By Babajide Komolafe & Michael Eboh
The upward trend in the equities segment is expected to continue this week, as investors continue to patronise the market due to the stability and impressive returns on investment inÂ recent times.
A bullish trend was recorded in the capital market, last week, as the value of listed equities appreciated by N111.04 billion.
The market capitalisation, representing the value of listed equities, rose by 1.91 per cent to N5.924 trillion from N5.813 trillion at which it opened the week. The All-share index, which isÂ Â another indicator of equitiesâ€™ performance also appreciated by 1.56 per cent to close at 24,517.88 points from 24,141.72 points.
Financial analysts have attributed the upward trend in the capital market in the last couple of days to the unattractive returns in the fixed income securities market.
According to the analysts, fixed income investments with banks have become unattractive due to the decline in interest rateÂ from between 12 per cent and 17 per cent a few months ago, to as low as four per cent.
This is attributed to excess liquidity in the banks as well as banksâ€™ refusal to lend (credit freeze). They are of the view that investment in deposit instruments might remain quite unattractive for investors, unless the liquidity in the banking system begins to flow out to the economy, giving banks the incentive to increase interest rates to attract deposit liabilities.
According to the analysts, money market instruments with a nominal annual average yield of 4 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.
According to a report by Meristrem Securities, Equities have remained the major beneficiary of
unattractive money market yields as investors re-assess their risk-return objective and re-allocate capital accordingly.
The report reads further, â€œThis coupled with dousing tension and relatively clearer investment horizon in the equities market is a key driver of the recent price moves. Just as the yield levels are setting new floors, equities prices are setting new year-to-date highs.
â€œIn terms of return, the Nigerian equities market has returned 17 per cent year-to-date, responding strongly to market perception of undervaluation. It is worth mentioning here that the Nigerian market was one the poorest performing markets in the world in 2008 and 2009 when it plunged by 45 per cent and 34 per cent respectively.
â€œAs at the date of this report, Nigerian stocks parade global equities market with a superior year-to-date return profile outperforming both Frontier and Emerging Market peers by an average of 17 per cent.
â€œWhile emerging market basket and frontier peers parade 90 per cent-plus 52-week return profile, we remain quite modest with the expectation of Nigerian market meeting up to that threshold but are quite bullish on out-performance ratings.
â€œHence, we submit that the recent gain is quite justified both from global perspective and domestic macroeconomic developments.â€
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.
Bullish trend to continue
The bullish trend that dominated the bond market last weekÂ is expected to continue this week, driven by fresh influx of funds from the statutory allocation and excess crude account.
In the Over-the-Counter (OTC) market for Federal Government of Nigeria (FGN) Bonds, a turnover of 495.61 million units value at N647.1 billion was recorded last week in 6,172 deals in contrast to the previous weekâ€™s turnover of 312.1 million units valued at N404.68 billion in 3,076 deals.
The most active bond, measured by turnover volume, was the Fifth FGN Bond 2028 Series 5 with a traded volume of 79.05 million units valued at N142.19 billion in 1,216 deals, followed by the 6th FGN Bond 2029 Series 5, trading 58.4 million units valued at N64.51 billion in 526 deals.
Of the 38 FGN Bonds available, 17 were traded, last week, compared to 20 in the preceding week.
Also last week, the Federal government, in its determination to attract investment in the capital market, especially in the bond market announced it has given approved the extension of tax waivers on sub-nationals and corporate bonds already approved under the companies income tax Act (CITA) to include the personal Income Tax Act (PITA) Value Added Tax (VAT), Capital Gains Tax (CGT) and short term federal government securities as well as a request for a reduction in stamp duties for re-issues of debentures.
The intention, according to the government, is to reduce transaction costs in the bond market and enhance the growth of the economy.
Increased investor patronage
The mutual funds in the memorandum quotation sector of the Nigeria are expected to record significant improvement this week.
Last week, ten ofÂ the 26 mutual funds listed in the sector recorded price appreciation, 12 were stable while four recorded price loss, last week.
The upward trend is expected to continue this week, especially with the renewed vigour and sustained improvement in the equities market.
FOREIGN EXCHANGE MARKET
Relative stability of naira to persist
The Naira will this week enjoy relative stability notwithstanding the nine kobo depreciation it experienced last week.
Market operators rule out any significant depreciation of the naira due to the improved inflow of foreign exchange from autonomous sources would enhance the stability of the naira. Last week, demand for foreign exchange rose by 22 per cent to $511 million from $418 million. The Central Bank of Nigeria (CBN) however sold $418 million hence a demand gap of $93 million in the official market. In the interbank market, the naira appreciated by six koboÂ with the interbank exchange rate closing at N149.9 down from N150.5 per dollar
Cost of funds to decline further
Interbank interest rate would further decline this week occasioned by increasing excess liquidity in the market. Last week, inflow from statutory allocation funds to the three tiers of government stopped a rising trend in interbank rates hence the market closed lower than it did the previous week. Interest rate on call fell to 1.19 from 1.191 per cent while interest rate on Seven days lending dropped to 2.49 from 2.87 per cent.