April 26, 2019 9:00AM / Content & Header Image by United Capital
2019, so far, has been a bearish tale for Nigerian equities despite the better balance of risk in both the global and domestic market. The Nigerian All-Share Index closed the quarter lower by 1.2% despite the massive turnover of $7.8bn recorded at the Investors and Exporters FX window. What was even more surprising was the fact that the conclusion of the presidential elections, following which the candidate of the incumbent party was declared the winner, did not spur any substantial rally in the market as players had anticipated. Equities also did not give much credence to the FY-18 earning season despite some impressive financial performances recorded by different companies.
Mr. Bawo Oritsejafor, Ag. Managing Director/CEO United Capital Securities Limited, in a recent interview, speaks about the financial market and activities embarked on by United Capital geared towards financial inclusion.
Before the conclusion of the 2019 General Elections, market analysts predicted that there will be a rally after the election. As at April 8th, 2019, YTD return stands at -7.22% which reflected that the market has continued to dip further after the election. What factors are responsible for this persistent sell pressure?
Definitely, the current downturn in the equity market may not be unrelated to the outcome of the election which may have been interpreted as another four years of lack of bold policy actions despite the need for reforms. Thus, investors may be taking a hard look at the Nigerian economy, which according to global institutions such as the IMF and World bank, growth is projected to stay muted at 2-3% over the next three years. Again, despite moderation in yield on Fixed income instruments, returns on investment in government Bills & Bonds remains quite attractive. Thus, the risk-off sentiment for equities. Nevertheless, the market remains attractively priced especially since two of the biggest risks (US Fed rate hikes and election uncertainties) - which predicated 2018’s bearish outing – appear to have dissipated. We are of the opinion that even though the market remains technically and fundamentally underpriced, a rebound would only be spurred by catalysts that can galvanize equity investors. Some of the near-term triggers we are looking out for include: 1) MTN’s expected listing in H2-19 and 2) a sustained uptick in oil price.
Revenue generation has been a major challenge for Nigeria considering the fact that about 50% of the revenue generated is being used to service debt. What should the Federal Government do to change this and solve its revenue challenge?
There is no gainsaying the fact that the major problem affecting government’s ability to generate revenue remains the over-reliance of the economy on proceeds from the oil export. Presently oil proceeds account for over 80% of government revenue which implies that the economy is largely exposed to the vagaries in the oil market. The recently concluded IMF article IV 2019 on Nigeria also harped on the worrisome state of Nigeria’s revenue mobilization. Overall, to boost government revenue, the FGN needs to review the protracted issue of subsidy on petrol in Nigeria, which is estimated at $1.0bn or N305bn. Imagine what that money can achieve if channeled into financing of production rather than consumption. The FIRS is doing a lot with respect to taxes; I think we can do more. Nigeria Tax to GDP ratio remains one of the lowest in the world; certainly the lowest in Africa. So, we need to expand the base and specifically look into how we can mine the huge opportunity in the informal economy. Mining is another sector that can generate a lot of for this economy but whatever we are doing is still too little. The incidence in Zamfara is a pointer that there are illegal mining activities going on here and there so the government needs to look into these and see to how the economy can benefit more from solid mineral mining.
Experts envisage that there is a likelihood that Nigeria will experience further Naira devaluation in 2019 while some are of the view that this is the right time to unify the multiple exchange rates we currently have. What are your thoughts on this?
Historically, FX rate trend in Nigeria reflects the CBN’s alternating decisions of pegging the Naira/USD rate within a band until unbearable pressure builds up to necessitate a devaluation. This played out well between 2015 and 2017, following the plunge in oil prices which triggered a currency market crisis in the Nigerian economy. There is a negative correlation between FX and oil price -which is not surprising, considering the structure and dynamics of the Nigerian economy. Over 80% of export proceeds comes from crude oil. Supported by strong FX reserves of $43bn and the sustained uptick in oil prices, the naira should remain stable in the short to medium term. Also, the unification of exchange rate (one of the policy recommendations of the IMF to Nigeria in its recent consultation report) is imperative so as to prevent the negative effects of arbitrage opportunities that the current multiple exchange rates windows portend. In the absence of a major shock to oil prices in the interim, a devaluation is unlikely, however, this remains a medium to long term possibility should oil prices plunge again.
United Capital recently upgraded the Investnow portal/App. Kindly tell us more about this and its impact so far on UCAP Securities’ business?
The new upgraded InvestNow app is a more robust trading platform that not only offers our clients Direct Market Access to the Nigerian Stock Exchange but also a whole lot of other product offerings that gives them the opportunity to have a more diversified portfolio. With InvestNow, our clients can now open a brokerage account online, fund the account through the portal (one-off or Recurrent funding), execute trades with access to live stock recommendations and monitor the performance of the account all in real time without human intervention.
The big selling point for us is that everything can be done on a single platform. The platform simply allows our clients to invest the simple way.
The impact has been tremendous for our retail and digital business drive. We are always thinking of how to make the customer experience better and they in turn have really been appreciative with the adoption rate of the platform.
What more can be done to encourage retail participation in the market?
For a country reputed to be the most populous in Africa, the level of retail investor participation in the capital market remains very low. On the positive side, the implication is that there is ample room for growth.
Firstly, the need for a stable macroeconomic environment cannot be overemphasized here. Government needs to address security challenges and economic instability in the country in order to create an enabling environment to promote Investment inflow and new business that is needed to deepen the capital market.
Although the Securities and Exchange commission (SEC) and Nigerian Stock Exchange (NSE) have done a lot and progress has been made, much still needs to be done in the area of awareness and capital market literacy. There is need to continue to build retail investors’ confidence and encourage their participation in the capital market through increased awareness campaigns regarding the importance and benefit of investing in the capital market.
Digitalization has had a significant impact on the growth and development of capital market worldwide. There is need for all market operators to continue to embrace digitalization especially with the over concentration of network of most stockbroking firms and other capital market operators in Lagos and a few other major cities leaving investors residing in rural areas at a disadvantage with respect to access to capital market products and services, which is required for their economic wellbeing.
Leveraging on technology for more retail participation is of utmost importance. In our view, mobile trading apps have immense growth potential. With financial services firms upgrading their systems to provide mobile trading facility, smart phones becoming increasingly affordable and a 4G network capability, the vast pool of mobile users in the country can be tapped. Such leveraging of technology will lead to a widening of the investor base in a cost-efficient manner.
Finally, there is the need to embark on a nationwide campaign to create awareness about the opportunities of investing in the Capital Market by all stakeholders.
How positioned is UCAP Securities to drive increased participation in the market.
United Capital Securities is committed to changing the narrative of financial services in Nigeria and Africa by contributing our quota in ensuring that financial services are available to all and sundry in an accessible and simplified manner. We will stay in touch with market regulators, stakeholders and other private entities to achieve the required market buy in. We will continue to invest in our people and technology in order to provide our clients with top-notch advice and execution excellence. We will focus on products that will improve financial inclusion and increase market participation
What is your outlook for the market in 2019 and what should the investing community expect from UCAP Securities Limited?
Thankfully, election risk is out of the way and economic activities have resumed fully. Broadly, economic outcomes in Nigeria are showing signs of improvement. Momentum at the investors’ and exporters’ window segment of the currency market has remained strong in the wake of President Buhari’s Re-election. GDP growth is set for another modest uptick, and the headline inflation rate is moderating sharply, settling to 11.3% in Feb-2019 (vs. 14.3% in Feb-2018). Accordingly, the Apex bank eased the monetary policy rate (MPR) from 14% to 13.5% in March. Again, external reserves remained strong, settling at $44.4bn as at end of March 2019 and this continues to support the stability of the Naira against the US dollar, amid increased foreign inflow and uptick in oil prices. Oil prices have sustained uptrend in the global market, up 26.5% in Q1-2019 amid supply shortages spurred by the crisis in Venezuela and the OPEC+1 accord.
As such, outlook is positive for the market, we maintain our view that the market should end the year positive, albeit modest. The current downturn is clearly unsustainable, especially with developments in the global space becoming increasingly positive for frontier markets so far in 2019. Notably, Central Banks in the advanced markets such as the US Fed, ECB, and the BOJ are sounding more dovish, holding off rates hike and contemplating further stimulus. A rebound can be spurred by some of the near-term triggers such as the announcement of a new CBN governor if the current governor’s tenor is not renewed, the expected MTN listing in H2-19, the sustained uptick in oil price as well as a possible stronger-than-expected performance of the local economy as the year progresses.
At United Capital Securities, we are committed to consistently creating value for our stakeholders and be at the forefront of the drive to ensuring more financial inclusion in the country.