The Deputy Group Managing Director of Meristem Securities Limited, Sulaiman Adedokun, speaks on the state of the capital market, among other issues, in this interview with STANLEY OPARA
How would you rate the performance of the capital market this year?
The capital market is a demand-supply relationship for investment and capital. The performance can therefore be better reviewed along the line of capital availability (such as savings, pension system, Foreign Portfolio Investment, law, and so on); investment opportunities (market capitalisation, number of firms, among others); and the macro-environment (the Gross Domestic Product growth, Gross National Income Index, population, political commitment, corruption).
The performance of the capital market so far has been a bag of mixed fruits. The bond market has enjoyed a high yield environment with average yield increasing from 10 per cent at the beginning of the year to 16 per cent in October. So, in terms of income stream, the bond market has been very positive. However, given the inverse relationship between yield and prices, bond portfolio valuations have taken a hit. On the other hand, the equities market has been tempered with a year- to-date loss of 4.06 per cent and the level of risk aversion is evident in the 95 per cent gain in the New Gold Exchange Traded Fund. This market underperformance is a reflection of the headwinds in the broader economy, recession, inflationary and exchange rate pressures, high unemployment and underemployment, trade deficit, fiscal fragility and others.
The NASD Over-the-Counter market has shown some resilience with a gain of 7.9 per cent in 2016. The OTC market is getting deeper with more admitted securities, and corporate disclosure has been improving.
When, in your view, do you see the market rebounding?
The economy should begin to emerge from the trough when net export recovers and government spending ramps up with significant multiplier impact on consumption and investment. At this point, we expect monetary policy to switch to an expansionary stance to solidify the gains. As the economy recovers, the equities market is expected to amplify the signals as it typically does at initial recovery phase of the business cycle. Earnings are key drivers of the equities market performance, and as the macro headwinds dissipate, corporate scorecards reflect same and the investors respond appropriately. Market rebound will also have to ride on strong demand, which should outweigh supply. The investment import of this cycle is that those who will emerge with strong return outperformance will not wait until the recovery is apparent before taking investment decisions.
What is your ideal model for increasing domestic participation in the market?
There is no perfect model for increasing domestic participation in the market. Each has its pros and cons. Although I pitch with the retail strategy, there should be a good compliment of institutional investors so that shocks are not easily amplified and do not unnecessarily persist in the market, which is the case for a retail-dominated market. The power of the retail market segment is enormous; there has been the advocating of the Pension Fund Administrators to be more active in the market, but come to think the of it, the so called funds are pools of retail pension contributions. So, aside getting a critical mass of retail investors to invest in the market directly and individually, the retail market can also be harnessed through structures such as mutual funds so that the institutional support needed in the market is not missing. Be that as it may, the depth of the market also needs to be improved to have a broader spectrum of investible stocks. On the bond front, it is quite ironical that the Nigeria Stock Exchange began trading with 19 listed securities – three equities, six government bonds and 10 corporate bonds. but today, bonds trading on the floor of the Exchange is very paltry and corporate bonds are illiquid. There is the retail bond trading platform but it is not being explored by investors.
What is the extent of loss you feel the market has recorded in the past one year given the current exchange rate?
The market has been pressured by the exchange rate challenges and is not just confined to the market, it is a macro-wide phenomenon. The market loss should not just be perceived in naira terms such as the decline in market capitalisation, but also in the low-trading volumes due to investor apathy and a high risk premium being demanded for investing in the market. However, if you view it from a broader perspective, the loss is not just due to the exchange rate but is also a reflection of asset re-allocation from equities to fixed income instruments, which offer more attractive yield. Really, there are still investible funds notwithstanding the forex challenges; it is only that they have gone in search of yields.
How are players like you surviving despite the bad state of the market and the economy as a whole?
In recessions, aggregate demand is weakened and by implication inflation is moderated. However, what is happening in the country is not conventional due to the multiplicity of shocks, one of which is high inflation. This development has therefore created a rare opportunity in the fixed income space in recessionary periods and we need to appreciate that fact. The infrastructural gap and the need for structural policy to be put in motion to re-engineer growth in the economy are also creating investible opportunities. So, by and large, it is about perspective; is it half cup full or half cup empty? Crisis period provide opportunities for revaluation and profound strategic decisions, and so we will not allow this crisis to waste.
In specific terms, how has Meristem maintained its position among the big players in the market despite not being a subsidiary of a bank?
The word here is actually diversification. In as much as correlation in the business operations is less than unity, there are diversification benefits, and this is one thing we have leveraged on as a group. We offer bespoke solutions to our clientele and our mission captures this — bonding with our clients to understand and meet their needs. We have grown organically through the years and have expanded our product portfolio to serve the broader segment of the investing public. We recently launched two mutual funds: the Equity Mutual Fund and Money Market Mutual Fund. We are also introducing foreign currency products to serve those who desire such in view of the forex issues in the country, and we equally have products for Nigerians in Diaspora, among many others. It is about understanding your strength and distinctive competence while not ruling out exploring new markets.