November 14, 2016
The Deputy Group Managing Director of Meristem Securities Limited, Sulaiman Adedokun, speaks on the state of the capital market, among other issues, in this interview with STANLEY OPARA How would you rate the performance of the capital market this year? The capital market is a demand-supply relationship for investment and capital. The performance can therefore be better reviewed along the line of capital availability (such as savings, pension system, Foreign Portfolio Investment, law, and so on); investment opportunities (market capitalisation, number of firms, among others); and the macro-environment (the Gross Domestic Product growth, Gross National Income Index, population, political commitment, corruption). The performance of the capital market so far has been a bag of mixed fruits. The bond market has enjoyed a high yield environment with average yield increasing from 10 per cent at the beginning of the year to 16 per cent in October. So, in terms of income stream, the bond market has been very positive. However, given the inverse relationship between yield and prices, bond portfolio valuations have taken a hit. On the other hand, the equities market has been tempered with a year- to-date loss of 4.06 per cent and the level of risk aversion is evident in the 95 per cent gain in the New Gold Exchange Traded Fund. This market underperformance is a reflection of the headwinds in the broader economy, recession, inflationary and exchange rate pressures, high unemployment and underemployment, trade deficit, fiscal fragility and others. The NASD Over-the-Counter market has shown some resilience with a gain of 7.9 per cent in 2016. The OTC market is getting deeper with more admitted securities, and corporate disclosure has been improving. When, in your view, do you see the market rebounding? The economy should begin to emerge from the trough when net export recovers and government spending ramps up with significant multiplier impact on consumption and investment. At this point, we expect monetary policy to switch to an expansionary stance to solidify the gains. As the economy recovers, the equities market is expected to amplify the signals as it typically does at initial recovery phase of the business cycle. Earnings are key drivers of the equities market performance, and as the macro headwinds dissipate, corporate scorecards reflect same and the investors respond appropriately. Market rebound will also have to ride on strong demand, which should outweigh supply. The investment import of this cycle is that those who will emerge with strong return outperformance will not wait until the recovery is apparent before taking investment decisions. What is your ideal model for increasing domestic participation in the market? There is no perfect model for increasing domestic participation in the market. Each has its pros and cons. Although I pitch with the retail strategy, there should be a good compliment of institutional investors so that shocks are not easily amplified and do not unnecessarily persist in the market, which is the case for a retail-dominated market. The power of the retail market segment is enormous; there has