There is the urgent need to embark on aggressive education and enlightenment campaign on the available investment opportunities at the Nigerian Stock Exchange (NSE) so that more Nigerians can participate in the capital market, according to a financial analyst , Mr. Johnson Chukwu.
“The Nigerian capital market, as one of the emerging frontier markets, presents a lot of investment opportunities for discerning investors. Given that the market is still at its early growth phase, the number of investment instruments is still relatively few,” he said.
He spoke on Wednesday on the topic, “Investment Instruments in Nigerian Capital Market: Risks and Benefits “, at the monthly business forum organised by Capital Market Correspondents Association of Nigeria (CAMCAN).
The analyst said inadequate investment information had prevented more investors from participating in the market.
“Complex instruments such as derivatives are novel to the market and will require a lot of market operators’ education of investor enlightenment before they can be embraced,” Mr Chukwu added.
He said the returns on debt instruments were largely fixed which eliminated the uncertainty associated with most other capital market instruments such as equity.
“The specific benefits of debt instrument to the issuer is the ability to raise fund for the long term project without dilution of company’s equity ownership structure. However there are a lot of risks that go with investment in the debt instrument. In the event of inflation the real value of the interest on bonds is progressively eroded. There is also the interest rate risk. Increase in interest rate leads to decline in the market value of bond instrument.”
The Nigerian bond market is still dominated by the Nigerian government bond instruments.
In 2013, the government floated a total of 898.34 billion naira worth of bonds while sub-national bonds and corporate bonds stood at 124.5 billion naira and 23 billion naira respectively.
He said equity instrument gave co-ownership to the holder with certain rights and privileges such as ability to vote and hold position in the invested company, as well as received dividends.
Mr. Chukwu identified some of the factors that were presently affecting investor confidence on the equity investment in Nigeria to include continuous tightening of banking system liquidity, high cost of fund, political uncertainty in a pre-election year and declining external reserves.
“The external reserves remain a cardinal barometer for assessing the financial risk of an economy. It is usually the first point of call for foreign portfolio investors to either the equities sector or in the debt instruments,” he added.
The Nigerian external reserves currently stand at 38.07 billion dollars as of 21 March from a high figure of 48.86 billion dollars on 2 May, 2014.
He identified some of the factors responsible for the decline to include, the continued defence of the Naira, the local currency, and decline in crude oil production as well as exit of foreign portfolio investors.