While the market’s rally in 2012 was spurred by a tripling of foreign portfolio inflows to $17bn, domestic investors – dominated by institutionals – have increasingly returned to equity markets as well. Scarred by the 2008 downturn, high-net-worth individuals have turned to the money market; exposure to rapidly rising equities has grown significantly since 2012. Pools of institutional funds like banks and pension fund administrators (PFAs) still accounted for over 90% of money invested in 2012, according to the Nigeria Stock Exchange (NSE), but retail participation has risen gradually on the back of new passive investment products such as exchange-traded funds (ETFs) and investor education drives.
RISING SHARE: Domestic investors’ share of stock holdings rose from 33.2% in 2011 to 38.6% in 2012, although the globally linked sell-off in emerging market securities raised this to 57.3% of the market by July 2013, according to the NSE. “The NSE’s uptick since mid-2012 has spurred greater participation by domestic investors, particularly since the end of last year,” Kyari Bukar, CEO of the Central Securities Clearing System (CSCS), told OBG. In an environment of low bank deposit rates, the high returns of NSE equities, rising on average 35.45% in 2012 and 28.8% in the first half of 2013, have proven a draw. Just as the number of Nigeria-exposed ETFs listed offshore (mainly in New York) expands, the key for both authorities and investment firms domestically will be to diversify product offerings further, to entice greater retail participation.
INSTITUTIONAL BIAS: The exchange counted approximately 5m account-holders in 2012, of which roughly 500 were institutional investors. Following a rapid rise in the number of account-holders to some 3.5m in 2007, amidst the stock-market rally to 2008, retail investor participation fell dramatically from 2009. High-net-worth individuals in particular fled to the money market, particularly Treasury bills, as a safe haven – FSDH, a broker covering equity, fixed-income and money markets that received a merchant-banking licence in 2012, has grown the most since 2009 and offers money market funds to qualified retail investors. Qualified investors are those with over N20m ($126,000) in investable assets. Yet most of the investing public stood on the margins of the NSE in the three years since 2008. Although retail participation has started to rebound, its value remains less than 10% of total domestic investment, according to NSE figures. While the main commercial banks have curbed their overt exposure to equities through margin lending to affiliated stockbrokers, one of the main causes of the 2008 crash, they remain key domestic investors in bonds of corporates as well as federal and state governments.
“New prudential regulations requiring banks to either divest from subsidiaries or ring-fence securities trading from the bank through a holding company structure have reduced banks’ exposure to the equities market,” Layi Olaleru, Cordros Capital’s head of operations, told OBG. New rules from the central bank cap bank margin lending at 10% of total loans.
Greater interest has come from the pool of pension funds, which has grown rapidly from N1.8trn ($11.3bn) in 2010 to N2.45trn ($15.4bn) in 2011 and N3trn ($18.9bn) by year-end 2012, according to data from Stanbic IBTC, which runs the biggest PFA by assets under management (AUM). While PFAs are authorised by the National Pension Commission to invest up to 25% of AUM in equities onshore, they maintained a more cautious 10-11% exposure in mid-2013. “PFAs have shifted back into equities, but from a low base,” Samuel Sule, deputy manager of Stanbic IBTC’s debt capital markets division, told OBG. They are also able to allocate roughly N500bn ($3.15bn) to state and government bonds, according to Stanbic IBTC. While roughly 35% of combined PFA assets are invested in government securities, falling yields on Federal Government of Nigeria naira debt since its inclusion on JPM organ’s emerging markets bond index have encouraged a rotation into equities to some extent. Meanwhile, PFAs have shown interest in the launch of the first multi-asset-class mutual fund run through a joint venture between Sanlam Investment and Africa Capital Alliance. “Multi-asset-class mutual funds offer exposure to unlisted firms in a more diversified set of sectors that are closely correlated to the Nigeria growth story,” Steve Iwenjora, a fund manager at SIM Capital Alliance, told OBG.
LOCALS RETURN: Domestic investors have often shied away from contributing to the local markets, though this seems to be changing. “Local players who could potentially play a role in private equity provision in Nigeria choose not to, either due to a dearth of funds or the necessary skill set,” Ike Onyia, a director of business strategy and advisory firm Parsifal Partners, told OBG. The return of domestic investors has been sharpest since the start of 2013, when their market share in value terms rose from 44% in January to 51.3% in May and 57.3% by July. In turnover terms, local investment’s share of transactions fell from a high of 63.1% in January 2013 to 35.5% in April, before rebounding to 51.3% in May.
As the global sell-off in emerging market assets gained steam in June 2013, domestic demand kept the market from falling more than the 5.7% that month. Given the flat corporate earnings and dividends reported in the first quarter of 2013, increased local appetite was driven by a search for capital gains.
Meanwhile, the inclusion of government bonds on JPM organ and Barclays emerging market bond indices from August 2012 onwards encouraged a significant foreign inflow that drove down yields sharply towards 12% from 16% six months prior. While local institutionals maintained their positions in fixed income, having locked in higher rates, they have dominated most bond issues from corporates and state governments. Stanbic IBTC sees PFA-funded state government bonds as a structural shift in Nigeria’s capital markets.
DRIVING PARTICIPATION: With clear room for growth, the exchange’s management is planning to launch five new product classes in five years, having started with ETFs in 2011. Unit trusts, operated as open-ended vehicles by 43 collective investment schemes, remain marginal, with roughly $600m in assets combined in the fourth quarter of 2012, according to IMF figures. This included $279m in 20 equity funds, $62m in two money market funds, $31m in four bond funds, $104m in two property funds, $65m in 11 balanced funds and $38m in four ethical funds.
Real estate investment trusts (REITs) present strong potential, with the third N30bn ($189m) REIT launched in March 2013 by UACN Property Development following the very successful initial launch of Skye Bank’s Skye Shelter Fund. Yet more issuance has been hindered by disagreement between the Securities & Exchange Commission, which considers REITs a pass-through vehicle, and the Federal Inland Revenue Service, which sees them as taxable assets. This ambiguity is expected to be resolved soon.
While most of the new product types target institutional investors, the exchange is emphasising investor education and passive index-tracking ETFs as a means of boosting participation. The first ETF, launched in December 2011 by South Africa’s Absa Bank, part of the UK’s Barclays, has had mixed results. Triple-listed on the Johannesburg, Botswana and Nigerian exchanges, Absa NewGold ETF has nonetheless faced light liquidity given its high trading price of above N1000 ($6.30). “ETFs offer a balanced portfolio mix for investors: this is particularly attractive for retail investors and will expand participation in the financial markets,” Olaleru of Cordros told OBG. “They also offer a passive investment instrument for domestic institutional investors.”
In July 2013 ethical investment fund manager Lotus Capital introduced a domestic ETF that tracks the NSE Lotus Islamic Index. A more diversified listing than the highly traded stocks in banking, fast-moving consumer goods, breweries and building materials sectors of the Nigerian market, the index covers 15 stocks in construction, building materials, agro-industry and others.
Meanwhile, stockbroker Vetiva Capital is preparing the launch of its NSE30 Index tracker fund, although due to disagreement with Bloomberg on use of the NSE30 name the launch was delayed from January 2013. Other brokers, including Marina Securities, affiliated with Access Bank’s CEO Aig Aig-Imoukhuede, are also preparing ETF launches.
TRADING PLATFORM: The NSE has introduced a retail-trading platform for government, state, Asset Management Corporation of Nigeria and corporate bonds in a bid to drive retail participation in the fixed-income market. By dropping the minimum investment size to N10,000 ($63) for dematerialised bonds in February 2013, the exchange hopes to drive competition with banks’ deposit rates. But while larger banks may prove reticent to market such products, which offer higher returns than low-cost bank deposits, the exchange hopes larger brokers will drive outreach.
As the brokers’ market faces pressure to consolidate, both the introduction of a new NSE trading platform in 2013 and higher regulatory requirements will see brokers driven to compete for new clients alongside the main institutional investors. As important as these outreach efforts will be the supply of new listings to better reflect the drivers of growth in the economy.
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