- Mr Olatunde Amolegbe is an expert in Investment Banking, Corporate Finance, Asset/Portfolio Management, Securities Trading and Investment Analysis & Research. He was also the former CIS President and the current Managing Director of Arthur Steven Asset Management Limited.
- In this interview with Nairametrics, he speaks on issues bothering on capital market and other challenges in the nation’s economy.
- Enjoy the conversation.
Nairametrics: How do you assess the Nigerian economy since the beginning of the year?
Mr Olatunde Amolegbe: So far, one of the major economic indicators that have remained positive is GDP, which has been growing for eight consecutive quarters since Q1 2021, indicating that the Nigerian economy has solid growth potential.
However, a comparison of annual growth rates revealed that the economy is already slowing, as annual growth in 2021, which was 3.40%, has now slowed to 3.10%.
When one examines the GDP figures for the four quarters of 2022, it is clear that the manufacturing sector contributed to the slowdown in GDP in Q3 2022 as the sector experienced negative growth as a result of obvious reasons such as foreign exchange volatility, which made importation of essential raw materials expensive, and rising energy costs as a result of the full impact of rising energy prices caused by the Russian-Ukraine war and with the naira crunch witnessed and fuel scarcity lingering, the GDP might be impacted negatively.
Other economic indicators, such as inflation, have not been impressive, eroding the purchasing power of the general public. We have also not seen a significant improvement in the exchange rate, despite the central bank’s efforts to manage it; it has remained consistent in the range of N412.49-N460.06 since January 2022 to date, which has impacted FPI and FDI, which is largely attracted by exchange rate stability, which has dropped significantly.
The country’s foreign exchange reserve has also been depleted, falling from around $39.65 billion in April 2022 to $36.70 billion in February 2023, reducing the country’s import cover to about 7 months. Other macros can be considered, but time is limited. However, for lack of a better word, the macros are not looking promising so far.
Nairametrics: What is your take on the investment landscape in the country?
Mr Olatunde Amolegbe: In my opinion, the investment industry in Nigeria has enormous potential because the country lacks fully developed investment products that exist in developed markets. I must commend the SEC and the NGX for making significant contributions to the market’s investment product offering by introducing derivatives and securities lending, among other things.
Furthermore, the Securities and Exchange Commission has been a big advocate of crowdfunding and blockchain, while the exchange is talking about creating a technology board to attract fintech, which is a rapidly growing industry. Furthermore, the Chartered Institute of Stockbrokers is raising investment awareness by encouraging universities to start awarding degrees in securities and investment.
All of these developments, when completed, will have a positive impact on the investment landscape. The product deepening will provide investors with a variety of products to choose from, and the efforts in training professionals and sensitizing investors will increase their knowledge of the industry.
Nairametrics: What are the challenges faced by investment banks and stockbroking in Nigeria?
Mr Olatunde Amolegbe: One of the major challenges faced by stockbroking companies is the direct impact of the volume of activities in the stock market. There was a time when the market was very active and many stockbrokers benefited from it, but with the low participation in the market, which bred lower transactions, most firms are barely trying to survive and still have to pay huge subscription fees and also have to comply with the regulators’ standards, which are also monetary.
Another trend is the transformation of banks into holding companies with stockbroking and pension arms, which frequently give the majority of their business to their subsidiaries at the expense of independent brokerage firms, such as Arthur Steven. Another pernicious myth is that pension funds should give transactions to independent brokerages or increase their exposure to the equities market.
While it is acceptable for banks to transition to a holding structure, regulators should also consider independent stockbroking firms because this may result in their crowding out despite their crucial role within the market architecture.
Nairametrics: What are also the prospects of fund management in emerging economies like Nigeria?
Mr Olatunde Amolegbe: I have high hopes for the asset management industry, given the dramatic shift from high net worth individuals (HNIs) to one that has been democratized with the introduction of collective investment schemes (CIS), which has become the toast of many retail investors regardless of their level of wealth.
According to one report, the industry’s Asset Under Management grew by 29% CAGR between 2016 and 2022, and I expect the industry to grow as a result of efforts to deepen investment product offerings by domesticating some of the offerings in developed markets.
Furthermore, as the population of tech-savvy investors grows, the deployment of technology in the industry is beneficial to the industry’s development.
Nairametrics: Most portfolio managers don’t look at retail investors rather they target high-net-worth investors what structures do you have in your organization to encourage retail investors as regards mutual funds?
Mr Olatunde Amolegbe: We are interested in investor education as an organization because we have discovered that HNIs and institutional investors will do the volume but rarely provide the frequency (buying and selling frequently) that retail investors, due to their large pool, usually provide.
With this in mind, we embark on a series of webinar sessions, social media publicity, research team engagement with retail investors, and real-time information dissemination to spur retail investors’ interest. We also have products such as The ASAM Heritage Fixed Income Portfolio and The ASAM Prestige Equity Portfolio that enables retail investments to accumulate wealth at a very good rate of returns.
Besides our online trading platform, ASAM ETRADE enables investors to start their investments with as low as N5,000.
Nairametrics: What factors do you think account for what will make investors come to the market or stay away from the market?
Mr Olatunde Amolegbe: To answer this question, we must consider it from two perspectives: market trust and monetary expectation. To begin with, it is an open secret that the capital market has gone through a dark period in which public offerings were the in-thing, with investors massively subscribing to the offer, eventually leading to the loss or significant reduction of their investment.
This has bred distrust in the market among older investors, and despite the Securities and Exchange Commission’s various initiatives to help sanitize the market, particularly with the transition to the electronic era, the number of Nigerians investing in the capital market remains low.
To attract more investors to the market, we must continue to educate old and disgruntled investors, existing investors, and potential investors about the market.
On the other hand, the economy’s performance attracts investors to the market. Inflation, the exchange rate, and interest rates, to name a few, all have an impact on the market.
An example that resonates well is the participation of foreign investors in the market; in February 2022, the percentage of participation of foreign investors in the market was 25%; in February 2023, the participation had dropped to 10% as a result of the economy’s performance, particularly the volatility of foreign exchange.
In general, the market is driven by expectations fueled by the current state of affairs in the country, industry, or firm, as the case may be. So if we were to fix some of these issues and we were able to raise FPI participation back to say 30% you can imagine what that can do for market momentum
Nairametrics: What is your take on the investment landscape in the country amidst the 2023 general elections and interest rate hikes?
Mr Olatunde Amolegbe: My outlook for the investment industry remains positive. Our research team conducted a historical analysis of the impact of elections on the equities market in the previous two election cycles, specifically 2015 and 2019, and it was discovered that the equities market closed negatively in both pre-election and election years.
For example, the All Share Index (ASI), the broad index and market barometer, closed at -16.14% and -17.36% in 2014 and 2015, respectively, while the same scenario repeated itself in 2018 and 2019 when the index closed at -17.18% and -14.60%.
However, in 2022, the market deviated from the trend by posting an eighteen-day rally in Q2 2022 and another eleven-day rally in Q4 2022, propelling the market to close positive at 19.98%, a clear deviation from the norm.
Even as the election approached, the equity market remained positive, indicating that investors were unperturbed about whoever won because the three main candidates were expected to have learned from the shortcomings of the incumbent administration and they were all pro-market in their approach as discussed in many quarters.
With the election of Asiwaju Bola Tinubu as president-elect, we expect him to assemble the best economic team to help salvage some of the major economic metrics that will reassure investors. We also expect the administration to continue the Buhari administration’s infrastructure strides, and given the president-elect’s track record of encouraging public-private partnerships, we expect this initiative to attract foreign direct investments.
I expect investors to react mildly to the interest rate hike because previous hikes had little impact on containing inflation. Investors, I believe, will be indifferent to the interest rate hike.
Nairametrics: Do you think the offshore listing being embarked on by some companies has a direct impact on the Nigerian economy?
Mr Olatunde Amolegbe: From the company’s perspective, the firms listed outside their home country benefit from the attraction of international attention to a company’s products and services which gives them access to new markets, increasing brand recognition, and of course, the opportunity to raise money in foreign currencies to boost its operations.
However, many of these companies may suffer a decline in share prices as the business model might not be understood by international investors thereby impacting investors’ perception towards the stock.
Since offshore listing provides Nigerian firms with to access international capital to finance operations and most importantly expansion such will have an impact on employment, production and government revenue.
Nairametrics: What are the challenges people face with getting dividends and why do unclaimed dividends remain high?
Mr Olatunde Amolegbe: As I previously stated, we are committed to investor education at Arthur Steven Asset Management (ASAM), and one of our webinar sessions addressed the issue of unclaimed dividends extensively, bringing in two professionals from the capital market’s largest registrars.
In my opinion, identity issues have made it difficult for some investors to regularise and harmonise their accounts; low awareness of market developments such as the transition to e-dividend on the path of investors while on the path of the capital market include infrequent publicity and administrative bottlenecks to name a few.
Nairametrics: Has the exchange rate policy by the Monetary Policy Committee (MPC) in any way boosted the Nigerian capital market and the economy?
Mr Olatunde Amolegbe: To answer this question, we need to look back at Foreign Investors’ Participation in the Equities Market to see if the exchange rate policy has worked or not.
In 2014, foreign investors’ participation outpaced domestic investors; by N1,539 billion Vs N1,137 billion, indicating that more foreigners participated in the market when the exchange rate was around N164.88/$1 compared to N379 Vs N1,945 in 2022 when the exchange rate was N423.72/$1.
The sharp drop is clear evidence that the exchange rate is a significant determinant of capital market performance. According to the numbers, the forex policy had little impact on the capital market because the naira continued to depreciate, scaring away foreign investors.
Furthermore, using foreign direct investment as a yardstick, data from macro trends show that in 2014, foreign direct investment inflows were around $4.69 billion, but by 2021, they had dropped to $3.31 billion after reaching a low of $0.78 billion in 2018, the lowest since 1998.
This also shows that foreign exchange volatility is a major issue, keeping foreign investors away from the Nigerian economy.
Nairametrics: On a year–on–year basis, the headline inflation rate In February 2023, was 21.91%, what are your projections for the end of the year and what do you think will be done by the authorities to bring about its reduction
Mr Olatunde Amolegbe: To begin, it is necessary to comprehend the nature of the country’s inflation. In my opinion, we are suffering from cost-push inflation.
Recall that in 2022, the inflation rate reached a 17-year high and was on the rise for ten consecutive months, fueled by input costs as a result of insecurity, dollar crunch, an increase in energy costs, and other factors that are priced in the prices of final goods and services.
It is no surprise that interest rate hikes by the central bank have not been able to curb inflation as expected. I do not expect a significant reduction in inflation this year because many contributors have not slowed down, and I believe inflation will be around 20% at best.
To reduce inflation, the fiscal side must complement the central bank’s efforts in the areas of security and boosting local production capacity by incentivizing businesses to help boost import substitutes to help attain raw material sufficiency.
I think the government is doing well with the sugar master plan and we expect more of such to help control the cost of raw materials.
Nairametrics: In which way do you think the incoming administration will help revive the nation’s financial market, especially on the issue of identity management and other economic drivers?
Mr Olatunde Amolegbe: As there has been an issue of identity management has always been a topical issue in the capital market and has been said to be one of the key drivers of the humongous amount of unclaimed dividends which is about N177 billion as of December 2021.
However, we have made progress in ensuring that each investor has a unique identification, which has contributed to improved identity management. I know we may not have reached our ultimate goal, but we are on the right track.
I believe that capital market operators involved in identity management, such as registrars and CSCS, are doing an excellent job, and given the president-elect’s track record, I expect the incoming administration to continue to support the regulators.
Furthermore, an excellent way to answer the latter part of the question is to look at the trend in Foreign Portfolio Participation in Nigeria. In 2015, the total FPI in Nigeria was N1,025 billion, according to NGX data, and by 2022, this value had dropped to N379 billion, indicating a -15% CAGR. Furthermore, by February 2023, foreign investor participation in the capital market had dropped to 10% in monetary terms and to N3.68 billion, indicating a massive drop in foreign investor participation.
Some of the reasons are related to macroeconomic variables and currency fluctuations, which have caused the currency to depreciate by 109.20%, falling from N196.99 to a dollar in December 2015 to N412.06/$ in September 2021.
This is a huge red flag for foreign investors who, while attempting to maximize returns, must also consider ensuring that their capital is not eroded as a result of currency fluctuations.
During this administration, we have seen the CBN engage in forex management by pumping dollars into the forex market to manage liquidity. Furthermore, we saw inflation rise to a 17-year high last year, and the hawkish stance against rising inflation, which most investors would naturally expect to impact input costs and finance costs for firms, resulting in a profit squeeze.
I believe Asiwaju Bola Tinubu’s administration will increase the country’s foreign exchange earnings by increasing oil production and bringing in his strong negotiation skills.
You would also agree with me that Asiwaju Bola Tinubu is known for his ingenuity in fitting square pegs into square holes, which means he will assemble the best cabinet and economic team to manage and run the affairs of the country.
The interesting thing is that President Buhari just signed into law that presidents are now mandated to appoint cabinet within 60 working days. For me, I think strategic appointment which Asiwaju Bola Tinubu is known for will help hit the ground running and achieve a better economy which has been caved for over the last 8 years.
Nairametrics: What do you think will happen to the stock market as the new government takes power on May 29?
Mr Olatunde Amolegbe: As I previously stated, the market defied expectations of a bearish close observed in the pre-election and election years, indicating that investors are indifferent about who wins the presidential election among the three leading contenders. My expectations for the market remain positive now that Asiwaju Bola Tinubu has emerged.
I understand that the administration’s impact may not be felt immediately, but I expect the administration to implement business-friendly policies that will have a positive impact on the market throughout the administration.
However, I expect investors to play more in the equities market this year because the CBN’s hawkish policy has consistently failed to contain inflation, and the interest rate hike, which should have had a negative impact on the market, did not. I do not anticipate a significant drop in inflation, and I expect investors to continue to prioritize real return, which the equity market is expected to deliver.
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