Investors in equities lose N2.3trn to bonds, others

Stakeholders warn of dangers to industrial growth

The rise in the issuance of bonds and other debts instruments by governments and corporate organisations has taken a heavy toll on the fortunes of the equities sector. Market investors may have lost about N2.3trillion in recent years.

The preference for the bonds and debts instrument arises from the fact that returns on such facilities, which are loaned to governments or corporate bodies, are guaranteed for the fixed period of their tenure, unlike the stocks or equities which are exposed to the vagaries of market forces as they are traded daily.

For instance, the market capitalisation of quoted equities, which was put at N11, 237 trillion on January 5, 2015, stood at N8,842 trillion as at Tuesday, March 21, 2017, down by N2.3 trillion, while the All-share index declined by 8384.72 points or 32.8 per cent, from 33,943.29 to 25,558.57.

Overall, the practice has made government the biggest competitor of the equities market as its unrestricted floating of official bonds and debts instruments has rechannelled elsewhere funds needed to stimulate activities in the stock market.

Consequently, investors may choose to remain in the market and become poor, or divest in pursuit of the new investment fad called government bonds. Either way, the equities market is weakened as funds required to boost trading are being gradually crowded out by incessant bonds issuance by government.

Crowding out occurs when increased government involvement in a sector of the market economy substantially affects the other sectors of the market, either on the supply or demand side. Domestic debts are debts instruments issued by the Federal Government and denominated in local currency.

Indeed, the worry stems from the priority that the debts enjoy over equity during payment on account of the risk management strategies and the poor investment decisions demonstrated by some investors in relation to the current slow economic activities.

Furthermore, investors pointed out that with the high level of debts instruments, the lull in the equities market may hit a deeper bottom and become more intense, as more investments would be channelled to the fixed income market.

In the last three years, a number of bonds and debts instruments have been issued to support various ventures, the latest being two weeks ago when the Debt Management Office (DMO) listed its $1billion Sovereign Eurobond on the FMDQ OTC Securities Exchange Plc.

The 15-year Eurobond priced at par and at a coupon of 7.875 per cent per annum is the first foreign currency denominated security to be listed and traded in the Nigerian debt capital market.

Last month, Forte Oil Plc listed N9 billion bonds on the platform. The bond, which is the first under the company’s N50 billion bond issuance programme with 17.50 per cent fixed rate, was listed concurrently on the NSE. The bond with a five-year tenure represents the first corporate listing on the FMDQ this year.

The FMDQ OTC PLC (FMDQ), on April 8, 2015, had welcomed the listing of the United Bank for Africa Plc’s N30.50billion first series’ seven-year 16.45% Fixed Rate Subordinated Unsecured Notes due in 2021 (the UBA Bond). Also, in October 2015, the securities exchange achieved another feat with the listing of N8 billion Nigeria Mortgage Refinance Company (NMRC) bond on its platform.

The Chief Executive Officer of NMRC, Prof. Charles Inyangete, explained that the successful completion of the bond issuance and the investors’ interest it generated underscored the confidence reposed in the underlying principle and operational model of the NMRC.

These listings have, therefore, opened an opportunity for other Nigerian corporate organisations to raise funds from the international market to list bonds for trading by local investors on the platform.

The long reign of the bears and the continuous depreciation in stock prices in the equities also became a justification for their apathy to investing in the stock market.
The Director General of the DMO, Federal Government’s debt management body, Dr. Abraham Nwankwo, had assured that it would put modalities in place to ensure that government debt instruments do not take away much-needed funds required to boost the equities market. He spoke during the facts-behind-the listing presentation of the $1billion Euro bond. This has not happened even as stakeholders insist that instead of this constant bleeding, government measures must stimulate investments from outside into the capital market, especially the equities sector.

Reacting to the development, the President and Chairman of Governing Council of the Institute of Capital Market Registrars (ICMR), Bayo Olugbemi, affirmed that bonds and government instruments were already crowding out funds from the equities market.

He noted that because of the attractive coupon rate (interest rate) and frequencies of payment on these instruments, they hold more promises for every segment of investors.

“Therefore, putting one’s scarce funds in the not very attractive equities market will be akin to willingly throwing your resources into the pit. The major reason for investing is to get attractive returns,” he added.

The Managing Director, GTI Plc, Amos Aladere, said that the challenge was not just in crowding out funds from the equities market, but also stifling private business owners in the country.

He explained that lenders’ funds were migrating to the Federal Government savings bond, leaving little or nothing for equities market and indigenous entrepreneurs. “SMEs are the growth catalyst of any economy. But it will later be beneficial to the economy if the funds being raised are used to speed up infrastructural development.”

The National Coordinator, Independent Shareholders Association of Nigeria (ISAN), Adeniyi Adebisi, said that the ideal option under the circumstances was that government measures should stimulate investments from the outside into the equities market.

“The National Assembly’s committees on Capital Market, the Nigerian Stock Exchange, the Securities and Exchange Commission (SEC), shareholders activist groups at a seminar in Badagry recently expressed worries about the dwindling fortunes of the capital market from N13trillion some years ago to now below N9 trillion.

“In a way, Federal Government’s floating of savings bonds into the capital market is a positive step towards deepening the market, as was hitherto widely clamoured. However, the gain of one sector of the capital market is the loss of another sector. The savings bonds issues have certain advantages over the stock capital market, and as such will necessitate movements of funds from that sector to the other sector of the same capital market,” he said.