Nigerian markets are moving to the next level –GTI

GTI Capital has said that equity derivative would signal Nigeria markets are moving to the next level. The firm in its note said that a recent IMF report highlighted the need for Nigeria to diversify its economy away from oil and gas.

The report outlined deficiencies in the economic environment which “are dampening long-term foreign and domestic investment and keeping the economy reliant on volatile oil prices and production”.

According to GTI, The benefits of diversification from an oil-based economy to one with a greater breadth of markets and participants will require advanced domestic financial markets. As Nigerian exchanges mature, inevitably derivative instruments will become an integral part of this development.

According to experts, a derivative instrument is a financial product with a market value that is derived from an underlying asset or basket of assets. Derivatives can serve as a risk management instrument as well as a leveraged vehicle for speculators.

However, the availability of derivatives will inevitably increase international capital flows and deepen Nigerian financial markets. Analysts observed that many Government policies have been directed at promoting the agricultural and mining sector.Read Also: Equities Investors Gain ₦37.8 bn as Stock Market Opens Positive

“It has become recognised that derivative instruments will play a key role in the expansion of domestic commodity markets. Derivative instruments have also been introduced to help in dealing with uncertainty and volatility inherent in the domestic currency markets”, GTI reckoned..

“To this end, FMDQ has been offering derivative instruments based on interest rates and currency to Nigerian financial market participants. These initiatives are laudable and should be supported by the financial services community”, GTI report noted.

It also observed that Up to this point, the focus has been on foreign exchange, interest rates and commodity-based derivative instruments. These are all vital components of a functioning market economy, but the one area with little or no discussion is equity-based derivatives.

An equity derivative is a class of derivatives whose value is derived from one or more underlying equity securities. The most common equity derivatives are options and futures.

Inflows of portfolio investment from foreign investors are key to the growth and development of Nigeria’s domestic economy. However, the IMF reports that “Non-resident holdings have been rising … but started to reverse recently… Record stock market gains have been wiped out in 2018 amidst increasing portfolio outflows.”

Any additional financial products offered by the Nigerian Capital Markets which would help counter the outflows should be explored. What has been overlooked is the attraction of equity-based derivative instruments to international investors. A functioning equity-based derivatives market will provide additional risk management capabilities to market players and help to promote more active participation of foreign investors in the Nigeria equity markets.

According to the Bank for International Settlements, “Only 10% of global derivatives turnover is in contracts denominated in the currency of an emerging market economy (EME), much lower than the share of these economies in global GDP or world trade.”

Clearly, the potential for growth in derivatives for emerging market economies is enormous. The current initiatives by various Nigerian financial market participants in this sector are very promising and GTI can provide additional expertise to help bridge any gaps.

Financial services firms, as well as Nigerian corporations interested in discussing how they can hedge their investment portfolio, derive additional income from their existing equity holdings or use derivative instruments to speculate on Nigerian stocks can contact GTI. Nigerian markets are moving to the next level –GTI