Amidst crashed rates, equities’ surge in 2020: Equities to deliver inflation-adjusted capital gains, dividend returns in 2021, say analysts

By Charles Abuede

• Fixed income market to see increased activities as government’s efforts to achieve debt sustainability could result in suppressed yields in 2021
• Potential of listed companies recording profit will also improve performance of equities market
• In money market, system liquidity to rise further

In the first quarter of 2020, the capital market witnessed severe capital flight as foreign investors divested due to drained confidence in the Nigerian economy, which led to weakened foreign participation in the course of the year. In addition to the constrained inflow of foreign exchange, there was a surge in foreign outflows.

Nine months into 2020, total foreign participation stood at N510.25 billion, showing that 65.64 per cent was outflows from the stock market and this further pressured the foreign exchange market. However, the markets rallied in the fourth quarter of 2020, following the excess liquidity in the fixed income space. The market, however, closed October with the highest monthly growth that was last experienced in February 2018.

Taking a retrospect view of the year 2020, which has had its good, bad, and ugly turns, and looking ahead into 2021, how will monetary policy and inflation rates drive the fundamentals of Nigeria’s fixed income, domestic equities and money markets in 2021? Such a forward look will take into consideration the following scenarios that played out in 2020 – a year that we saw some businesses get crippled, job losses, imposed national lockdown arising from the COVID-19 global pandemic, rising inflation, currently sitting above 14 per cent; the deepest GDP constriction in about a decade, in Q3 2020, rising external debt levels, as well as ongoing convergence of the exchange rates by the Central Bank of Nigeria (CBN).

Market observers, analysts and experts have asserted that they expect the CBN to further adjust its monetary policies for the most part of 2021 in a dovish manner, as it continues to pursue economic growth. They note the key challenge to be the monetary policy rate, which has stopped being a guide for the market; and as such the market would be looking more at what the CBN intends to do with banks liquidity through the Cash Reserve Ratio (CRR), Open Market Operation (OMO) issuances and T-Bill auctions.

Abiodun Keripe, managing director, Afrinvest Research, told Business A.M. in an interview that given the low yield environment in the fixed income space, the equities market would remain attractive for investors with the potential to deliver inflation-adjusted capital gains and dividend return.

“The fact that yields are currently very low in the domestic fixed income market due to the policy actions of the CBN, which restricted local investments in OMO securities, inducing huge demand for Treasury bills, investments in domestic bills and bonds will earn a negative real return when compared with the inflation rate. For emphasis, the 5-year and 10-year bonds currently trade at 5.2 per cent and 6.3 per cent, respectively, and the 1-year Treasury bill trades at a 0.65 per cent yield. Thus, the sub-Saharan Africa Eurobonds market presents opportunities for attractive yields and serves as a currency hedge at current pricing,” Keripe stated.

The economic and market expert added: “There are risks to our outlook on SSA instruments due to the susceptibility of commodity prices to global economic uncertainties. However, a prolonged new wave of the pandemic especially in developed countries and delay in the deployment of vaccines may adversely impact commodities prices and drive sell-offs in SSA instruments.

“But we believe somewhere in 2021, the CBN would be looking to bring market rates to convergence. We expect inflation to ease pressure in 2021, given the recent re-opening of the land borders but, further currency devaluation amid limited FX supply and higher demand would, however, remain a drag to inflation,” Keripe projected.

Outlook, expectations in Capital and Money Markets

For Nigeria’s financial markets, 2020 can be aptly described as the year of crashing interest rates and surging equities. During the years from 2010 to 2019, inclusive, Treasury bill rates exceeded the rate of inflation by 2.57 percentage points, on the average. Similarly, saving, whether through building up bank deposits or mutual funds, was straightforward during this period, since the risk-free Treasury bill usually offered an attractive return. All that changed in 2020 when, over a period of 11 months, 1-year T-bill rates fell from 5.40 per cent to almost nothing.

Investors, not surprisingly, were not impressed with this; some were indignant. Many of them were unaccustomed to taking risks to obtain an adequate return. And inflation stayed in double digits during 2020, rising to 14.89 per cent, year-on-year, for November 2020. Despite the current uncertainties painting itself bold in the economy and rearing its ugly head in the scheme of things to give market investors reasons to prowl for returns in their investments from alternative investment vehicles, market analysts at FSDH Capital Research have stated, with high optimisms, the level of traction which would be witnessed within the fixed income, equities and money markets.

Fixed Income Market

The analysts assert that the market will experience increased activities as the deficit of N5.2 trillion in the federal government’s 2021 budget will be financed mainly by borrowing. Despite this, the government’s efforts to achieve debt sustainability could result in suppressed yields in early parts of the year. Given the excess liquidity in the market, the government holds a strong bargaining power. Therefore, primary auctions would continue to offer low yields. However, the introduction of the CBN Special Bill could stabilize the fixed income market. Corporate bonds and commercial papers will gain further traction as investors scramble for alternative investment vehicles and businesses take advantage of the low-interest-rate environment to raise capital.

Domestic Equities Market

With many businesses returning to full operation in 2021, the potential of listed companies recording profit will also improve the performance of the market. Foreign participation could remain subdued in the equity market if external reserves position does not improve. As the economy recovers, the market will experience improve activities in the year.

The Money Market

With over N5.1 trillion expected to mature in 2021, liquidity in the system will increase further. Consequently, yields on CBN Bills, alongside other rates, will remain low in the early part of the year. However, the analysts say they believe that the regulators will make efforts to increase rates in order to attract foreign capital into the economy. This will materialize in H2 2021.