Ayodeji Ebo says growth expected in Q1, 2021
Although the Nigerian economy still struggles with stagflation and myriads other problems, it has technically exited recession with a 0.11 per cent growth in Q4, 2020 after two consecutive quarters of negative growth. In this exclusive interview with Nigeria Today’s Kehinde Sallah in Lagos, a financial analyst, Ayodeji Ebo, who heads Retail Investment at Chapel Hill Denham, explained that the economy is poised to continued growth momentum in Q1, 2021 and beyond. He also speaks on tackling inflation, investment strategies that will define 2021 amongst other issues. Excerpts.
What is your assessment of the Nigerian financial market?
The financial market started on a very high note for both the fixed income and the equities market. However, with the confirmation of the COVID-19 first case, which disrupted the projections, we saw markets for the equities dipping significantly to 5-year low in March, which prompted renewed investors interest. Looking at it from the fixed income market angle, we saw the moderation in yields as the CBN adopted a dovish stance.
As a result, we observed more interest from the domestic investors in the equities market and as at year-end, contribution of equity investors was as high as 64 per cent, which means that the domestic investors took control.
We saw the PFAs increase their stakes in the equities market from a low proportion of about 3.4 percent in March to almost -6.5 per cent as at December 2020. For the fixed income market, there was sharp decline in bonds yields, which was positive for the traders with position at double-digit rate when you view it from the capital gain perspective.
It was very positive and the low interest rate environment provided that opportunity for corporate to issue instruments in the form of corporate bonds and commercial paper. Close to about 1 trillion-naira worth of instruments were issued by the private sector in 2020 to refinance their existing loans at a cheaper rate thereby lowering their finance cost to boost their bottom line.
What are your expectations for the financial market this year, especially on the domestic scene?
For this year, we believe it should be the year of two halves. There is a new twist to it with the recent report on the Nigeria’s GDP showing that we are out of recession at 0.11 percent in Q4 2020. Therefore, we believe that this should affect the fixed income market as we expect yields in the fixed income market to sustain this upward momentum.
In addition, the positive growth rate provides the CBN with an opportunity to raise the benchmark rate, Monetary Policy Rate (MPR) as economy stabilizes. When you look at the equities market, we believe the positive GDP would be positive for the markets albeit, the downside risk remain the rising fixed income yield. We expect to see more traction as even fuller year results begin to trickle in which will drive the market in the interim.
Looking at the second half, we believe that as interest rate moves up and fixed income becomes more attractive, there will be less interest for the equities market. We are projecting a return of about 14 percent at the end of the year for the equities market. We feel that yields will attain double digits in 2021.
Are you surprised we are out of recession?
Yes, the economy moved out of recession quicker than anticipated. Analysts’ consensus was that Nigeria will exit recession from second quarter, but with the acceleration that we are seeing, we have achieved growth in Q4 2020.
So, we believe that the momentum would be sustained albeit, may be negative or marginal in Q1:2021 year-on-year due to high base effect-the quarter than preceded the COVID-19 pandemic, Moreover, there has really been no major disruption to activities in Q1:2021. Despite the second wave, it has been well managed, businesses are better positioned and more prepared this time around, hence consolidating on the growth in Q4:2020. That said, the focus now is how do we want to achieve the growth rate that is above population growth rate?
We know that pre-COVID, we were still struggling below our population growth rate level, which still shows that more people were going into poverty and Nigeria has been tagged as the poverty capital of the world. So, how do we want to come up with policies that will further accelerate the growth rate so that we can exit the 3 percent population growth rate at the end of the year?
If we look at the major sectors that are still down, the manufacturing sector that employs a lot, there is need for a deliberate, national development plan or a blueprint to unlock more value in that sector. The Agriculture sector came out strong boosted by, crop production sub-sector. Most of what we import are raw materials, and need to begin to add more values to them so that we can earn more from export. We believe that as we progress in the year, the main focus should be achieving a growth rate that is above population growth rate.
How disruptive would you say the pandemic has so far been for the investment space?
One of the ways it caused disruption was that it came unexpected, so a lot of businesses had to learn how to adjust to working remotely and also working with less capacity and that’s why you would see that the second wave didn’t really have much impact. Most companies had already adjusted, so, in terms of business disruption, companies realised that they could work and achieve more by working remotely, and as a result, some have reduced the space that they rent for their businesses. Some have moved to working from home and being able to coordinate their staff.
Therefore, it is showing that remote working may be here to stay and even if businesses return to normal, there is change of mentality of business owners that things can still run remotely or people can still run with less supervision. Therefore, it had its impact. You know, with the lockdown, when you look at some of those sectors that were impacted, transportation was significantly impacted by the lockdown but we see that with the gradual process, things will return to normal.
Looking at recent trends in the equities and fixed income space, where stock prices have been falling and yields rising, what would be the optimal strategy for investors?
The strategy for investors is going to be mixed. Therefore, the best things would be, investors need to create a portfolio, based on investment objectives and investors need to increase their appetite. Luckily, we have seen improvement in fixed income yields, but there needs to be a diversification. Therefore, we would advise investors based on their investment objective and risk appetite to create a portfolio. Their portfolio would have asset classes starting with the fixed income, can do some short-term fixed income instruments, in the likes of treasury bills, commercial papers and look at bonds, which will also give them consistent cash flows.
They can also look at the dollar-denominated instrument. In terms of dollar inflow, Nigeria is a mono-economy based on the proceeds of dollar from oil. Therefore, we believe that our FX crisis will persist and if we do not diversify, our FX earnings would continue to be challenged when there is a major disruption in crude oil prices.
Because of that, dollar-denominated investments in the likes of Euro bonds, dollar mutual funds will provide ideal investment opportunities. Some investors may also want to trade in foreign stocks.
They can also look at local equities, in some sectors that are positioned to do well this year. The oil and gas sector were seriously beaten because of the COVID impact. We expect that there should be improvement in that space.
If you look at the FMCG, with the low interest rate environment, they were able to raise capital to refinance and they have the ability to increase their prices though demand is coming, but the increase in price is compensating for that.
There are also the opportunities in the banking sector. They have always been able to navigate their way despite the challenges. This year, we thought it was going to be challenging, but with the improvement in yields environment, it will cover up for that gap. We believe that there will be opportunities within that space.
Lastly, the telecoms would also be a major sector to watch. We know that with the business disruption, working remotely has become a new norm and that has resulted to increased use of data. We believe that this new trend will also sustain yields in that space.
More so, we believe that the agric space will also sustain positive momentum.
What are the major things you expect to see in the capital markets this year? Are you expecting to see IPOs, increased capital-raising activities, etc.?
For the capital market, the expectation is that if interest rate remains at a considerable level, we will see more capital offerings especially in the fixed income market by corporate. However, if the yields spike significantly, that will not be encouraging for the private sector to issue instruments.
For the equities market, we believe that as the economy improves, some of the companies will become confident to issue public offerings, taking advantage of the e-public offer that the NSE has developed. That would help. We believe that this year we should see IPOs and for the fixed income, we believe if the rates are favourable, we should see more issuances from corporates.
What has been the importance of the pandemic to Investment risk management?
It further put investors on the alert because nobody foresaw the pandemic. It may not have been built into the model, but we all know that pandemic will always come and go.
For the monetary authorities, CBN was very proactive and provided conveniences for banks, which means it gave them a leeway to be able to manage this problem and not just book unnecessarily high amount of non-performing loans. They advised banks to restructure those loans and give moratoriums and that created some form of support for the banks.
For risk management, I think it is also for them to further tighten risk management and we believe that there will also have been lots of lessons from this that pandemic – that shocks can always come.
The recent restrictions of banks from facilitating cryptocurrency transactions in a time the SEC is seeking to regulate the asset has caused major reactions both within the country and abroad. What does this portend for our innovation as a financial hub in Africa and what is your view on cryptocurrencies, which seem to be gaining ground with some bellwether banks in developed markets?
My view will be that a lot of studies should be done or carried out on the cryptocurrency and see how it works. I think what CBN is trying to do is to also prevent money laundering, as well as to also protect investors.
I may not understand how the investment works, but I know the ban by the CBN cannot affect total investors’ interest in the instrument because there are other ways. It is not totally in its control.
What CBN has done is to ban companies that are directly creating those platforms. I would have preferred a word of caution to be put in place and also that banks should do their due diligence before opening account for technology platforms, but the banning of cryptocurrency exchanges, I feel might have been given much time before taking the action.
Looking at it from even the SEC angle, SEC is trying to review and study the instrument to see whether it can be admissible. Yes, it looks like a security but most times they are also trying to protect investors and get them to understand what they are putting their money into.
My view will be that further studies would have been done before placing the entire exchange on a ban but I do not see this move as stopping investment in cryptocurrency because there are other means that investors who wish to invest in cryptocurrency can go about it.
What is the impact of high inflation on wealth accumulation and what do you recommend for investors to do to protect their wealth?
We know Nigerians are lamenting the impact of inflation. When you look at January inflation at 16.47 percent, the major culprit is food inflation, which is above 20 percent. We know the current challenges the sector is going through. It is a surprise that the agriculture sector improved in the recent GDP report but we all know the security problem is a major risk to our food production, which will now impact on the headline index.
That’s why some investors need to change their perspective in terms of investments. Even if you are unable to invest based on the above inflation, you need to look for investments based on your risk tolerance level. You need to look for investments that will help you reduce that gap. That’s what the focus should be, because if you continue to just invest with very low interest rate, then it means that your purchasing capacity will continue to be eroded.
Putting it into perspective, if you look at inflation rate at 16.4 percent, it means your N1 million today will be worth just about 600,000 in the next one year if it continues at this same pace or we can say your 1 million last year is worth just six hundred and sixty something thousand naira today.
What you can buy has reduced. What do you need to do to increase so you don’t just put your money in a savings account where you are earning just 1 percent when inflation is 16.4 percent? You need to leave your comfort zone, try to see even if you can’t do commercial paper, can you do mutual funds if that will give you 2/3 percent. Can you look at stocks that will give you yields of about 8/9 percent? In essence, all efforts should be towards bridging that gap. I won’t say you can cover the gap but that should be the major focus.
For Nigerians generally, what do you think the government should do to cushion the effect of inflation?
We need to do two major things. We need to first increase our food production. The government reopened the border. Therefore, we believe that we will begin to see some form of moderation. However, if we do not tackle insecurity, it can lead to food insecurity too.
With the farmers/herders clashes that is now spreading to the south-west, it will affect planting period.
If we are unable to plant well now, it means there is nothing to expect. If government does not tackle that insecurity, then we will not see improvement in food production, which will then affect food prices.
The second one is on foreign exchange, FX. We believe the increase in crude oil prices should enable the CBN increase supply of the greenback. However, we need to see convergence in the exchange rates as that will help create some form of stability.
To bring down inflation, we need to increase production. If we are able to increase production, that will bring down prices, and then we will see inflation coming down. As I mentioned earlier, we expect that inflation should begin to moderate as we come to third quarter of this year.
The AFCTA has kicked off effectively. What impact do you expect this would have on the Nigerian Economy?
It should be positive for Nigeria. However, I believe we need to be deliberate in repositioning the economy to enjoy that benefit.
Currently, many small and medium scale enterprises are not aware of this opportunity. They are not aware of how to tap into it. Therefore, there needs to be a lot of awareness in that space. We must create that enabling environment and process what we are exporting to other African countries, which is the major market.
We know the infrastructure challenge will still be there because there needs to be that smooth export and that is going to happen between the medium to long term. We are not going to see any major infrastructure projects done now.
What we have seen is that gradually it is going to create more markets for Nigerians. Some of our goods are not up to standard and may not meet the European standards, but some of the neighboring countries will still appreciate the quality. Therefore, it is a great market for us.
The government should now see how they want to support. Banks can also begin to look at how they can support with finance. Now that we have a market, can we build more capacity within that MSME space and begin to fund once we know they are a well-driven market? Can we sponsor trainings for SMEs to create awareness around where those opportunities are so that they can begin to channel their businesses towards that side and make their businesses more profitable? I think those are the areas to focus on. Overall, I think it’s going to be positive for Nigeria to be deliberate to take advantage of it.