The Chief Executive Officer, Stanbic IBTC Stockbrokers Limited, Mr. Dele Sotubo, in this interview with DAYO OKETOLA, highlights factors that will boost the country’s bond market, among other issues
Stanbic IBTC Stockbrokers was recently appointed as the stockbroker to Federal Government bonds. What impact will this have on the bond market?
The appointment places the obligation on Stanbic IBTC Stockbrokers to provide the market with two-way quotes: bid and offer prices, on all FGN bonds listed and to be listed on the floor of the Nigerian Stock Exchange.
It positioned the company as the seller and buyer of last resort in all listed bonds. This means that there will always be a buyer and seller of FGN bonds on the floor of the Nigerian Stock Exchange daily. The appointment is Expected by stakeholders to lead to a more robust market for bonds, while opening up the market to retail investors.
Until our appointment, bonds were hardly traded on the floor of the NSE. The last time any bond transaction was recorded was as far back as the call over days. With our appointment, trading in bond has resumed on the floor of the exchange and as part of our role as the government stockbroker, we have embarked on awareness creation to mobilise interest in this segment of the market.
The first of the series was with stockbrokers whom we see as a sure link to retail investors. We intend to take this forward by having sessions with retail investors directly in the course of the year.
Can you expatiate on your role in the bond market, especially as it affects the average retail investor?
By our appointment, we provide an average retail investor the opportunity to buy FGN bonds with as small as N100,000.00. This was not possible before now as the minimum tranche a Primary Market Maker will deal is N100m. Also, retail investors had to hold bonds till maturity as there was no exit window prior to maturity. Stanbic IBTC Stockbrokers Limited provides daily bid and offer prices putting ourselves out as buyer and seller at any time. Investors are no longer forced to hold to maturity. Stanbic IBTC Stockbrokers Limited has been conducting market-wide, investor-education programme which is expected to continue.
Will this market-wide, investor-education programme enhance appetite for investing in bonds in the country?
There is no doubt about the appetite in bonds among corporate Nigeria but the move is to create the awareness and get the retail investors to develop the appetite for this asset class. The approach is to make them see the benefits in this asset class as compared to other classes they are already used to.
The major advantage of fixed income is the fact that it possesses the combined nature and benefits of equities and fixed deposit. Most investors do not currently understand the fact that there is room for capital appreciation like equities while returns, in terms of coupon payment, is guaranteed as in fixed deposit. Above all, performing our role as government stockbroker, retail investors are sure of an exit window in case they decide to exit from the investment before maturity date.
The Nigerian bond market has not been as popular as the equities market over the years. Do you see this changing anytime soon?
The idea is not to get bond to overshadow equities but to provide an alternative asset class for investors. The best practice is for an investor to have a diversified portfolio, which means that the portfolio must contain instrument from several asset classes. Once an average retail investor imbibes this investment culture, then investment in bonds will start taking it rightful position.
An interesting part of your role as a government stockbroker is that you will provide a two-way quote on FGN bonds. How does this mechanism work?
What this mean is that at any point in time, Stanbic IBTC Stockbrokers will have bid and offer price displayed in the market. These prices show the level at which we are ready to buy or sell that particular bond. Any buyer or seller is able to trade with us at the prices quoted.
Three to five years’ tenor bonds are quite popular among investors in the country. How do you intend to generate and build interest in the longer tenor bonds?
Expectations of reduction in the yield will drive investors to lock in on longer tenor bonds. Long term bonds have higher duration which shows higher risk that will be compensated by higher expected return as longer term bonds are more volatile. Investors also look at assets that will match their liabilities.
Many have expressed fears at the Federal Government’s aggressive bonds programme. They argued that it could affect businesses from accessing credit. Is this really true?
This might be true if yields are attractive. As yields become less attractive, banks which happen to be major investors in the FGN bond space will have to look for alternative assets to bond and this will create room for lending to real sector of the economy. However, with the lesson learnt from post market crash era, we expect to see a robust credit and risk management from banks in appraising credits.
Analysts have projected a fall in inflation this year to a single digit, which will likely depress already falling bond yields. How do you see this affecting bond patronage?
In line with the projection, inflation is already below 10 per cent mark and as this trend lowers, we expect yields to decline while bond prices increases. However, we do not see this affecting the bond patronage as capital remains preserved and return guaranteed. Investors’s preference is usually a diversified portfolio which will be achieved by investing part of the portfolio in bonds.
Do you think bonds will remain attractive as they were last year?
Our expectation is that the yields will not be as attractive as the levels they were trading last year but we still see a lot of interest from investors at current levels.
The International Finance Corporation recently raised about N8bn through a naira-denominated bond. What is your assessment of this; and what impact do you see it having on the bond market?
The IFC bond issuance further shows the confidence the investing world has in Nigeria economy. The bond issuance was successful and the bond has been listed on the Official List of The Nigerian Stock Exchange. On the account of this, and the inclusion of some of the FGN bond of globally tracked indexes, we expect to see more issuance from other supra national bodies.
What are your expectations for the bond market in 2013?
The growth projection for 2013 is expected to print lower than last year’s spike as yield projections are lower this year. The inclusion of FGN bonds in the JP Morgan Emerging Market Index last year was the first, which led to so much interest in bonds from both offshore and onshore investors. We think the Barclay’s Bank inclusion has been somewhat factored into the current pricing.
We expect a possible decrease in MPR in Q2 as a result of expected drop in inflation while remaining flat in Q3 and Q4 if there is continuous stability in the exchange rate; relative low federal government borrowing expected with parliament’s approval of a fresh $1bn euro bond and $7bn loans to facilitate the budget; inclusion of FGN bonds in the Barclays Bank Index; and inflation is expected to drop to single digit around 9.25 per cent and 9.50 per cent.