Issues clogging pipelines of investment inflows to capital market need addressing – Keripe, MD, Afrinvest Research

For over two decades and a half, AFRINVEST WEST AFRICA Limited has remained a leader in the Nigerian capital market, delivering top-rated advisory solutions across Africa with dedication, professionalism and discretion; thus facilitating the issuance of a variety of corporate, national and sub-national debt and equity instruments. Licensed by the Securities & Exchange Commission (SEC), and recognised as a leading trading license holder and an issuing house on the NGX and NASD OTC, Afrinvest boasts of first-class services credentials to a myriad of clients across various industries, including power and utilities, oil and gas, telecommunications, infrastructure and real estate projects.
With the Nigeria’s equities market projected to close the year 6.0 percent up resulting from accommodative policy stance of the CBN, increased domestic investors’ participation in the market and stronger corporate earnings, regardless of the underwhelming investor confidence, Business A.M.’s CHARLES ABUEDE in this interactive and exciting exclusive, picked the brains of ABIODUN KERIPE, managing director, Afrinvest Research & Consulting, a subsidiary of Afrinvest West Africa Limited, who spoke on the issues clogging investment inflows into the Nigerian capital market, eNaira launch by the CBN, and what to expect from the market in Q4’21 and beyond. Excerpts:

Kindly take us through the local equities market during the last nine months of 2021. What are the major highs and lows seen in the market during this period?
The performance of the market so far in the year has been a tale of two halves; in the first half equities plunged by 6 percent but in the second half there has been a rebound of 11 percent. Recall that in 2020, the equities market gained 50 percent outperforming other markets tracked by Bloomberg.

That rally was mainly due to the low yield environment in the fixed income market and the abundance of liquidity in the financial system given the accommodative stance of the CBN. Coming into 2021, we had a better understanding of the pandemic and news about the vaccines inspired confidence around the world. Thus, with inflation rate trending higher there was a need to taper system liquidity, reversing the low-interest rate environment.
Since the valuations of some companies were already overstretched, there was selling pressure in the equities market. Since June-end, however, sentiments have improved on the bourse due to a myriad of factors including the impressive earnings results, a bullish fixed-income market, and relatively better macroeconomic signals.

Across sub-Saharan Africa, the Nigerian equities market is the second-largest bourse but way behind the Johannesburg Exchange in terms of market capitalization, number of listed equities, among other things. How do you think we can grow the Nigerian market to be 10 times better and higher than it is currently?
Currently, the Nigerian equities market represents just a small fraction of the economy. The stock market capitalization to GDP ratio for Nigeria was 13.1 percent in 2020, compared to 348.3 percent for South Africa, indicative of the low depth of our market.
To increase the size of our market, we need to attract more investments into Nigerian companies and encourage more firms to list publicly. For the former, the fiscal and monetary authorities need to collaborate to address the perennial issues that have clogged the pipelines of investment inflow from the private sector.
Therefore, moving the needle would require critical reforms across key sectors of the economy, and we are already seeing some encouraging signals from the government. For the latter, there is the need for greater awareness and education because a lot of business owners are yet to understand the importance of listing their companies.
Asides that, there is the issue of size as a lot of businesses never scale up to a size suitable for public listing. To provide context, in 2017 Micro enterprises accounted for 99.8 percent of 41.5 million Micro, Small and Medium enterprises (MSMEs) surveyed by the Small and Medium Development Agency of Nigeria (SMEDAN).
On the part of the Nigerian Exchange Group (NGX), we have seen significant efforts to accommodate businesses that cannot meet all the criteria to join the main board.
The Alternative Securities Market (ASeM) and Growth Board on NGX allow SMEs to raise equity capital from the public without the need to meet stringent requirements. On our part at Afrinvest Research and Consulting, we are engaging and working with MSMEs to provide needed support to groom them to a point where they become suitable brides for listing on NGX.

Unconfirmed sources within the market have highlighted some forms of pump and dump activities by capital market operators (CMOs) and brokers in the market as a way to meet expediently, their financial obligations or pay salaries. What is your comment on this, and do you see it as a threat to the market growth and confidence of investors?
Activities on the Nigerian capital market are monitored and regulated by the Securities and Exchange Commission of Nigeria (SEC), and there are laid-out rules and punitive measures to dissuade unethical practices. If there are instances of malpractices in the capital market, as alleged, we believe that the SEC would step in to address such.
For us, the confidence of investors in any market is the quality of mechanisms that regulators have put in place to safeguard the interests of the various stakeholders. What we have seen over the years is that the SEC has been active in ensuring that regulatory guidelines are adhered to and the activities on the Nigerian capital market align with global best practices. In addition, the NGX has strict disclosure and trading rules that must be complied by all stakeholders. For instance, there is the NGX disclosure requirement on insider trading which includes the name of the participant, the volume traded and the price.

What is your assessment of the current level of investor confidence as it relates to the inflow of Foreign Portfolio Inflows (FPIs) into Nigeria?
The level of investor confidence is currently underwhelming even though there have been some improvements in the global and domestic economic landscape. Foreign Portfolio Investment (FPI) in Nigeria stood at $1.5 billion in H1-2021, 67.5 percent lower than was recorded in H1:2020.
At the current pace, FPI inflow for FY:2021 could underperform FY:2020 ($5.1 billion) and pre-Covid levels of $16.4 billion (FY:2019) by 40.6 percent and 65.9 percent respectively. In addition, data from the Nigerian Exchange Group (NGX) show that foreign transactions on the bourse between January and August 2021 stood at N262.9 billion or 21.7 percent of total transactions.
The performance record is well below N470.2 billion (39.1 percent of total transactions) in the same period in 2020. In our view, the biggest challenge with luring offshore investors back to the economy is the lack of certainty around the FX policy.
Notwithstanding, we believe that the accretion of foreign reserves above $40.0 billion due to the $4.0 billion Eurobond issuance, the IMF SDR and booming oil market should help CBN sustain its intervention in the FX market, clear the backlog of pent-up FX demand and subsequently inspire confidence in FPIs.
A growing index on the exchange is an indication of the performances of some sectors of the nation’s economy as represented on the local bourse. Which of the stock indexes can you say have performed most excellently, and perhaps outperformed the NGX-ASI so far in 2021?
The Oil & Gas Index has gained 69.3 percent till date in 2021, compared to 5.7 percent, 3.2 percent, -0.3 percent and -6.4 percent for industrial goods, banking, consumer goods, and the Insurance sector respectively. The performance means that the Oil & Gas index, which was the worst-performing in 2020, is ahead of the broader market’s 4.2 percent gain as of October 28.
The rally in the oil & gas sector follows the steep recovery in the global oil market, where Brent has now risen past the $80.0 mark. Some other positives in the oil & gas space include the passage of the Petroleum Industry Bill (PIB) into law and the resolution of the Oando-SEC tussle.

The inclusion of cryptocurrency, tokenization of assets, SPACs, among other asset classes could draw attention to investors. Does Afrinvest have any doubts that the market cap of the local equities markets (NGX and NASD) will attract more participation from both local and foreign investors through the adoption of these asset classes?
Currently, the suite of products traded on the Nigerian capital market tend to be traditional because the domestic market is not yet developed enough to accommodate more complex instruments.
Some of the asset classes traded in the more advanced markets have limited application in Nigeria, and the current level of financial education does not support their adoption. That said, we expect that SEC will continue to push for the introduction of products that will deepen the market and improve the participation of local and foreign players.
The Statement on Digital Assets and their Classification and Treatment from the Commission in 2020 lends credence to this as long as the various regulators including the CBN can find an alignment.
SEC also engages with stakeholders from time-to-time to understand market needs and where capacity needs to be strengthened in terms of product development and increasing capital market activities.

CBN banned trading and transactions of crypto currency in Nigeria while directing banks to desist from the facilitation of the transactions. Also, SEC’s rule of asset trading prohibits some fintech firms domiciled in Nigeria from rendering stock trading services to some tech savvy and new investors. What is your comment on this, a smart move by the regulators or economic mirage to growth?
Technically, the CBN has not banned trading in cryptocurrencies which are in fact decentralized assets. What the apex bank has done is to restrict banks and financial institutions under its supervision from facilitating transactions in cryptocurrencies and related assets. This move by the CBN reflects the cautious approach adopted by some other central banks and the IMF towards cryptocurrencies because of the risks the asset poses to the financial system.
Concerning SEC’s prohibition of some Fintechs from rendering stock trading services, the commission has stated that only foreign securities listed on any Exchange registered in Nigeria may be issued, sold, or offered for sale or subscription to the Nigerian public in line with the Investments and Securities Act (ISA) 2007 and SEC Rules and Regulations.
This was the rationale for its prohibition of the collaboration between registered capital market players and unregistered Fintechs that sell offshore securities. We opine that it is well within the purview of these regulators to protect the integrity of the capital market and the economy where applicable.
Therefore, their actions can be understood as measures necessary to protect all stakeholders. Be it as it may, innovation is essential for progress in the economy and capital market. This means that regulators have a duty to research new developments and adopt aspects that would be beneficial to all stakeholders.

The CBN has launched the e-Naira. What will be the benefit to the average Nigerian who is not financially included in Nigeria?
With the launch of the e-Naira, Nigeria became the first African country to roll out its Central Bank Digital Currency (CBDC). Some of the benefits of the e-Naira include facilitating cross-border trade, lower cost of transactions, improved targeted social interventions, enhanced revenue and tax collection, and diaspora payment as articulated by the CBN.
On financial inclusion, there is the need to make onboarding the platform possible for people without a Bank Verification Number (BVN). If the unbanked cannot register and use the wallet then there is very little impact, if any, that the e-Naira project can have on financial inclusion.
There are also concerns about the need for internet enabled mobile phones and internet connections which are not accessible and affordable for some Nigerians. Overall, there are potentials for the e-Naira to help reduce the financial exclusion rate from 36 percent in 2020 with continued product development and research.

A retrospect of the performance of the domestic equities market and the economy at large so far in 2021 saw mixed trading, waning investor sentiment and growing GDP. What is your Q4’21 outlook or expectations at Afrinvest Securities for the Nigerian equities market?
In our half-year review and outlook report, we projected that the equities market should close 6.0 percent up in 2021 due to sustained accommodative monetary policy, increased domestic participation and stronger corporate earnings over the second half of the year.
So far, the market has turned the corner from -5.9 percent at half-year to 4.2 percent as of October 28. We maintain this outlook and expect that equities would receive further support from improving sentiment in the market and year-end activities from portfolio managers alike.