Interview : Kayode Akinkugbe
How can retail trade be encouraged and investors brought into the market?
AKINKUGBE: Retail investors are generally risk averse during market downturns, owing to their experience in the domestic credit market. Many have made ill-informed investments based on promises of specific returns that brokers failed to deliver.
In the long term the market needs these investors alongside its institutions, but a fair bit of work must be done to attract them, including raising awareness of the risks, encouraging investment through collective schemes, deepening the list of issues, easing public access to regulators, facilitating portfolio transfers, and reducing know-your-customer hurdles by adopting a bank verification number as a credible identifier.
What is the outlook for the activity of foreign portfolio investment (FPI) in 2019?
AKINKUGBE: Nigerian Stock Exchange data shows that FPI participation decreased by 65% from June to July 2018 and accounted for just 24% of July’s turnover in equities. This lacklustre activity is largely seen across other emerging and frontier markets. Owing to liquidity, frontier markets usually feel the headwinds later and to a lesser extent than many emerging ones.
Nigeria is a good case in point: FPI has generally stayed away from its equities market, and we believe this trend will continue until after the elections, barring any major positive catalyst. In addition to this, investors in both equities and fixed-income portfolios are closely monitoring the position of liquidity in the foreign exchange window at present.
The central bank is providing foreign exchange to smooth exits from the market, and while this depletes reserves, the oil price recovery is slowing this drawdown. If investors begin to sense scarcity at the window, we could see a major FPI pullback. As of the end of August 2018 reserves provided a healthy buffer, equivalent to about 10 months of import cover.
How is investor confidence in the mergers and acquisitions (M&A) market expected to develop?
AKINKUGBE: We see numerous opportunities in the M&A space in the coming years. In the oil sector, we highlight forward and backward integration strategies, as well as the possibility of a bidding round on marginal fields. In insurance, we expect regulatory-driven activities to help move industry players through the tiers to their desired positioning. Turning to power, investors may be looking to acquire or sell distribution and generating assets, as the five-year lock-up period that followed privatisation ended in November 2018. Lastly, the federal government, through the Bureau of Public Enterprises, is administering a programme of asset sales, including Yola Disco, Afam Genco, the Calabar Free Trade Zone and the refineries of the Nigerian National Petroleum Corporation. Investor pursuit of these opportunities, however, is likely to be constrained by a wait-and-see stance in anticipation of the 2019 elections.
What role do bonds play in financing infrastructure and enhancing market liquidity?
AKINKUGBE: Bonds play a crucial role in infrastructure financing. Well-structured bonds pool liquidity from domestic and foreign institutional investors, including pension fund administrators. A typical structure would see a three-year commercial bank loan provided to the developer in the development and construction stage. Once the asset is delivered, the loan is refinanced via a long-term bond. This helps de-risk the project and enhance debt capacity, ensuring that only assets that are generating cash flow are placed in the bond market. A funding alternative is a zero-coupon bond, which is refinanced with a coupon paying structure once the project starts to generate cash. In a few cases a third party services the bond, such as the N100bn ($323.3m) in sukuk (Islamic bonds) that the federal government issued in 2017.
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