The capital market is not likely to see a strong recovery until next year. But there are still huge opportunities in the market for savvy investors, especially in the Mutual Funds space. United Capital Plc Group Chief Executive Officer Peter Ashade speaks with COLLINS NWEZE on the investment outlook for this year, need for multiple exchange rates review and how regulators and operators can deepen the market.
Looking back at the performance of the stock market in 2018, are you surprised that it could not sustain what it did in the previous year?
Actually, I am not surprised. There are lots of factors that supported the performance of 2017 market position. For instance, the market grew by 42 per cent in 2017, and you saw the temperament even at the global level. But give or take, in 2018, a lot of parameter changed. When you looked at the global financial market, outlook tends to favour more of advanced community more than emerging markets. Also, in the case of Nigeria, the build up towards the 2019 election had started in the second half of last year, and really hit up the polity. So, the direction, in terms of 2018 outlook, was quite expected.That is why, to a very large extent, when you see what is happening in the global scene, again, the oil sector, and the political terrain in Nigeria really affected the performance of the market.
Given that those factors that shaped market performance last year are still present, are you optimistic that we may see a recovery this year?
Quite well, I can tell you that I am optimistic. This year, in terms of performance, there is likely to be an elevation in the market. Why do I say so? Give or take, considering both local and global scene too, there are lots of factors that could affect the performance. However, the election is definitely going to come in the first half of the year and the euphoria will end in the first half of the year. So, regardless of the party that eventually becomes the ruling party, I am quite optimistic. But, in terms of recovery, that we are looking at, it may not be strong recovery. But it is going to gradually recovery. By the time we will be feeling the impact of the recovery it will be 2020 upwards.
It is expected that in the second half of the year, the market will enjoy a rebound.
Despite that the equities market offers high returns, investors are still skeptical. What can be done to encourage more investors into it?
One thing that is key in the capital market is that it is not a scene for short-term players. Capital market is for medium and long-term funds. So, each player must have that at the back of his mind. And it is not another gamble or bait. As you come into the market, one thing that is key to sustain the interest is investors’education.
Investors will know that as they are coming into the market, it is not where they will make 100 per cent in one day. It could happen. But you have to have it at the back of your mind that it is a market for medium and long term players. When you come into the market, you will be careful, patient to drive through the growth and volatility that we see within the market.
So, to a very large extent, if you want to build equity market, two things will happen. We have the regulator side and the investor side. The regulator needs to put structure in place to deepen the market. The depth of the market in terms of even coming up with different products that investors can play in.
The second part is investors’education, which could be driven by the regulator or operator in the market. This market belongs to all of us. As far as the market is concerned, it has come to stay.
Given that there is volatility in the market, what will be your advice to investors on the best way to go?
The investor must, firstly, understand the market. Even if you do not understand where you are playing, there is no way you are going to take advantage of what is happening. Volatility is part of the capital market antics. When you have understanding that the market could go up and down. Secondly, is that you must have a clear objective of why you are investing in the market. Some may want to invest because of revenue, others may invest because of capital appreciation. You must have clarity. Thirdly is that you must not be greedy. Greed sometimes affect investors. So, when you set up your investment objective, you must be clear about it and stand by it. For instance, you can say if I have 10 per cent, I think I have made my day. I should leave. You now discover that the share price of your investment has started moving, it gets to that 10 per cent, but you still see that the market’s rally, and you decided to wait a little, then greed is coming in. And in waiting a little, it goes to 11, 12 per cent and before you know what is going on, you find yourself at seven per cent. So, the area of greed also needs to be addressed. You must identify your objective, and ensure that you are not greedy in terms of your investment outlook.
Is United Capital doing anything to deepen the market?
Sincerely, we are doing a lot. United Capital has been in this space for a very long time. We have at different times, played our roles in supporting the regulator in deepening the market. We have participated in various investors’ education that is being orchestrated by the regulator. On our part, we have ensured that we decentralised our investment platform. We are very stop on the social media.
How far are you playing in the Mutual fund Market and the potentials you see in that market?
One of our business lines, United Capital Asset Management, specialises in Mutual Funds. Mutual Funds market has potential for stable return for even low value investments. And we see the huge potential for growth that the market holds. The mutual funds market deepened last year, with most of the funds recording strong performance. Mutual Funds is the way to go especially in encouraging savings and investment habits among a large population, even for low income earners. At United Capital Asset Management, we currently have six Mutual Funds running and all of them are doing quite great. Between 2017 and 2018, we had triple digit growth in our Mutual Funds portfolio. We have a Mutual Fund targeted at women – Wealth for Women Fund – and the Eurobond fund, which is dollar-denominated fund. Our Eurobond Fund portfolio crossed $8 million in 2018 from $3.6 million in 2017 and that’s more than 100 per cent growth. So, what we are saying in essence is that the funds are really growing and that underscored why we won three awards last year alone including Best Mutual Funds at the 2018 BusinessDay Awards. As far as we are concerned, there is more to be achieved in the mutual fund market.
How do you see the entry of foreigners into the Mutual Funds Market. Do you see it as a challenge or opportunity for the local players?
Foreigners coming to play in the local market, have often conducted extensive feasibility studies to see existing opportunities within their risk appetite. That means there are still huge opportunities in the mutual funds space, otherwise foreigners will not come and want to play in that market. What that means for us as an organization is that we are in the right direction. It also signals that we need to do more. As we execute our innovative strategies, we will create more products that will be available for the market. So, to answer your question specifically, we view this in a positive light, and not in a negative at all. We are poised to tap into growth opportunities that we see in that space.
What factors will define the economy and businesses this year?
In 2019, we expect three dominant themes to shape events in the economy. Clearly, the general elections come ahead of others as the outcome will shape policy and overall momentum of growth. A possible change of guard at the office of the Central Bank of Nigeria (CBN), considering that CBN Governor Godwin Emefiele’s first five-year tenure ends in June. Finally, depending on the outcome of the election, we expect some policy and structural changes.
What is your advice for investors in the capital market and fixed income securities?
The risk that spooked investors from naira assets in 2018 can majorly be classified into global and domestic risks. However, while global risks are expected to remain in 2019, the domestic risks are expected to reduce in second quarter of this year, especially after the winner of the presidential election is known. Overall, financial market activities in 2019 will be driven by elevated uncertainties in local and global environment. We expect this to drive the yield environment higher in first quarter of this year ahead of the election. On the other hand, yields on fixed income should retrace after the election as clarity returns to the economy. The Stock market is also unlikely to rebound until after the election due to weak sentiment and the continued flight to safety. However, we expect some decent rebound in the post-election and transition period as Foreign Portfolio Investment flow return to the economy. The downside risk to this view remains the continued volatility in the global economy. Accordingly, investor should take advantage of cheap market prices before the election to benefit from the rally that may follow the post-election and transition period.
Could you tell us about United Capital and its major area of focus for this year?
We are a financial services group providing integrated financial solutions along the financial services value chain to governments, corporates and individuals. We have a wide range of services for all our different categories of clients. Our investment banking business has a proven track record of raising capital for governments and corporates and we intend to scale up on that with more bespoke, innovative solutions for each client. We will also scale up on our play in the Small and Medium Enterprises space with our services in the structured finance space. In our asset management business, we offer customised portfolio management services for corporates.We also have a wide range of mutual funds for individuals looking to invest. We intend to grow our funds with the use of our online investment platform, InvestNow.Ng ,which we launched last September. Our wealth management business is also strategically positioned to provide top notch wealth management services for our ultra-high net worth and high net worth clients. We will partner institutions in Nigeria and abroad to ensure that we provide world-class wealth management services to them.
For our securities brokerage business, we expect that, after the elections, the pre-election bearish sentiments will simmer and the stock market will gradually recover. We plan to power our play in this space. We won the Pearl Award for the Stockbroking firm of the year 2018 and the team is ready to top this performance in the coming year. Our Trust business is a market leader in the trust space and we will not rest on our oars. When we launched InvestNow last September, we also introduced Online Wills, which allow users to write a will easily on the platform. We will continue thinking up ways to make life easy for our clients through innovative thinking. One key strategic priority for us in the coming year is to power up our play in the retail space which we will do with the use of technology. We already launched a much-improved version of our online platform and we will continue building on it as well as develop other digital channels to make investing much easier for our clients. This is also in line with our unwavering commitment to financial inclusion, not just in Nigeria, but also in Africa. Also, we have had pan-African aspirations for a while and we expect to gain some more traction in this space in the coming months. We will also continue scoping the market for emerging opportunities and we hope to add a few innovative products to our repertoire in the coming year. In a nutshell, we will hit the ground running in 2019 as we take more deliberate steps towards the achievement of our corporate goal of being the financial and investment role model across Africa, deploying innovation, technology and specialist skills to exceed client expectations while creating superior value for all stakeholders.
Are we likely to see a new area of focus in United Capital, especially in expansion in new market segments?
Over the years, we have largely focused on institutional and retail clients. We intend to significantly scale up our service offering the retail segment using digital and non-digital channels in response to changing consumer preferences and emerging lifestyles. Nigeria’s teeming youth population provides a huge market and we are interested in helping young people develop a culture of investing by offering products in a way that suit their needs and lifestyle while guaranteeing significant returns on investment. In September 2018, we launched InvestNow (Investnow.ng and InvestNow Mobile app) our flagship digital channel which offers diverse financial and investment solutions to a fast growing client base across multiple geographies. We will continue to launch new offerings on this platform to bring more players into the capital market while enjoying the benefits of scale.
What are your thoughts on the state of the naira, including regulatory policies, to keep it stable? Do you foresee the local currency doing weakening in the year and what should be further done to protect it against other world currencies?
Currency market conditions were mostly stable in 2018 on the apex bank’s commitment to Naira stability via frequent interventions at the interbank and BDC segments of the market. Although this has pressured the external reserves significantly, the naira has been relatively stable compared to peer economies. The CBN also commenced the sale the Chinese Yuan in H2-2018, following the currency swap agreement signed with the Peoples Bank of China in April-2018. We expect the naira to remain relatively stable in first half of this year, considering Emefiele’s obvious resolve to defend the local unit supported by a strong dollar reserve position. Things might change in H2-2019 considering the change at the CBN from Jul-2019. Overall, Nigeria is still in a good position considering the size of the reserves at over $40 billion.
What are your views on the inflow of hot money into the economy, and what can be done to achieve a more stable investment climate for the country?
Inflow of funds into the Nigerian economy is not expected to improve significantly in first half of 2019 amid election uncertainties as well as an Emerging market wide rout. However, we expect a net capital inflow in H2-19 regardless of the election outcome. Downside risk to this outlook includes changes in the policy environment due to possible changes at the apex bank as well as the overall development in the polity. Increased pressure forex and net capital outflow in first half of 2019 points to further depletion of the external reserves; we imagine another $5billion to $7 billion decline, if recent trend is anything to go by. If this holds true, the CBN should be left with $38billion-$40 billion reserves going into second half of 2019. Nonetheless, we expect pressure on the reserves to ease in second half of the year on the back of increased capital inflow. That said, in the absence of a profound changes in the policy environment, FPIs funds in search for cheap naira assets will dominate capita importation into Nigeria. FDIs, on the other hand, may remain on the side line, as the await policy signal from the authorities to make their move.
Tell us United Capital areas of strength and impact it has made in building sustainable wealth for its clients?
As a financial services group listed on the Nigerian Stock Exchange, we are held to the highest governance standards. This ensures, among other things, that we operate a credible and resilient organisation focused on value creation for all stakeholder groups including our clients. We pride ourselves as being the intelligent choice for every financial and investment decision by our various clients. This means that we are able to provide top notch services to clients based on the client’s investment objectives and we have consistently done this over the years and we intend to do much more. We were awarded “Best Money Market Fund” at the 2018 Businessday Awards
What is the biggest challenge you see confronting the investment industry and how can that be addressed?
As noted above, the uncertainties around the election and transition period, who become the next CBN governor and the need to implement bold policy changes are the biggest issues for investors. Uncertainties around election and key appointment at the CBN are dependent on political actors. On the other hand, the only way to address the badly needed policies changes is to take bold decision and implement them. Now this will include a review of the multiple forex regime, the necessary reforms in the oil and gas sector as well as the power sector. If these are done, we expect the investment climate to feel the impact significantly. This is because reforms in these sectors can boost Foreign Direct Investments into the economy and trigger massive capital market activities.
Are you worried by the level of bad loans in the industry? What should be done for banks to create better loans?
The banking sector was hugely impacted by the 2016 recession, which resulted in a spike in non-performing loans, especially in the oil sector, yet banks have shown resilience owing to strong regulations by the CBN and risk diversification strategies employed by most banks. The improvement in data collection capabilities, Bank Verification Number, advancements in digital platforms and development of analytical competencies should translate towards better decision making in the loan process.
However, an accelerated recovery of the domestic economy would drive down the rate of non-performing loans in the banking industry, as the credit profile of both consumers and businesses improves under favourable economic conditions.
