- Investors to target dividend yield against capital appreciation
The government in a bid to stimulate growth in the real sector of the economy crashed the rates in the money market and fixed income space about the last quarter of year 2020. Due to the low yield environment in the bond market and money market as at then, investors shifted attention to the equity market in search for superior returns; and that was responsible for the bullish run in the equity space to the tune of returning up to 50% in 2020. Then in year 2021, rates in the money market and bond market began to improve. At that, investors began to move their resources back to the money market and bond market from the equity market.
At the last bond auction by the DMO last week Wednesday, the yield went as far as 11.8% which is very attractive; hence there is capital flight from the equity market into the bond market due to the attractive yield.
Capital market experts pointed out that current downturn in the equity market is as a result of policy reversal by the government. The initial drive to stimulate the real sector of the economy by crashing the rates in the money market and fixed income space has been altered as rates were increased to woo investors in order to raise funds to finance the deficit budget of about N5 trillion.
Commenting on the current market mood, Uthman Olubodun (AAT, ACA, ACS), Investment Manager of NLPC PFA Limited stated thus:
“One of the major cause of the market down trend is policy inconsistency. Prior to this period, the Government wants to drive growth by crashing rates. So when rates went down; yield on bond went down, money market rates went down and Treasury Bills went down. So many institutional investors and private investors took solace in the equity market. At least for a long time we saw domestic investors outweighing the foreign investors in the equity market. For a long time, the percentage of equity investors outweighs that of the foreign investors. These are monies coming from institutional investors which is a good development”.
“Unfortunately, now we are beginning to see a kind of policy reversal. Probably to finance the deficit budget, the government is trying to make yield attractive. As at January, Treasury Bills auction ended at 2%, but last auction was around 4% or 4.5%. Last bond auction went as far as 11.8% from about 7%. So people are beginning to dump the stocks in order to take position in a high yield bond. So that is the issue with this environment- policy inconsistency. Today you want to drive growth, tomorrow you want to finance deficit budget”.
“The government decided to borrow to finance deficit of about N5 trillion in this year’s budget. So people are beginning to dump the equity stocks to take profit; then the money is now going to the bond market because the yield is very attractive now. 11.8% is the last yield at the last auction and that is the standard for the secondary market. Whatever happens in the bond auction is a template for negotiation in the secondary market”.
The bearish trend will continue; who knows anything can happen. But I don’t see bullish run in the short term because people are still not comfortable with equity investment. People will prefer to invest their money in an instrument that will give them stable return.
Due to the huge appreciation in the bond market, many PFAs mark to market their bond instrument. So in order to curtail the risk of volatility of pension’s money, PenCom issued a circular that restrict the amount PFA can invest and deadline has been given. So a lot of PFAs are now selling bond in order to achieve that target percentage. So that forces of supply versus demand in the bond market is another factor that is driving yield up. When people are selling; a lot of people want to sell and few people want to buy, price will go down. There is an inverse relationship between price and yield. So as price is going down, yield is going up. And has yield is going up, institutional investors are beginning to take position. So somebody that has money in the equity market would want to take profit and enter the bond market a good yield in a stable market.
A whole lot of the PFA money seems to have found its way into the equity market; so people are beginning to take profit to enter the bond market that has attractive yield.
The sell pressure by PFAs in the bond market in order to meet target by PenCom is responsible for increasing yield. Because, supply as outweigh demand, so price is crashing and yield is going up and people find it more attractive. That is why the equity market is on the bearish run. People are taking position in an attractive bond yield.
Once you seal an investment in the bond market, it remains for the tenor of that bond. It does not fluctuate unlike equity market which is characterised by gain today, loss tomorrow.
What thrived the bullish trend in the equity market is because of the low yield environment. And now that yield is reversing, many people are pulling out of the equity market to take position in the bond market.
What is the way forward?
The Chief Dealer of Global View Capital Limited, Aruna Kebira pointed out that the government might come with another shocker tomorrow that might tilt to favour the equity market.
According to Mr Kebira: “Things are working well in the country. Nigeria just exited recession in Q4 2020, oil price is now $64 per barrel and dividend are beginning to roll into the market”.
“Going forward for the equity market, capital appreciation may be hard to come by. So what investors should look forward to is the dividend yield.
For instance, UCAP has declared 70 kobo dividend. Relative to its current share price of N6.25, dividend yield be over 10%. It is that yield investors, should look for, not capital appreciation. The market might drive it to N7, but it might not stay at N7 before it is marked down”.
For Zenith Bank. I am sure they can pay N2.70 as final dividend to make a total dividend payment of N3 for a stock that is less than N30. There is away the market can make the stock rally so that your cost of acquisition could be offset”.