The volatility in the financial markets has seen investors taking a flight to safety in a bid to get more returns, or at least reduce their losses.
Apart from events in the international arena which have compelled local investors to assume a cautious approach, developments in the local scene have only amplified that mode.
The benchmark monetary policy rate (MPR) was raised 275 basis points to 12 per cent in October, for the 6th time this year, while the cash reserve ratio of banks was doubled to eight per cent. Also, the Central Bank of Nigeria (CBN) is already contemplating devaluing the naira in a bid to halt the depletion of the foreign reserves and to price the currency more appropriately, rather than defend it at an inauspicious level. The continuous tightening of monetary instruments and the liquidity squeeze that followed has ensured that financial market players trrad the market with cautious optimism.
This can be seen in the behaviour of the stock market in the last few months and the converse movement of indices at the bond market. The stock market opened the year at a market capitalisation of N7.912 trillion with index at 24,770.52. This was after reaching N8.52 trillion at the end of the week ended February 11, 2011. Since then, the performance indicators have seen capitalisation dropping to N6.4 trillion and index to 20,311.51at the end of trading last week.
The pull factor
“The attractiveness of the fixed income market would continue to act as a pull factor away from the equities market,” stated analysts at FSDH Securities Limited, a Lagos-based securities and advisory firm. They also attributed the preference for fixed income instruments to the unresolved sovereign debt crisis in the Euro area which has increased the apathy for risk in equities by global institutional investors. These developments have potential negative impact on domestic liquidity conditions and pose renewed threats to price and exchange rate stability.
Indeed, the bond market has become investors’ delight, in the wake of market volatility. This is more so with the exchange rate’s fluctuation which has become a challenge to the regulators. As the CBN struggles to manage inflation and exchange rate’s stability, including the interest rate, investors are watching on the sides and moving their funds accordingly. Bonds, treasury bills and other money market instruments provide a more stable and reliable investment outlet at this point.
With the latest inflation figures put at 10.5 per cent in October, and the liquidity mop up embarked by the CBN, investors will still find the bond and fixed income market attractive and a safe haven to patronise. For instance, while the equities market traded 24.3 billion shares worth N159.1 billion in 326,515 deals in the second quarter, transactions on the Over-the-Counter (OTC) bonds market indicated a turnover of 3.51billion units worth N4.7 trillion in 14,417 deals during the same period.
It is therefore no surprise that bond auctions has always been oversubscribed as mostly institutional investors throng the auction for safety. “The FGN bonds had consistently enjoyed market players’ patronage due, largely, to the fact that bonds often provide a hedge against interest rate fluctuations and are generally regarded as safe investments,” stated the CBN in its second quarter report.
The regulator noted that the need to ensure tradability of the bonds along the yield curve, especially at the short-end, also influenced subscription. At the last bond auction last week, the subscription was for N152 billion even though the Debt Management Office (DMO) opened the bid for N65 billion 10-year instruments in two tranches. Since last month, the DMO have issued bonds of N630 billion.
Also, the uncertainty about the state of the naira has triggered a speculators’ market as traders take position, in anticipation of a devaluation of the currency. This explains why all the measures put in place by the CBN to dampen dollar demand and to discourage speculation have met with little success.
The result is that the regulator is in a struggle sometimes to even meet a third of the dollar demand, in the face of achieving a balance in monetary and fiscal strategy.
Many now see the dollar as a safe investment outlet, and so are putting up bids at the currency auction, even when there is no immediate need for it. “Given the highly inelastic demand for imports, it is doubtful that increasing the cost of dollars will significantly reduce quantity demanded. Indeed, genuine demand would be compounded by high levels of speculative demand,”
said the CBN governor, Lamido Sanusi, at the end of the emergency MPC meeting last month.
With investors still hurting from the stock market crash from its level in 2008, and the fact that authorities have yet to take any decision that would have direct positive bearing on the capital market, investors will continue to trade with caution and pull their funds to where there is guaranteed maximum returns.
For this, the stock market would continue to suffer, as according to Bismarck Rewane, Chief Executive Officer of Financial Derivative Company Limited:“The equities market is likely to be negatively affected by the attractive yield currently on the money market instruments.”