Investment Dilemma: Declining Yields Vs Crashing Equity Market

Equity market halts 12 successive gaining streak with a loss of N143.75 billion

Fund managers and investors in the Nigerian financial market must be facing a tough time at the moment. This is because the returns on the financial assets they are investing in are dropping and, in some cases, recording a negative performance. Yields on fixed income securities have been dropping since the beginning of 2019 as investors, both local and foreign, have increased their patronage of fixed income securities. Investors are now re-investing maturing investments at lower yields than before. The yield on the 364-Day Nigerian Treasury Bill (NTB) dropped from 16.95% on 02 January 2019 to 12.53% as at 17 July 2019. Despite the drop, FSDH Research expects the yield on the NTB to drop further from the current level. You may call that bad news: our job is to tell you the truth. But one thing is sure, large companies and the government who are borrowing in the Nigerian financial market are happy at the development. They can testify how much interest expenses they have saved through the process.

In the equity market, the bears are winning the match over the bulls, leading to declining equity prices. The value of The Nigerian All Share Index (NSE ASI) stood at 27,918.59 as at 26 July 2019 leading to a depreciation of 11.17% from December 2018. Warren Buffett, a well-known American business magnate, once said that as an investor, it is wise to “Be fearful when others are greedy and greedy when others are fearful.” This means that investors who have long-term funds can take advantage of the imbalance in the share prices of some companies that have strong investment case in the equity market. Although we may not know exactly when the equity market will take a turn, it is clear that the market is close to the bottom. Therefore, FSDH Research expects the bulls to take over from the bears very soon.

Imagine that an investment of N100,000 in the equity market in 1985 recorded a return of
24,590% as of December 2018. This means that the N100,000 increased to N24,690,000 within 33 years without additional capital. This was the performance of the NSE ASI between 1985 and 2018. Not a bad growth at all. Meanwhile, there were some companies that recorded higher returns during this period than the NSE ASI. But be aware that historical performance is no guarantee for future performance in the financial market. The point that we are stressing is that investment in the equity market is for the long haul, especially at a time when activities are depressed and share prices are low.

The equity market may recover from August. A number of companies have indicated that they will declare an interim dividend for Half Year results only waiting for regulatory approvals. In addition, we expect the various monetary policies the Central Bank of Nigeria (CBN) initiated to boost economic activity and lead to increased liquidity that can ow to the financial market. This assumption is based on the availability of complementary fiscal measures that will de-risk the economy, the absence of which may limit the ability of the monetary policies to achieve the desired objectives. FSDH Research believes the current bearish trend in the equity market is an opportunity for strategic investors to take positions in the market. In addition to the capital gain that investors enjoy in the equity market, investors could also benet from dividends that companies pay and the bonus issue (additional shares that investors earn, for which they do not pay).

FSDH Research expects the low yields on fixed-income securities in Nigeria to provide an
opportunity to source long-term debt capital for infrastructure development in Nigeria that will improve the Nigerian business environment. Government and corporates can also leverage on the high appetite for debt securities to issue discount bonds. Meanwhile, we see attractive investment opportunities in the following sectors of the equity market: Consumer Goods, Industrial Goods, Banking, and Oil and Gas. Your investment adviser can recommend specific stocks to buy in these sectors. Final words – “The Nigerian financial market is loaded with opportunities, don’t be left behind”.