Author Topic: WHY PEOPLE MAKE MORE MONEY IN BONDS THAN STOCKS  (Read 1369 times)

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WHY PEOPLE MAKE MORE MONEY IN BONDS THAN STOCKS
« on: December 21, 2009, 10:51:59 AM »
Why people make more money in bonds than stocks
? Ike Chioke, MD, Afrinvest West Africa Ltd
By OMODELE ADIGUN
Monday, December 21, 2009


Chioke

Since the capital market crash, many investors have since switched over to the bond market. According to Mr Ike Chioke, the Managing Director of Afrinvest West Africa Ltd., equity market is just a fraction of the existing bond market in the country.

He explained that bond market is a deep and active market in the country today.
Chioke, an investment banker of over 17 years experience, stated:
?With all the noise we heard about the equity market. NSE has gone up by N75 billion today, NSE has gone down N25 billion tomorrow?, equity market is just a fraction of the existing bond market that we have. I will give you an example. In all of November, the equity market recorded a total value of N85 billion, total volume , everything traded in November was N85 billion. In the same month of November, the bond market recorded a total volume of N2 trillion.

?That is not all about that, its capital preservation is so much bigger that there is so much money for the ordinary investors who consider this market. But , I always say that, you need a lot of money to participate. The smallest investible amount to drive the transaction volume is about N250 million. For average investors, that is far beyond their reach.?
Chioke, until his appointment last May, was the deputy Managing Director of the company. He has nearly two decades of investment banking experience garnered from home and abroad. He started with Goldman Sachs in New Yorkin 1991 before joining Salomon Smith Barney (a member of Citigroup) in 1997.

From Citigroup, where he worked in both the New York and London offices, he joined Afrinvest London in 2002. In 2003, Chioke returned to Nigeria to establish Afrinvest locally, which subsequently led to the combination with SecTrust to create Afrinvest West Africa, a more robust company with focus on Nigeria and beyond. A holder of a B.Sc. (First Class Hons.) degree in Civil Engineering from Obafemi Awolowo University, Ile-Ife as well as an alumnus of Oxford University as a Rhodes Scholar where he obtained an M.Phil. in Management Studies,Chioke?s product and industry spe...ation include corporate finance, mergers & acquisitions, project/structured finance and debt/equity capital markets activities in the telecommunications, media, financial services and general industrial sectors.

On what his company is doing currently to bring average investors to the bond market, he said:
?What we are talking about today is the relaunch of Afrinvest Nigeria International Debt Fund (NIDF).Through that Fund, an ordinary investor can participate in the bond market. It is a much safer and a much stable market environment which offers you current income.?
In this piece, he sheds more light on it.

The company
Afrinvest is an investment banking itself. We are involved in securities trading, investment banking, wealth management, broker/dealer, underwriter, portfolio managers and financial advisers. From that perspective, we understand what is going on in the capital market in Nigeria and even beyond. Our business on investment banking is advising corporations on capital raising. We have raised capital for corporate body such as GT Bank when it did its Eurobond issue. Afrinvest acted as financial adviser when it did the $50 million Eurobond transaction, the same thing for First Bank when it did its N100 million hybrid offer.We also acted for First Bank for the $100 million tranche of the offer for its international investors. Our investment bank also provides services on mergers and acquisition, which is still very topical today in the light of the distressed banks .We advised a company like Standard Bank of South Africa when it came to Nigeria for the IBTC Chartered Bank deal.

Within our security trading business, we are in bond trading. Fixed income market is very active today. We have been involved in security trading for institutional investors as well as retail investors. We are also currently trading in money market.
The last but not the least, we have wealth management division. Here, we manage money for private individuals, ranging from man in the street who has N5,000 to invest ,who can come through our mutual fund, to the man who have much money.

Fixed income security market
We are in an environment where the natural instinct for investment is buying shares. But I tell you, investment really involves a Co*ktail and is a spectrum of asset factors available to investors which is largely quite wide .But what has happened in Nigeria is that people take a narrow definition of the market place. As we enter a new day in our normal decision, we think about asset factors that may be opened to investors, maybe in the real estate, that is an investment, you think of money market placement, you put money in cash in banks and ask for fixed deposit rate which doubles quite often and often. You can think of equity, buying common shares at the stock exchange and also you can think of bonds. Now, in the boom of the market in the Nigerian stock market from 2006 to March 2008. Clearly, a lot of people forgot what we call investment diversification, which is the ability to think of investment as a basket and try and balance their exposure to each market. Rather, we all saw that the equity market was rising so rapidly, so we all jumped in. As a result, some people made a lot of money compared to a lot of people who lost a lot of money. Some put their money in real estate, but not everybody bought because of the the large amount of money required. We don?t have enough of investible funds, REITS , real estate investment fund that allows you to participate alongside developers of the real estate Also there are some issues around REITS that have to be sorted out.

Bond market is actually a deep and active market in Nigeria today. With all the noise we heard about the equity market: ?NSE has gone up by N75 billion today, NSE has gone down N25 billion tomorrow?, equity market is just a fraction of the existing bond market that we have. I will give you an example. In all of November, the equity market recorded a total value of N85 billion, total volume , everything traded in November was N85 billion. In the same month of November, the bond market recorded a total volume of N2 trillion.That is not all about that, its capital preservation is so much bigger that there is so much money for the ordinary investors who consider this market. But , I always say that, you need a lot of money to participate. The smallest investible amount to drive the transaction volume is about N250 million. For average investors, that is far beyond their reach.
What we are talking about today is the relaunch of Afrinvest Nigeria International Debt Fund (NIDF).Through that fund, an ordinary investor can participate in the bond market. It is a much safer and a much stable market environment which offers you current income.

Capital market rebound
We can still witness another capital market boom in the country because market goes round in circles. If you look at the trajectory of its development, you will find out that every five to 10 years, there will be major market corrections. There is a boom, then correction; then another boom, then another market correction. From my own experience, I have been in investment banking since 1991, I have witnessed not less than three downturns or corrections in the capital market. So what is happening in Nigeria is not in isolation at all but what is unusual is the character of what has happened, the fraudulent manipulation of the market boom that we witnessed between 2006 and March 2008. I did say, however, with a bit of caution that this is not to say that the international market did not have fraudulent manipulation. If you look at the major reason for the stock price crisis that engulfed the US capital market in 2007, you will see clearly a lot of fraudulent manipulation by the so-called investment bankers and investment advisers who sold mortgages to poor people who could not afford to pay. But they took their commission from those mortgages, leaving the burden of the toxic debt to the banks to sort out.

The character of what you see in the Nigerian scenario is that it is expected that in a couple of years, the market would come back because the Central Bank will soon introduce the Assets Management Company to take off the toxic assets, there are new investors coming to the banking sector and if there is a renewed focus on the real economy. Corporate investment needs to structure and digest all the excessive shares that are depreciating. We have been suffering like somebody who went to a party and ate too much. So we are suffering from indigestion. So once we digest all the excessive shares, then the economy will virtually pick up, the capital will pick up and we will then get the boom back.

Bailout
I think it is always good to look at the foreign [countries?]solutions to their problems and then think before you jump[at them]. I think what the CBN has done in this instance is to look at the foreign solution and figure out a way to adapt it to the local problem. That is the best way to do what I would call technology transfer. I think where they recognize the problem is that the foreign banks, looking at the US economy, had a greater proportion of decent people in custodian positions such as the managing directors. The controlling officers of many of their financial institutions comprise people of proven character in general. But what we saw in our own situation was that we didn?t have the same percentage of people whose character could be regarded as unimpeachable. Hence the government could not take money from the masses of Nigeria and give it to these people who would put it in their pocket. But the CBN approach is that if your bank has a problem and I am going to give government money to bail it out, it behoves me on behalf of the Nigerian people to first get rid of those bad eggs in the banks, put my own people who I can trust in control. And CBN has put a total of about N620 billion in the distressed banks. That is about $4.5 million. This is a lot of money. If the CBN has gone to put it in banks without being sure that the management can handle that responsibility, it becomes a problem. I think.

If the CBN has not put the money in those banks, those banks would have suffered what is called deposit liability. What would happen is that the depositors, whose money is approaching N3 to N4 trillion, would be demanding about N3 to N4 trillion from the banks. And they would not have the money to give because you could see from their results that they have already mismanaged the banks? money, spent it without any control and eroded the shareholders? funds. If you have depositors lining up to ask for N3 to N4 trillion, they would not have the money to give[to them], they would start to get it from other banks. If some other banks put their money in those distressed banks, you would likely have a nightmare scenario, a systemic collapse of Nigerian financial system. If you ask me, the most courageous person in Nigeria today is the CBN governor for the actions that he took.

Wema/Unity Bank N200bn
If Wema Bank or Unity Bank comes to the capital market, the same equity market where I operate, to raise equity capital [of N200 billion], I would say no [it is not possible].But there are strategic investors who are desirous to come to Nigeria to operate in the banking sector ; there are financial investors who have money and see the Nigerian banking sector as the natural conduit for petrodollars when the government makes money. There are quite a wide range of investors for them to access. There may be many of the South African banks which still want to come to Nigeria. There are options of mergers. I don?t see a reason why Wema cannot consider merger with a Nigerian bank and repackage itself and be part of the bigger bank. So there are ways they can do that. But if their purpose is to remain independent and find it through their own sweat, certainly there are Nigerians today who have $200 million, equivalent to N55 billion to put into that bank. There are quite a number of Nigerians who can do that. The challenge for such investors will be what plans do the management have on ground to justify a decent return for that money.

Sanusi?s ?Northern agenda?
The truth has actually come out. Which Northerner will go and buy a bank with minus (negative)N250 billion[in shareholders? fund] . Remember when they say you are minus, that means that to get to N25 billion, you have to put in N275 billion, nearly $3million. Meanwhile, N25 billion alone is enough to give you a banking licence. If any Northerner has that kind of money, wont he say ?I will just go and apply to CBN and get a new banking licence.? You can be sure now that there is no agenda in there. I think the issue is that you can?t do everything to satisfy everybody. But the issue is that how do you satisfy the majority of the people?

Regulatory supervision
When a market has reached a level of difficulty, like the point the Nigerian capital market is facing now, you have to try and solve the problem from holistic perspective. It is not a matter of simply telling stockbrokers that they can start to trading again. It is not also simply a question of bailing out our banks so as to go and start lending money to their subsidiaries to go and start buying their own shares again.
You look at the whole financial system and understand the linkage between the bank market, the insurance market and the stock market as well as the role of the various regulators in the chain; from the Central Bank, the NDIC[Nigeria Deposit Insurance Corporation], the SEC[Securities and Exchange Commission], the NSE[Nigerian Stock Exchange],PENCOM[Pension Commission] to the insurance regulator. SEC will regulate company fcd ,CBN will regulate bank xyz.Nobody is mindful that xyz being regulated by CBN has got a company not being seen by CBN, it is now under SEC which can be doing some things that SEC can not nip in the bud because its parent company is actually not under SEC. That is why the prime focus now is corporate governance. You look at the control of an organisation from corporate governance perspective and instil discipline and orderliness in that board. You tell them that this is how you should do things; these are the kinds of things you cannot do. The next thing is that the company knows that it will be penalized if it does such things it should not do or if it does not do certain things that it should do, it will be penalized. So that is ongoing now. I understand that that is the third phase of the CBN action to reform the financial system.

The first phase was clearly the August 14 sack of the MDs of the five banks. The second phase is the introduction of the Asset Management Company to buy some of the toxic assets off the balance sheets of the rescued banks, which will free off some liquidity and probably allow the banks to start making profit again. The third phase is a situation where they then strengthen the corporate governance system of the core financial services companies: the banks, the insurance companies, the assets management company, the investment banks, the stockbrokers. If everybody knows what is the limit of what it can do and then the regulators then have a more unified approach of regulation, with all that going on, I think you will see confidence going back among the investors. Investors will then see that a bank cannot necessary come for public offer and use its subsidiary as the issuing house. The subsidiary can not take up advertisement and say oh, the bank shares have tripled in value in the last 10 years to make it worth investing in. Meanwhile, this is the same subsidiary that was buying its shares in the market to create that artificial value without any fundamental growth in earnings and profits of the bank to justify the escalation in value. You can?t see those kind of excesses come back again. They may, however, come back in different shapes or forms but not in the way we saw between 2006 and March 2008.

Nigeria International Debt Fund
Unknown to many investors in our society, fixed income investments offer great opportunities for both institutional and individual investors. However, given the peculiar dynamics of the bond market and the large minimum investible amount , not less than N250 million required to participate, many otherwise interested investors are not able to do so. In an effort to remedy this, Afrinvest pioneered the first ever bond fund to provide fixed income savvy investors the opportunity to realize their investment dreams. This bond fund is the Nigeria International Debt Fund (NIDF) created by Afrinvest in 1997. It is a distinct investment product created as a closed-end fund in keeping with the company?s culture of providing innovative financial solutions to its clients. The NIDF was launched in anticipation of a likely devaluation of the Naira relative to the US dollar in the mid to late 1990s.Against this backdrop, the fund was established to provide sophisticated investors with the opportunity to invest in the thriving international bond market by investing in the dollar denominated debt obligations of the Federal Government of Nigeria.These included Nigerian Collaterized Fixed Rate Bonds(Par Bonds) and the Central Bank Promisory Notes.

The Fund was to serve as a veritable investment product that could provide a hedge against the potential devaluation of the Naira. Owing to the prevailing securities regulatory framework that existed then which did not allow unit trust schemes, a special purpose vehicle known as Nigeria International Debt Fund Plc was floated to list the notes of the Fund on the Nigerian Stock Exchange. A total of one million investment notes were created and authorised. Of this, 106, 980 investment notes were issued and fully paid at $100(N8,250). An investor who invested $100 (N8,250) in 1997 would have earned an annualized return of 20.64 per cent in Naira terms and 11.64 per cent in dollar terms as at the end of May.It is important to note that all investors in the Fund?s noble objectives of providing a safe investment option in the debt markets, ongoing income as well s a hedge against the Naira devaluation. The minimum amount required to participate in its ongoing offer is just $500 or N750 thousand.

We have toyed with the choice of making the investible amount smaller than that. Part of the problem was he character of the Fund from inception. Bear it in mind that the original NIDF at a par value was $100 per unit. We have virtually brought it down to $10, which means that each note is worth N1, 500. If I say we will make it smaller to the level where an ordinary investor can come in, then I would say that an ordinary investors would start with about N30, 000.But that presented a challenge for us on the number of notes to be managed for people. But I believe that an ordinary investors coming in should be able to come in with $500(N750,000) .For an account holder with Afrinvest can come in with N50,000.

The NDIF is virtually an institutional product, particularly tailored towards pension fund administrators who invest in government bonds. But this instrument allows them to invest in bond market through an asset manager, who is also actively trading the bonds with the view that they will get about the same coupon that they are getting if they had bought the bonds directly. Having said that it is also a good way for private investors to diversify their portfolio . For many investors who are doing over a million Naira, N2million a year portfolio, I don?t think N750, 000 will be such a challenge. But if there are ways that someone can start putting money aside in the bank for a period of time to get to the minimum level where one can participate, I will recommend that. In the future, we look favourably towards breaking it down the minimum to make it even lower to something like N200 thousand, N100 thousand.

Deregulation and inflation
Over the long time, inflation will come down as a result of deregulation. But in the short time, the immediate effect is increase in cost of doing business and the economic hardship of the average Nigerians. But I think the deregulation is absolutely needed for the economy to move forward. And it is the right thing to do. If you have a sick child, you have to take him hospital and make him get injections, conduct an operation. These are painful experiences that traumatised the baby.But ultimately you are doing him a long term good. Subsidy in the oil industry today handicaps the government in many ways. The so-called subsidy that you and I enjoy only affect the people that live in Lagos , Abuja and Port Harcourt just about 26 million people out of 150 million people that are supposedly expected to enjoy the subsidy.The cost of subsidy is between $5 and $6 billion a year. What that means is that all this noise about subsidy is actually lining the pockets of a lot of oil millionaires with the system of command from NNPC down to the oil marketers who sell petrol .It does not actually affect average person who lives in a place like Kafachan, who buy petrol for N100 a litre and he has been buying it for N100 a litre and nobody knew. I am from Enugu, I periodically buy it for N80, N90 and N100 per litre unless if I want to spend three hours in NNPC filling station. Now how many towns in Nigeria have NNPC filling stations? If you go there , you fight to get petrol.

What we have is a situation where government builds storage plants all over the country but there is oil in the ground.If there are people who can refine this oil to petrol. But I dare say , if I refine petrol and I have to sell at N65 per litre, I wont make money. But I am not saying I would sell at N100 per litre. I may later discover that the break even point is that N65. They may put up N10 on top of it. By the time they build a refinery, run it for one or two years, cost of running it gets cheaper. You will discover that as more people build refinery, that petrol price may even crash below the N65 per litre that we are paying because there are more people supplying. The same thing happened in the GSM industry.

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WHY PEOPLE MAKE MORE MONEY IN BONDS THAN STOCKS
« on: December 21, 2009, 10:51:59 AM »

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Offline Prince

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Re: WHY PEOPLE MAKE MORE MONEY IN BONDS THAN STOCKS
« Reply #1 on: December 21, 2009, 10:52:30 AM »
Good to know.

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Re: WHY PEOPLE MAKE MORE MONEY IN BONDS THAN STOCKS
« Reply #2 on: January 04, 2010, 01:13:22 PM »
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Re: WHY PEOPLE MAKE MORE MONEY IN BONDS THAN STOCKS
« Reply #2 on: January 04, 2010, 01:13:22 PM »

 

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