BONDS: Further downturn in prices
By Babajide Komolafe & Michael Eboh
The upward trend in the equitiesâ€™ segment of the Nigerian Stock Exchange (NSE) is expected to continue, this week, as investors continue to shy away from the fixed income market and money market instruments due to crash in deposit rates and over-valued bond prices.
Last week, investors gained N200.07 billion from the capital market, as the value of their investments in the market appreciated by 3.38 per cent. This was reflected inÂ the rise in the market capitalisation and All-share index which roseÂ by 3.38 per cent and 3.28 per cent respectively.
The capitalisation which opened the weekâ€™s trading at N5.924 trillion closed at N6.124 trillion while the index garnered 804.99 basis points to close at 25,322.87 points from 24,517.88 points at which it opened the week.
Rates in the money market have hit an all_time low, with yield plummeting to an annual average of four per cent compared to between 12 per cent and 17 per cent bracket recorded a couple months ago. This has made investmentÂ in money market instruments unattractive especially when viewed against the current inflation rate, thus creating a rush for the equitiesâ€™ market.
Another factor that is expected to drive activity in the capital market in the next couple of weeks is the recent passage of the year 2010 budget. With the passage of the budget and the appointment of ministers by the Acting President, after screening by the National Assembly, activity in the economy is expected to be pick up, as economic players would become aware of the direction of the economy in the next 12 months.
The budget is a major pointer to the direction of any economy in a fiscal year and this will help investors and speculators make major financial decisions.
Also, the recent passage of the Asset Management Company of Nigeria (AMCON) bill by the House of Representatives and its likelyÂ passage by the Senate this weekÂ is expected to help drive the capital market in the days ahead.
Experts are of the opinion that, when fully functional, the AMCON will help return buoyancy to the capital market as the toxic assets of banks, especially bad debts associated with margin trading will be borne by the company, giving the banks a clean slate with which to build their business upon and ensure future profitability for shareholders and other stakeholders.
It is expected that the much-awaited results of banks, which shouldÂ start coming in from this week through April, will provide a further direction for investors. Investors will be able to rate the banks according to their performance and will be expected to make decisions regarding the most suitable investment choice among the banks.
However, we expect the upward trend to ease slightly towards the middle of the week, as few investors take advantage of the increased activity in the market and significant improvement in share prices to make few gains.
Further downturn in prices
The decline in bond prices in the over-the- counter market last week is expected to persist this week. Last week, 12 of the 18 FGN bonds traded suffered price decline while the others were relatively stable. The sharp turn in the fortunes of the market is due to general belief that most of the bonds are over-valued hence the market became unattractive to inevstors.
â€œThe securities were assumed to be grossly over-valued, and not true reflection
of the market position. The activities as characterised by the traders preference seems to favour the short tenured
securities, as against the long tenured security. Major reason was its sensitivity to macro-economic changes. It recorded
upward movement in yield across 5, 10 and 20 yrs despite liquidity in the Naira market,â€ said Financial Market Dealers Association of Nigeria (FMDA), in its report for the week.
Meristrem Securities also noted that, â€œTo put this unattractiveness in real term perspective, money market instruments with a nominal annual average yield of four per cent only amounts to a negative real return of about 7.4 per cent in the face of 12.3 per cent headline inflation rate.
â€œThe impact of low interest rate environment has also been reflected on the current yield of FGN bonds. It is worth mentioning here that government issued bonds control more than 95 per cent of the bond market and banks and discount houses are the major players of these securities.
â€œWhile the broad expectation has been that yields might stage a reversal, suppressed interest rate has kept yield at historical low. The 10_year FGN bond, which currently trades at some 25 per cent premium to face value, yields barely 6.6 per cent.
â€œOn a relative basis, however, the yield still remains more attractive than the standing deposit facility of the CBN which was further lowered by 100 basis points to one per cent in the last MPC meeting in early March.
Price increase to persist
The upswing in the fortunes of mutual funds listed on the Memorandum Quotation segment of the Nigerian Stock Exchange (NSE) last week is expected to continue this week, going by the continuous improvement in the value of listed equities on the NSE.
Last week, of the 26 mutual funds on the NSE, 12 appreciated, compared to 10 in the previous week, 11 remained unchanged compared to 12 in the previous week, while three depreciated compared to four in the previous week.
Naira to enjoy relative stability across the market
The relative stability of the Naira in recent times would persist this week especially in the light of decline in foreign exchange demand and increased supply from oil firms.
Last week, the Naira was quite stable in the four segments of the foreign exchange market with only marginal movements in the exchange rates. At the official segment, demand slumped by almost half to $288.200 million from $509.9 million in the previous week.
As a result the official exchange rate dropped to N148.3 from N148.4, indicating 10 kobo appreciation of the naira. At the interbank segment, the exchange rate rose marginally N150.07 per dollar from N1409.96 while at the bureaux de change/parallel market segment, the exchange rate remained within the N151.5-N153 band.
Cost of funds to decline further
Cost of funds in the interbank money market will further experience marginal decline reflecting the severeÂ excess liquidity in the market.
Last week cost of funds declined marginally with interest rates on Call lending and Seven Days lending falling to 1.208 and 2.5 per cent from 1.233 and 2.707 per cent respectively.
Investigation reveals that the marketÂ anticipated $1 billion fromÂ the excess crude fund was not released last week but the market remained extremely liquid with N400 billion idle funds.
Consequently, the release of the excess crude fund this week is expected to aggravate the excess liquidity situation hence causing cost of funds to decline further.