because there are huge opportunities in the Nigerian fixed income securities market for investors to create wealth. Investment in fixed income securities presents an opportunity for investors with a preference for low risk to generate regular income and reduce the volatility of the return on their investment portfolio.
Fixed income instruments are used by governments and corporate organisations to borrow money from the investing public to finance their activities either on a short-term or long-term basis. The issuers are the borrowers while the investors are the lenders.
This is why markets world over always fashion out policies that would boost its Fixed Income Securities market segment. In line with efforts by the Nigerian Stock Exchange to further build capacity and enhance investors’ participation in the fixed income market, the exchange, last week, announced an enhancement to its Fixed Income Securities market segment as well as the associated benefits to trade execution via its platform.
State of fixed income market Nigeria’s fixed income market has enjoyed significant attention over the past months with market capitalisation growing from N12.9 trillion at the end of 2019 to N16.4 trillion YTD as a result of increased listing activity from the Federal Government and Nigerian corporates. Its turnover also increased by 389.26 per cent in 2019 when compared to 2018 although capital raising was dominated by the Federal Government, being responsible for 60 per cent of bond issuances during the period in a bid to finance fiscal and infrastructure deficits.
According to the report, some of the ground breaking achievements for the 2019 include listing of Access Bank Plc’s N15 billion Green Bond, the first of its kind to be issued by an African corporate, listing of North South Power Company Limited’s N8.5 billion corporate infrastructure Green Bond, which was oversubscribed by 60 per cent, with firm commitments from twelve institutional investors including nine pension funds.
Capital raising by corporates increased by 321.61 per cent with a total of N132.68 billion raised in 2019.
Speaking recently at the presentation of key performance of the Exchange in 2019 and prognosis for the market in 2020, the Chief Executive Officer of the exchange, Mr. Oscar Onyema, said: “The Nigerian capital market mirrored the performance of the larger economy, which continued its moderate path of recovery, growing by 2.28 per cent (Q3’19).
“The Nigerian bourse witnessed the impact of various factors, including a weak macroeconomic landscape; fiscal and monetary policy direction; underwhelming trends in Foreign Portfolio Investments; concerns around the stability of the naira and moderate corporate earnings.
While these factors led to a negative performance in the equity market during the year, our Fixed Income market performed exceptionally well, reflecting a flight to safety. “We observe that there was a reduction in market velocity as regards equities, which is indicative of how the economy performed.
We saw a sustained downward trend and in a market like Nigeria, velocity tends to drop, if you look at what has already happened this year, there has been a significant increase and so, I think that the culture here is that velocity tends to increase when the market is going up and on our part, we need to do a better job of educating investors around the fact that even in a down market, there are opportunities to make money including from securities lending and appropriate measures because there are quite a number of individual stocks that did quite well in 2019.”
Onyema said that from an international investor’s perspective, the Nigerian bourse had to compete with developed and emerging capital markets which saw risk-based assets priced/ valued more competitively.
According to him, the NSE will continue to develop new strategic partnerships with the goal of delivering better products and services to its customers and maintain momentum in executing the NSE’s 2018-2021 corporate strategy in its efforts to elevate the prominence of Africa’s global financial markets.
NSE revises trading fee In line with its ambition to support Nigeria’s economic growth by providing a liquid, efficient and multi-asset securities exchange hub, the Nigerian Stock Exchange (NSE) has announced enhancements to its Fixed Income Securities market segment as well as the associated benefits to trade execution via its platform.
NSE, in a statement, noted that as part of its liquidity-enhancing efforts, the Exchange introduced a trading fee moratorium as communicated via a press release dated August 11, 2016, to stimulate activities and liquidity in the fixed income market. “Following the end of the four-year Fixed Income Securities Trading moratorium, the Exchange has now received the regulatory approval of the Securities and Exchange Commission to revise its fee structure.
“The revised fees will become effective on October 5, 2020. Under this revised fee structure, The exchange will charge 0.0005 per cent (N5 per million) on debt instruments traded on its platform. “The NSE offers a hybrid market for the execution of quote and orderdriven transactions providing dealers as well as institutional and retail investors access to increased liquidity in Fixed Income Securities.
“By leveraging best in class market design and infrastructure, the NSE trading venue provides investors integrated straight-through trading and post-trade process that supports efficient execution without any trade failures across all asset classes including Fixed Income Securities.
“Investors trading via the NSE platform can also enjoy access to diverse listed debt instruments including Federal Government, State Government, Corporates, Supranational and Retail Savings Bonds. “The Exchange continues to conduct various trainings, workshops and conferences on Fixed Income Securities products to build domestic capacity and enhance financial literacy while encouraging inclusiveness.
“We remain committed to our corporate goal of providing investors and businesses a reliable, efficient and an adaptable exchange hub in Africa, to save and to access capital,” the exchange noted.
However, The Managing Director, HighCap Securities Limited, Mr. David Adonri, had said the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE) and FMDQ Securities Exchange, which are the main bodies saddled with the growth and development of the market, must ensure that stock market serve as a balanced investment outlet.
He explained that other factors that can reshape the capital market this year are the unfolding uncertainties about the global macro economy and escalating domestic terrorism which could adversely affect foreign investment flow to the economy. “In periods of strife and uncertainties, equities suffer greatly.
If the prediction of slowdown in the global economy occurs and the Nigerian government does not adopt a conservative approach in expenditure or reduce borrowing, fixed income securities may continue their dominance over equity this year,” he added. A senior broker, who craved anonymity, also said the low patronage being witnessed in the bond market, especially on corporate bond, is mainly as a result of poor awareness. He noted that the awareness given to bond relative to equities is low.
Bond issue should be widely publicised like equities during public offers. Even after the issue, bonds should be listed on the Nigerian Stock Exchange for trading rather than placing the trading in the hands of some few investment houses that carry out the transaction over the counter only.
”Another reason for the low patronage is that people are usually not aware of the issue and cannot participate in the subscription. After the completion of the subscription, bonds are not quoted on the NSE for trading like equities such that retail investors can have access to them,” he noted.
The broker added that the Securities and Exchange Commission and NSE had a great role to play in sensitising the public on the benefits of bonds. ”SEC and NSE have a lot of roles to play in this direction in ensuring that bonds are treated like equities and are given adequate publicity for wider participation. “The NSE has the right platform for trading bonds but it has not been used. Until this is done and government is educated to appreciate this, bonds to small investors will remain a nightmare,” he noted.
On the benefits of a developed bond market to the economy, he said: ”The economy will benefit immensely if the market for bond is developed like the equity market. If bonds are given equal treatment like equities, the economy will be better for it and the capital market will experience greater depth.
The bond market, if developed, can complement the development from the equity sector of the capital market to the economy.” He noted that another benefit of a developed bond market to the economy was the financing of domestic debt with issuance of bonds as against the issuance of treasury bills, which were short-term instruments.
To the Managing Director Crane Securities Limited, Mr. Mike Eze: ”The exchange currently has the facilities to trade in bonds, as this will create a sustainable secondary market that will enhance transferability and liquidity in fixed income market investment.
Also, corporate bonds should be encouraged because shareholders, who are satisfied with the performance of a particular company via good returns on equity investment, will be motivated to invest in the corporate bond issued by such company.”
With consistent investment in fixed income securities, investors can create and grow wealth while providing the needed capital to the issuers to finance developments in the domestic economy