Demand for Fixed Income Securities to Remain Strong – Meristem

Demand for Fixed Income Securities to Remain Strong – Meristem

Demand for fixed income securities will remain strong as investors restructure portfolio, Meristem Securities has observed.

The recent decision of the Monetary Policy Committee, MPC, of the Central Bank of Nigeria, CBN, to hold key rates has been generating mixed reactions from analysts and other market observers.

Analysts projected that fixed income space would remain appealing to investors as expected.

They noted that buying pressure has filled the market since the MPC voted to cut rates by 50 basis points, bps, at its meeting in March.

The firm said that consequently, the average Treasury Bills yield declined by 1.24% to 11.68% while the average bond yield dipped by 0.24%.

Many fixed income analysts are of the view that the fixed income market has remained attractive despite the decline in yields, shored up by weak investor sentiment in the equities market which pushed investors to restructure their portfolios to accommodate more fixed income instruments.

Meanwhile, the recent MTNN listing on the bourse has shown signal that would reverse bearish trend that had permeated the market space.

The firm said based on the announcement of the committee’s decision to hold rates, we expect activities in the fixed income market to maintain status quo.

Demand for fixed income instruments is expected to remain strong as investors seek to minimize reinvestment risks.

The efforts of the CBN towards improving credit to the private sector have yielded some positives, reflected by the 9.64% increase in credit to the private sector.

To further moderate credit risk, the MPC cited the need to speed up recovery of delinquent loans while facilitating consumer and mortgage lending as well as lending to key sectors in the economy: SME, Manufacturing and Agriculture.

Meanwhile, the committee commended the moderation of Non-Performing Loans amidst other financial soundness indicators.

The committee called on the CBN to provide a mechanism which would limit the access of banks to government securities, with a view to reduce the crowding out effect of the government and thus, to improve lending to the real sector of the economy.

The committee has consistently called on the CBN to intensify its efforts at improving credit to the private sector and some results have come to fore.

However, high NPL ratios in the banking sector has caused some of these institutions to trail a cautious path in improving lending.

“Nonetheless, we expect a moderate increase in credit, as new and existing policies yield desired results”, Meristem stated.

In the real sector, the manufacturing sector continued to show resilience, growing by 2.47% year on year in the first quarter of 2019 and accounting for 90.86% of GDP for the period.

This was achieved mainly due to favourable oil prices and relative foreign exchange stability, although paucity of credit to the sector, weaker consumer spending remains as major headwinds, along with a harsh operating environment.

The Security firm said; “We maintain our stance that to spur the pace of growth in the sector, there is a need for private investment to improve.

“Hence, the decision to limit the access of DMBs to government securities should encourage banks to increase lending to the sector, although risks to lending may temper the significance of this measure”.

“While the decision to retain the MPR at 13.50% will not significantly influence the expansion of the sector in the near term, alternative efforts to encourage bank lending to the sector as well as efforts to de-risk lending should boost the activities of players in the sector”, it added.

Read Also: Rising Inflation, Plunged Yields Ruffle Investors, Analysts

Since the last MPC held 26th of March 2019, the equities market has been largely bearish; unimpressive corporate earnings as well as the overall lack of investor confidence dragged the NSE-ASI to a year-low of 28,286.08pts on the 15th of May 2019.

The market however, saw a rebound in the week with the listing of MTNN, which spurred positive sentiment in the Nigerian bourse.

This, as well as bargain hunting on cheap counters have brought back renewed interest in the market.

As stated above, the renewed interest in the equities market is hinged on investors’ strong appetite for the newly listed stock, MTNN.

It is also instructive to note that 50bps cut in the MPR at the Committee’s last meeting barely moved the market.

Subsequently, we do not expect the latest decision by the MPC to alter the course of the equities market, analysts stated.

Demand for Fixed Income Securities to Remain Strong – Meristem