By Amaka Ifeakandu
Lagos
Capital market regulators have been urged to work out modalities that would enable investment returns on equities instruments to be more attractive than that of the fixed income market.
The Managing Director of Cowry Asset Management Limited, Johnson Chukwu who made this call said there is need to encourage more local investors’ participation in the nation’s capital market and reverse the consistent fall in share prices.
He said that the issue of returns on fixed income instruments being more attractive than returns on equity instruments is a major factor affecting the activities in the stock, maintaining that for more retail investors to come back to the market, the returns matrix must favour equities against fixed income.“Retail investors are hobbled by a number of factors from investing in the equities market. One factor is the relatively weak confidence in the market as a result of the 2008 market crash, which many retail investors are yet to recover from. There is also the issue of wrong investment time horizon as most Nigerians expect their investment to generate returns within three months and cannot relate with the fact that investment in the capital market is of long term nature.
“Other factors include the near complete lack of credit for investment in the capital market and the recent bear run which has further scared the few retail investors, who were planning of returning to the market. To encourage more retail investors to come back to the market, there is the issue of returns on fixed income instruments being more attractive than returns on equity instruments. The returns matrix must favour equities against fixed income.
He further said that the interest rates must be significantly below their current levels, adding that lower interest rates should however be preceded by lower inflation rates and more stable exchange rates.
According to him, the current CBN policy which has made lending for capital market activities unprofitable for banks should be amended to guarantee responsible lending to market operators.
This, according to him, would not only encourage retails investors but will also make it possible for the licensed market makers to have the financial resources for carrying out their role of creating market liquidity.
On the issue of the anticipated revival of the the Initial Public Offer market, Chukwu pointed out that IPO market only strives when there is a vibrant secondary market where equity prices reflect the underlying intrinsic value of the quoted companies.
He said in instances where secondary market equities are underpriced, company directors are not encouraged to offer fresh shares to the market as such shares would have to be sold at prices below their intrinsic worth.