Investors’ Appetite for Fixed Income Assets Raises the Bear

• ASI sheds 7.3 percent Jan 4 to April 21.

• Earlier - than – expected reversal in fixed income yields kick- boot equities

• Fixed income yield up. 12.64 percent.

• UBA down 18. 07 perxent; Dangote Cement 10.55 perxent; Nestle 5.67 percent; Zenith 13.22 percent, Gtbank 6.7 percent;

Lafarge 4.57 percent.

• Guinness, Flour Mills, Airtel, Ardova defy general market downturn.

• Market attempts rebound, ASI gains 3.29 percent April 21 -

May 11.

• Companies go for internally generated capital due to high cost of funds

• Nestle, Dangote Cement, MTN, Stanbic IBTC. show high R O E

• Oil price, expected foreign investor return, robust earrings boost hope for equities.

Investors are rebalancing their portfolios in favour of fixed income instruments like Treasury Bills and Bonds, authenticating our earlier prediction in the February edition of Businessday Nigeria Stockwatch that investors would switch to fixed income market following expected reversal in returns from that market. Uptick in fixed income market was triggered following CBN auction late February 2021 when average stop rate rose 467 basis points to 8.5 percent. This provoked selleoff of equities in favour of government instruments. Responding to the share dump, the all-share index which gained 2.97 percent between January 4 and February 1 lost 7.33 percent between January 4 and April 21,2021. In 2020, the index gained 37.98 percent from 29,183.40 in January to 40,270.00 in December.

The slump in all-share index was led by high cap stocks like Zenith Bank which lost 13.25 percent in price. Dangote Cement depreciated 10.16 percent. Gtbank lost 6.71 percent, Nestle 6.71 percent, Lafarge 5.67 percent, Dangote Sugar 7.83 percent, Nigeria Breweries 2. 53 percent, FBN Holdings 7.00 percent, UBA 18.02 percent and Access Bank 14.70 percent. Jolom Odonghanro, head, Cordros Research said investors should expect a choppy market in Q2 with bearish bias as inves

tors chase. gains arising from higher yield. However, some stocks defied the general market downturn to record positive movements in prices. The resilient stocks include Linkage Assurance which appreciated 53.84 percent; Guinness 51.05 percent, UACN 41.20 percent; Seplat 36.75 percent ; Flour Mills 15.02 percent; May and Baker 16.80 percent and CAP 11.00 percent. Other stocks that strengthened in value include Airtel 9.18 percent, Ardova 8.04 percent, Honeywell 7.57 percent., AIICO 5.00 percent , NASCON 4.82 percent; Total 4.53 percent, Custodian Investment 3.41 percent and LASACO 2.43 percent (see sectoral analysis and performance).

Since the early part of 2021, yields on fixed income securities have spiked with yield on 10 – year Nigerian Treasury Bond rising 400 basis points to 12.64 percent. This trend is the result of CBN monthly auction of bonds. The expectation is that the Apex bank will keep rate flat because of the uptick in yields in the 2021 Q1. Yet Fixed Income Assets are to remain attractive to investors, according to Joshua Odebisi, head, financial research, Vetiva Capital Management Ltd. However, the bulls are staging a comeback as the All share index gained 3.29 percent between April 21 and May 11 supported by blue chips like Seplat which gained 12.72 percent, Okomu Oil 17.22 percent, Dangote Sugar 8.52 percent, Nigerian Breweries 9.38 percent, Access Bank 12.10 percent, Zenith Bank 4,28 percent, Total 4.8 percent and BUA Cement 7.15 percent.

Dividend payment has been a major incentive to Nigerian investors apart from capital appreciation and bonus issues. However, STOCKWATCH research shows that only a few companies pay attractive dividend consistently. These include Nestle, Dangote Cement,

MTN Nigeria, Stanbic IBTC Bank and Zenith Bank. Others are BUA Cement, Guinness, Dangote Sugar and Unilever. Others pay dividend that investors consider insignificant. Even companies that pay dividend have low payout ratio and returns on equity.

PERFORMANCE OF NGX AND PEERS

The Nigeria Exchange Group is yet to replicate its 2020 performance when it was voted the best perfroming stock market in the world and may not attain that position in 2021. This is in consideration of the rising yields in the fixed income market which has triggered investors’ switch to government securities.

So far, the Nigerian market has year to date (YTD) of -2.8 percent compared to Ghana +39.45 percent, South Africa +13.80 percent and Egypt -2.37 percent.

Notwithstanding, the NGX performance in Q1 and early part of Q2 is still considered good with forecast that the market will end 2021 strong. but not as good as it did in 2020. The expectation for positive sentiment is based on optimism that the economy will continue on the recovery curve marked by impressive corporate earnings, continuous rise in oil price and acceptance and application of the COVID – 19 vaccine across the globe.

DOWNSIDE RISK TO WATCH

Following the slow recovery of the economy and prevailing uncertainty, some of the key downside risk to watch are low corporate earnings, further decline in dividend pay-out, resurgence of COVID 19, fall in crude oil price and worsening bear market. In the event of upsurge in COVID 19 in Nigrria’s trading partners, lockdown could be an option to contain the pandemic, leading to travel restrictions, slow economic activities in those friendly countries, decline in demand for oil, fall in foreign exchange earnings, dwindling external reserves, slowdown in economic activities at home, low savings, reduction in stock investments and depreciation in stock prices.

KEY UPSIDE RISK TO WATCH

Possible upside risk would be further rise in the price of oil, increase in foreign exchange liquidity, improvement in corporate earning and acceptance and adoption of COVID 19 vaccine.

The expectation is that oil price will continue on the upward trend, leading to build-sp in external reserves; ability of companies to access foreign exchange to fund raw materials and other production inputs to beef up productivity and grow earnings and returns to investors.

Should economic managers resort to devaluation of the Naira, the expectation is that foreign portfolio investors would return to take advantage of opportunities for accretion in returns and capital repatriation.