The Nigerian capital market appears to have rebounded with capitalisation on the Nigerian Stock Exchange currently at over N10 trillion, from a record low of N4.6 trillion in 2009. Do you think the existing fundamentals are strong enough to maintain growth on a sustainable basis, more so as the Exchange projects to hit $1.6 trillion capitalizations by 2016?
The recovery in the equity market is a welcome development and we believe it is sustainable. In 2008, the All Share Index (“ASI”) of the Nigerian Stock Exchange (“NSE”) actually rose to over 66,000 on the back of strong positive sentiments and high liquidity. Following this, there was a crash in equity markets globally between 2008 and 2009. As at April 2008, the capitalization of the NSE was N12.62 trillion but following the crash it reduced to a low of N4.48 trillion and it has now improved to N10.51 trillion partially due to the introduction of new listings, most notably Dangote Cement Plc which dramatically increased the market capitalization by N2.09 trillion (an increase of 34%) in 2010. Thus, excluding Dangote Cement and other new listings, the market capitalization would have been below N8 trillion. Whereas most markets have now recovered and are back to trading around their pre-2008 levels, Nigeria continues to lag behind in recovery. Hence, we believe there is still significant headroom for growth.
Furthermore, we believe the strong economic growth and expanding youthful population, coupled with the Federal Government’s strategic reforms in sectors such as energy and agriculture will continue to support the growth of most of the listed companies, which should help to sustain the performance of the market. Also there have been key reforms by the NSE to deepen liquidity and improve corporate governance through improved monitoring and reporting requirements of listed companies and the establishment of market makers to provide coverage for all the listed stocks. As such, we expect all these positive developments to help sustain the recovery of the Nigerian capital market.
Local stakeholders have raised concerns about the near-dominance of foreign portfolio investors, who control about 65 percent of the Nigerian capital market, that it may trigger another financial crisis should they divest from the economy for whatever reasons. Do you also nurture such fears? What could be done to stem such fears?
The main factor responsible for the emerging dominance of Foreign Portfolio Investors (“FPI”) was the low domestic investor confidence level following the global financial crisis. Also, the high yield on fixed income securities especially in 2011 and 2012 encouraged investors to allocate more of their assets to these securities. However, a recently released report by the NSE regarding FPI flow as a proportion of total stock market transactions indicated a reversal of this trend in 2012 and 2013 as participation by domestic investors increased to 61% from below 30% 2009 and 2010. On the other hand, the participation of FPI’s has declined to around 39% as at the end of February 2013 from a high of 67% in 2011.
Furthermore, we believe the key to reducing the dominance of foreign investors in the market is increase in participation by domestic institutional investors such as pension funds, asset management companies, insurance companies, and so on. There is also the need for the Securities and Exchange Commission (SEC) to continue to intensify campaigns regarding the reforms and other activities taking place in the market in order to continue to build investors’ confidence.
Although the conversation is ongoing, reforms of the capital market have so far failed to persuade important sectors of the economy, such as telecommunications, upstream and multinationals, to list their shares on the Nigerian Stock Exchange thereby denying the capital market the much-needed depth and robustness. What is your view on this?
As a result of the strategic importance of sectors such as Information and Communications Technology (ICT), Upstream oil and gas, and power, as key drivers of government revenue and national development, we concur that the non-listing of companies within these sectors limits the opportunity for investors to benefit from the growth potential and vast economic benefits that accrue to these sectors.
Thus, reforms encouraging the inclusion of the telecommunications, upstream oil and gas sectors and increasing the participation of multinationals on the exchange will go a long way towards creating a more robust and deeper capital market, which would further enhance investor confidence and increase both local and global participation. As such, we believe all hands must be on deck and the various stakeholders must continue to collaborate towards creating appropriate incentive packages that will encourage these companies to be listed. We understand that the Federal Government of Nigeria has taken this into cognizance in the on-going power sector privatization that will aim to see some of the shares of privatized generation and distribution companies listed on the NSE.
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The major reason for investing in mutual funds is the opportunity for steady growth in assets while reducing the risk associated with investing in individual securities. Why should people in the lower economic bracket bother about mutual funds?
The main objective of collective investment schemes is pooling funds from various investors in order to achieve diversification and cost reductions while obtaining competitive returns relative to direct investment.
As such, on the contrary, mutual funds are ideal for retail investors with low risk tolerance as the minimum investment is usually as low as N50,000.00 and the units of the mutual funds give access to a well-diversified professionally managed portfolio with a lower risk profile compared to investing directly. Furthermore, the retail investor may not possess the requisite market knowledge, information, expertise and do not generally have the funds to employ the services of a professional Fund Manager. Hence, investing in a mutual fund helps reduce the cost associated with the services of professional management and fund administration. For instance, funds such as the Stanbic IBTC Money Market Fund and the Stanbic IBTC Bond Fund enable retail investors to achieve Fixed Income yields that would otherwise accrue to High Net-worth Individuals (HNI) by investing in a pool of high quality bonds and money market securities that retail investors would ordinarily not have qualified for. Therefore, mutual funds can be used as an effective tool for wealth creation by people in lower economic brackets. On the assertion that the returns of equity market are small when compared to direct investment in shares, we believe that the returns usually outperforms majority of listed equities of underperforming companies.
Stanbic IBTC Asset Management states that it offers mutual funds to investors with both low risk and high risk appetites. How does this work? What differentiates you from other fund managers?
Understanding the risk profile of your client is an important aspect of the investment management process as failure to manage a portfolio in line with the risk appetite of the investor will certainly lead to unmet expectations. At Stanbic IBTC Asset Management, we have provided multiple platforms through our various mutual funds to ensure that investors across the risk spectrum are catered for. We understand the link between risk and returns and the role of behavioral finance. Thus, we ensure that we actively engage our clients to get a clear sense of their investment objectives and tolerance for risk which serves as the basis of our recommendation of suitable products. Also, we differentiate ourselves by focusing on a disciplined fundamental approach to investing and paying attention to the key economic value drivers, layering the core of the portfolio with industry leaders and ensuring that we invest in only fundamentally sound securities which we aim to acquire at substantial discount in order to earn attractive returns. We also employ a combination of strategic and tactical asset allocations, sector plus asset class weighting and sector rotation. Our team of passionate and dynamic people with a deep understanding of the Nigerian market is another key differentiator and we have a strong parentage in Standard Bank (which is the largest bank in Africa in terms of assets and profitability) and has presence in 18 African countries and 12 countries outside Africa. This enhances our ability to adapt global issues to our local market.
Nigerians are used to different forms of collective investment schemes, but somehow there seems to be limited knowledge of mutual funds and their availability particularly by the generality of the people. What further steps, do you think, should be taken to raise awareness about mutual funds?
We believe that there should be a broad based collective investment schemes awareness campaign conducted jointly across all segments of the industry with greater industry collaboration among the various key stakeholders and we think the SEC and NSE are well placed to coordinate these efforts in conjunction with the private sector. We also believe the Government and specifically the tax authority, needs to improve some of our tax laws in order to reduce the tax burden and to further improve the efficiency of mutual fund operations which in turn should improve returns and consequently awareness and participation in mutual fund investment.
Over the past couple of years, in the aftermath of reported growth in Nigeria’s GDP, the middle class is said to be growing in large numbers. Has that growth made a positive impact on the savings culture of Nigerians and by extension investment in mutual funds?
Over the last 5 years, there has been a significant growth in the middle class in Nigeria. However, the growth for now seems to be more evident in growing consumption and stronger demand for quality and imported goods in line with the life style changes. But we believe that with the expectation of sustained domestic growth and urbanization over the next 10 years, we should see a strong transition from consumption to savings outside the regulated pension’s space. Hence, we expect that with sustained confidence, growing income and strong awareness campaigns, the savings culture will improve and mutual funds should benefit strongly from that.
