The Investing & Capital Markets Conference is a fixture on BusinessDay and the Nigerian Stock Exchange’s annual calendar of events. Investors, regulators, analysts, and business leaders gather to discuss the most pressing issues affecting the raising of capital, trading of securities, and integrity of financial markets in Nigeria as a whole. Some of these issues include new economic events, regulatory developments, technological innovations, back office support systems, geopolitical trends, emerging practices in portfolio construction, swings in market sentiment, and investor engagement.
This year, the conversation ranged across:
• Market developments over the past year, especially those aimed at making the Nigerian market more competitive, transparent, accountable, and efficient
• Current regulatory revisions and introductions under consideration
• Market fundamentals
• Investor perceptions
• Risk and return in a rising inflation environment
• Progress made in simplifying market participation for retail investor groups
• Prioritization of liquidity and the contraction of investor horizons post-COVID-19
• The 12-month outlook.
This year’s event was proudly sponsored by Alliance Law Firm, Anchoria Investment & Securities Ltd., Comercio Partners, Central Securities Clearing System Plc., FBN Quest Merchant Bank, EFG Hermes Nigeria Ltd., STL Trustees, VFD Group and the Nigerian Stock Exchange.
Highlights of panel sessions and presentations
Chasing Alpha on a treadmill? A fund manager’s view of trends and bends in Nigerian markets,
a presentation by Mr. Erik Renander, Portfolio Manager, HI EMIM Africa Fund
Mr. Renander gave a breakdown of the direction and destinations of global fund flows in 2020: 1.1 trillion dollars had moved to money market funds, 200 billion dollars to bonds, 70 billion dollars to gold and 40billion to equities, and most of the flow in equities was to developed markets and away from emerging markets.
Frontier markets have fared the worst. Basically, there is a flight to safety. He also observed that China is becoming its own asset class distinct from Asia or emerging markets classifications.
Mr. Renander acknowledged that the appeal for Nigerian Treasury bills has significantly dimmed, since the current yields do not compensate for the associated FX risks. In his assessment, the CBN’s current FX policy is significantly hurting the attractiveness of the Nigerian market from a foreign investor point-of-view.
For funding needs, he expects Nigeria to tap the local market and its banks, the Eurodollar market. Another option would be to borrow from the IMF and World Bank. With 2% yield on treasury bills, Nigerian banks will be pressured to provide finance to local corporates, which will pay higher rates.
On Africa’s recovery from the global recession, he believes that it will generally be a slow recovery as Africa was already facing serious challenges before the global recession pandemic hit its shores.
However, Africa might outperform the rest of the world as it is coming from a very low base and the continent is very responsive to changes in efficiency.
Comparing Nigeria and South Africa, the two sub-Saharan giants, Renander stated that he is particularly encouraged with the anti-corruption reforms in South Africa, and the fuel subsidy removal and power sector reforms in Nigeria. But there remains a lot of work to be done. In his assessment, the FX policies and border closure policies in Nigeria remain significant negatives.
More importantly, Renander notes that by leveraging on the power of social media, youth across the continent have started demanding for better leadership. He sees this as a driver for good governance.
He expressed his optimism about the African Continental Free Trade Area (AfCFTA), and the renewed focus of developing infrastructure around the continent. He believes that over time, intracontinental trade will become a game changer for growth in Sub- Sahara Africa
In assessing current investment opportunities in Nigeria and Africa, he advised Nigerians to invest in their country themselves as the current FX policy would make it very difficult for foreign investors to come in. The exit of foreign investors should open up new opportunities for local investors to exploit. He opined that a devaluation of the Naira might even support the growth of the market, like that in Zimbabwe.
For the rest of Africa, he remains bullish on gold and mobile technology. He concluded with stating that investors should pay close attention to block chain and cryptocurrencies especially in Africa. He opined that the same way Africa has become a global leader in mobile payments, it might become a lead in the adoption of block chain technology.
Fireside Chat with Mr. Lamido Yuguda, the Director General of Securities and Exchange Commission (SEC)
Mr. Yuguda, who resumed as DG of SEC on 6th July 2020, outlined a five-point agenda which would drive the key priorities of the regulator during his tenure.
These include, boosting the commission’s operational efficiency, continued implementation of the capital market masterplan, restoration of investor confidence, improvement of investors’ experience in the market and raising awareness about the attractiveness of the capital markets for issuers and investors.
The DG explained that the 2015-2025 capital market master plan is currently in its midlife, and is due for a review that takes into account the current realities facing the capital market. He emphasized the need to restore the confidence in the capital market, in order to attract new investors.
He shared one revealing statistic. The average age of investors in Nigeria is currently above 50 years, meaning that the vast majority of economically active adults are keeping away from the market.
“We have an average age of the CSCS customer above 50 years which means a lot of young people are not in this market.”
It was therefore paramount that all efforts should be directed towards reversing this trend. Part of this effort would include simplifying the operational processes so that investors can buy or trade their equities as efficiently as possible. The DG explained that the COVID-19 pandemic exposed the need for countries to be self-sufficient in critical infrastructure, including healthcare, as countries were so quick and effective in closing their borders to outsiders. He stated that the Nigerian capital market should be the vehicle that will attract people and institutions that have the money to invest towards developing the country’s infrastructure. With an attractive policy environment and returns, the market an provide the funds to address infrastructure needs such as rail lines and hospitals.
He pointed out that some market operators have seen this gap and have begun to create these kinds of funds. He gave assurances that the SEC is working with other regulators to create incentives to attract these kinds of funds.
With regards to the effect of the fall in oil price on equity valuation, and whether the federal government should intervene directly in the market, the DG explained that the Nigerian capital market has three unique structural characteristics. First, the preponderance of foreign investors, whose exits always negatively impacts the capital markets. Secondly, domestic institutional investors like the PFAs who are very liquid but choose to invest very little in the capital markets. Thirdly, domestic retail investors who have refused to return to the capital market because of the losses suffered in the 2008/2009 financial crisis.
While acknowledging that oil prices are an important determinant of economic activity in Nigeria, he believes that addressing these three fundamental factors will release pools of autonomous funds that can be harnessed to significantly improve the performance of the Nigerian capital market.
The DG revealed that the SEC is working towards completely eradicating the problem of unclaimed dividends. At the end of 2019, the value of unclaimed dividends stood at N158.44 billion.
Of this figure, over N100 billion is attributed to unclaimed shares. Towards achieving this, the SEC had mandated all capital market operators to update their KYCs.
The SEC is also working to harmonize ID systems and processes to create a seamless environment for investors. This includes leveraging on shareholders’ BVN and new technology to create a system where customers can have a unique ID throughout the entire system. This would apply not only to the investor, but also to issuers and market operators.
Mr. Yuguda surmised that in a nutshell his aim is to contribute his best towards making the SEC a regulator that would be a reference point for the continent, and the Nigerian capital markets a preferred destination for investors.
Panel 1: Row, row, row your boat: An Investor’s guide through Choppy Markets
• Moderator: Mrs. Omobolanle Adekoya, Partner, Capital Markets and Accounting Advisory Services, PwC
• Mr. Haruna Jalo- Waziri, CEO, Central Securities Clearing Systems Plc
• Mr. Uche Val Obi, SAN, Managing Partner, Alliance LF
• Mr. Nnamdi Nwizu, Co- Managing Partner, Commercio Partners
• Ms. Ete Ogun, MD, Anchoria Asset Management
Mr. Haruna Jalo-Waziri, CEO, Central Securities Clearing Systems Plc
Mr. Jalo-Waziri stated that of the 13 million accounts opened with the CSCS only about 500,000 remain fully active, implying that the overwhelming number of accounts have become dormant.
He explained that the CSCS was directing efforts to not only reactivate the dormant accounts but also attract new investors. To achieve this, the CSCS has invested in technology to improve operational efficiency and reduce turnaround time for processes. He further announced that the CSCS had developed the capacity to do T+1 and even T+0 if needed.
Mr. Jalo-Waziri highlighted two major events, in the past, that were responsible for a surge of investors coming into the capital markets. The first was the Federal Government privatization policy, which saw number of accounts opened in the CSCS go from 1.6 million to 5 million in the space of a few years. The second was the banking consolidation policy, which took off in 2005, which saw accounts opened at the CSCS go from about 4.5 million to 9 million.
He explained that what the market needed now are such catalysts to spike investor participation in the market once again.
Mr. Jalo-Waziri also announced that the CSCS was able to move their ratings from A to A+, joining only two other CSDs in Africa at that rating. This was an independent recognition of significant improvements that the CSCS had recorded in risk management, operations, capital base and partnerships.
Mr. Nnamdi Nwizu, Co-Managing Partner, Commercio Partners
Mr. Nwizu explained that it was important to shift the thinking paradigm of investors from a short-term to a long-term focus. The savvier investors are the more products that can be sold to them. Similarly, the more investors understand the market, the more willing they are to go into the market, so financial literacy is indeed key for market development.
Mr. Nwizu believes that despite the apparent challenges there are still opportunities in the Nigerian market.
For example, in evaluating the Nigerian equities market with price to earnings ratios compared to other African countries, Nigeria’s average PE ratio is 9, Kenya’s is 12, and South Africa’s is 17. He also stated that dividend yield currently stands at 19 times which is better when compared to fixed income markets and more than compensates for price volatility.
Nwizu however acknowledged that excluding the biggest names, on the stock market, investors are indeed left with very limited offerings, making it critical for all stakeholders to work together attracting encouraging new big names to list.
Mr. Uche Val Obi, SAN, Managing Partner, Alliance Law Firm
Mr. Uche Val Obi stated that it is important for regulators and players in the Nigeria capital market to be proactive in rule making.
He reiterated the point that the domestic market does not have the capacity to meet all the funding requirements of the Nigerian capital market. This makes it necessary to attain the legal and regulatory harmonization with other major economies that will serve as sources of major funding to the Nigerian capital markets.
He referenced as a good example, a report done by the Emerging Capital Market Taskforce Initiative, which had the objective of easing the flow of investments between the United Kingdom and Nigeria.
Mr. Obi further explained that the Nigerian Capital Markets cannot operate in isolation in today’s global financial system. He advised that the Nigerian capital markets should always benchmark best practice globally rather than holding on to antiquated rules that might unnecessarily frustrate viable cross border transactions.
He encouraged operators not to be shy in seeking out novel transactions, because it is in attempting such new transactions that rules governing such transactions will be defined.
Ms. Ete Ogun, MD, Anchoria Asset Management
Ms. Ogun explained than significantly growing financial literacy is very key in market development, because without doing that other reforms might not have the desired effect.
She also noted that clients complain about the bureaucracy associated with the capital markets, meaning that this might be another factor discouraging new and younger investors from being part of the capital markets.
On trending investment options among investors, Ms. Ogun stated that non-traditional asset classes such as structured products and Eurobonds have become more popular with institutional investors and HNIs, while the retail investors appear to be more interested in traditional asset classes.
“Rediscovering Risk: Not so bad after all”, a Presentation by Mr. Guy Czartoryski, Head, Research, Coronation Asset Management
Mr. Czartoryski explained that investors in the Nigeria capital markets should understand that the days of easy risk-free returns are over, at least for now.
For the last ten years investors had enjoyed a 14% interest on treasury bills, which therefore assured them a 2% margin on inflation.
However, due to changes in CBN policies the current yield on treasury bills has seriously gone down to about 2%, far below inflation rate therefore making it very unattractive to investors.
In addition, Nigerian banks that were the default destination for savings, are currently contending with the highest cash reserve ratio in the world and a loan-to-deposit ratio of 65%.
These requirements have forced the banks to crash their savings and time deposit rates.
His presentation showed that the net result of the disappearance of risk-free returns is that investors have increasingly diverted money to managed funds or Collective Investment Schemes (CIS).
He suggested that there is a good possibility that managed funds might replicate the astronomical growth of the pension funds which currently stands at N10 trillion.
Investors that will succeed are investors that will understand a variety of asset classes not just T-bills, bonds or equities.
Guidance and diversification will be crucial in dealing with new set of products being launched which include money market funds, fixed income funds, credit structures and an increasing role of private equity and venture capital.
In his estimation, interest rate risk management and all forms of risk management are more important than ever for fund managers.
Technological innovation is also gradually introducing young people into the market and with time they will play a bigger role in the market. Considering the percentage of young people in Nigeria’s population, he is of the view that their full entry into the market will not only deepen the market but also set it on the path of sustainability.
“New perspectiwve on asset allocation and behavioral finance in volatile markets”, a presentation by Mr. Niyi Adenubi, Executive Director, Institutional Business and Investor Relations, VFD Group
Mr. Adenubi explained that the “Behavioral finance” is a concept that deals with the roles that emotions play in determining how successful an investor can be in the market.
He quoted the prospect theory which alludes to the concept that when investors suffer losses it registers on their minds more than when they enjoy gains.
As a result of this emotional reaction the simple investment principle of buying low and selling, becomes very difficult to implement practically, as in practice most people actually sell on the low and buy high leading to the creation of bubbles.
According to him, some of the cognitive and emotional biases common to investors include confirmation bias, anchoring bias, recency bias, familiarity bias, loss aversion, and overconfidence.
“The discipline to stay with a conviction even when you seem wrong in the market relies on one’s control of his emotions.”
Mr. Adenubi said that the VFD group had developed strong processes designed to help investors cut through these biases.
These processes included: portfolio rebalancing, diversification, defined investment policies and training.
On asset allocation, Mr. Adenubi acknowledged the gold ETF as a welcome asset class that has enjoyed good inflow, but the markets needed more commodity asset classes.
Most Central banks in trying to stimulate their economies had embarked on aggressive quantitative easing so fund managers, around the world, trying to hedge against currency risks are looking to invest in commodities such as gold and copper and even cryptocurrencies.
He ended his presentation by encouraging investors to be careful in picking their asset managers, and to focus on asset managers who have adopted cutting edge technology in their operations.
Panel 2: Is it all in the mind? Interpretations and perceptions of market events against performance
Moderator: Ms. Tosin Ajose, Lead Advisor, Deal HQ
Mrs. Lilian Olubi, CEO, EFG Hermes Nigeria Ltd
Mr. Bunmi Asaolu, Head Equities, FBNQuest Merchant Bank
Mr. Niyi Adenubi, Executive Director, Institutional Business and Investor Relations, VFD Group
Mr. Niyi Adenubi, Executive Director, Institutional Business and Investor Relations, VFD Group
Mr. Adenubi took the position that the global trend is for businesses to go private rather than public, and in such cases the wealth created is not evenly spread since regulators impose restrictions on those who have access to non-public investing opportunities.
To achieve broad participation ad open access to the upside of successful companies, government policy must explicitly encourage viable businesses to list on the stock exchange.
Mr. Adenubi further stated that in the era of digital technology data is everything. Yet, in the Nigerian capital markets there is still a huge gap in the use of data algorithms to reduce the human interference in decision making.
However, he remains optimistic that with growing trend of Nigeria’s youth being very adept at adopting new technology, very soon the desired technological innovations would not only take hold in the capital markets, but could actually turn out to be the saviour of the capital markets.
He also insisted that every nation needs both its local investors and FDIs for a robust capital market.
Therefore, he advised the NSE and the CBN to work together towards addressing the FX challenges and also formulate policies that would make the Nigerian capital market attractive to foreign investors
Mrs. Lilian Olubi, CEO, EFG Hermes Nigeria Ltd
Mrs. Olubi stated that there was actually a lot of data being put out to empower investors with the right knowledge, but the issue is whether the investors understand the plethora of information available today.
She acknowledged that there have been significant efforts to drive financial literacy in the country, with some secondary schools even including it in their curriculum. However, these efforts should be measured to know how impactful they have been.
She observed that issuers are not paying enough attention to retail investors, and tended to over concentrate on institutional investors.
Listed companies should also be more willing to share their success stories to retail investors and also target millennials who are the future of the market.
Mrs. Olubi advised that investors should not remain averse to the market because of focusing on near term incentives, but also consider the long run performance of the market, as the market has consistently been able to beat inflation.
Mr. Bunmi Asaolu, Head, Equities, FBNQuest Merchant Bank
Mr. Asaolu opined that an improvement on a single issue may drastically change the sentiments that the general population have about the capital markets, so a catalyst can possibly kick start a rally, due to investors’ psychology.
Examples of this have played out in the US stock market.
Mr. Asaolu reiterated the view of other speakers that investor education is very important. This being the case, opportunities for engagements between investors and market participants should be created and made broadly accessible for all parties.
He also encouraged the stock exchange to do better in the enabling of online access to retail investors in particular.
This will be part of the push to bring the market closer to investors using technology.