Investors appear to be showing increasingly less appetite for fixed-income securities as Nigerian equities continue to sustain double-digit lead ahead of the most attractive fixed-income securities.
Nigerian equities opened yesterday with average year-to-date return of 42.2 per cent, still showing positive return after adjustments for inflation rate and interest rate. Inflation rate stands 16.10 per cent while the Monetary Policy rate (MPR)-the benchmark for interest rate, is 14 per cent.
Domestic sovereign bond issue by the Federal Government has seen declining participation over the past five months, in spite of gradual increase in the coupon rate or interest rate. The Federal Government had in March 2017 introduced the Federal Government of Nigeria (FGN) Savings Bond (FGNSB) to woo retail investors to the sovereign debt market and deepen capital formation. The minimum subscription was fixed at N5,000 while the maximum was pegged at N50 million.
With a fixed quarterly interest payment of above 13 per cent, the FGNSB offers guaranteed return. With equities on the downtrend in the first quarter, the FGNSB had been hailed as a highly attractive investment.
But a report by FSDH Merchant showed that subscription to the FGNSB has been on the decline since the first issue in March. The amount allotted has dropped consistently from N2.07 billion in March 2017 to N400.57 million in July 2017. The total number of investors in the FGNSB has also dropped from 2,575 in March 2017 to 779 in July 2017.
However, the coupon rate on the two-year FBNSB, which was 13.01 per cent in March 2017 had risen to 13.39 per cent in July 2017 while the coupon rate on the three-year bond, which was 13.79 per cent in April, the first time a three-year bond was issued, had risen to 14.39 per cent in July 2017.
Between March 2017 and July 2017, a total amount of N5.15 billion was raised through the FGNSB. The highest amount allotted so far was N2.07 billion in March 2017 while the lowest amount was N400.57 million in July 2017. The coupon rates for the August 2017 offer are 13.535 per cent and 14.535 per cent for the two-year bond and three-year bond respectively.
FSDH pointed out that the August FGNSB bond issues carried higher coupon rates than the July issues and represent the highest coupon rates since inception.
“The persistent increase in the coupon rates has not attracted enough subscription to the bond despite the steady decrease in the inflation rate in the country since January 2017. One of the factors we can attribute to this development is the rally that dominated the equity market in Nigeria since the introduction of the bond in March 2017,” FSDH stated.
According to analysts, the rally that has dominated the equity market in Nigeria since the introduction of the FGNSB has been a major factor for the low participation.
Analysts noted that low awareness of the benefits and characteristics of the bond; its low liquidity at the secondary market and the high yield on the Nigerian Treasury Bill (NTB) are other factors responsible for the low participation.
With the benchmark index at the NSE indicating average return of 51.47 per cent between March 01, 2017 and August 9, 2017, many retail investors appeared to have diverted funds to the equity market to take advantage of capital appreciation.
Investors in Nigerian equities had netted N902 billion in capital gains in July 2017 as expectations on corporate earnings reports and improved macroeconomic outlook boosted the market to its highest performance in more than 31 months.
Aggregate market value of all quoted equities on the NSE closed July at N12.354 trillion, representing an increase of N902 billion on N11.452 trillion recorded at the beginning of the month. The All Share Index (ASI)-the value based common index that tracks share prices at the Exchange, also indicated a month-on-month average return of 8.23 per cent to close the month at 35,844.00 points as against its opening index of 33,117.48 points for the month.
The average year-to-date return for the seven-month period stood at 33.37 per cent. This implied that investors have so far earned N3.11 trillion in capital gains over the seven-month period.
Aggregate market value of all quoted equities and the ASI had opened this year at N9.247 trillion and 26,874.62 points respectively.
The July rally further consolidated the performance of the equities market and set the second half on an upswing after equities netted more than N2.2 trillion in capital gains in the first half of the year.