CBN says no cause for alarm over JP Morgan delisting bonds

The Nigerian economy will not suffer material damage over the removal of the country from the JP Morgan's Government Bond Index for Emerging Markets (GBI-EMI) says the Central Bank of Nigeria (CBN).

This line is also towed by some analysts who say that Nigeria’s exit from the global index can only be temporary.

The CBN also said that the strong bond market will lead primarily to the strength and diversity of the domestic investor base.

CBN Governor, Godwin Emefiele

According to the CBN, despite the fact that oil prices have fallen by nearly 60 percent in one year, it has called for expectedly reduction of  the amount of liquidity in the market, ensuring that all genuine and effective demand were met, especially those from foreign investors.

In this vein, there was a mandate that all forex transactions were posted online in the Reuters Trading Platform so that all stakeholders can easily verify all transactions in the market. In addition, the Official FX Window at the CBN was closed to ensure a level-playing field in the pricing of foreign exchange.

 Analysts say the JP Morgan action may have scant effect in the short term as good number foreign investors have previously liquidated their Nigerian bond holdings. So, the level of capital outflows from this current episode will be relatively infinitesimal.

 Head, Research & Investment Advisory at Sterling Capital, Mr. Sewa Wusu, says:  “If you look at the total JP Morgan bond portfolio of about $208.29 billion, Nigeria`s FGN bond only constituted about 1.5% which is about $3.12 billion. This implies that this amount will be sold off from the index potentially”. 

Mr Femi Ademola, a research Associate at BGL Plc also said that the exclusion of Nigeria from the JP Morgan's Government Bond Index for Emerging Markets (GBI-EMI) was not an unusual phenomenon.

 He said every Index is created based on inclusion criteria or rules which may be flexible or rigid. Although not sacrosanct, he said the flouting of any of the index inclusion criteria is a ground for exclusion.

Hence, Ademola noted that if the Nigerian currency failed the index criteria on liquidity, it is normal for the bonds to be removed as index constituents. Because the index creation is rule based it does not matter what caused the illiquidity or the actions of the monetary authority in managing the currency volatility, the failure of Naira to meet the required liquidity benchmark could lead to exclusion from the index.

JP Morgan Index fallout, investors may sell-off $2 billion worth Nigeria bonds

As Nigeria smarts from JP Morgan’s forking off her bonds from its emerging market index, analysts say as much as $1.5 to $2 billion dollars may be shed by investors on Nigerian bonds.
As direct result from the JP Morgan action, the yield on Nigeria's 10-year bond has jumped from 16.2 per cent yesterday morning to 16.7 per cent today, according to data obtained from Bloomberg.
Nigeria accounts for 1.5 per cent of the largest GBI-EM Global Diversified index, which is tracked by $183.8bn.
Samir Gadio, head of Africa Strategy at Standard Chartered, said:
There's a risk we see a further spike in yields as foreign investors exit and domestic investors will turn more bearish
The removal of Nigerian government bonds from the GBI-EM indices will be seen as a setback for Nigeria (and the wider frontier Sub-Saharan African region) after a series of successful reforms to develop capital markets from the mid-2000s.
The country's external credentials may also be affected. Being a GBI-EM country highlighted Nigeria's achievements in building sophisticated and vibrant financial markets over the past decade… this exclusion could also make it more difficult to attract much-needed portfolio inflows
The Nigerian government introduced a series of restrictions on foreign exchange transactions earlier this year as the naira collapsed amid a rout in oil prices. Oil accounts for the vast majority of government revenue and foreign FX inflows.
The naira fell 24 per cent against the dollar between November 2014 and February 2015, before the restrictions capped it at about 200 per dollar.
The exclusion from the indexes could result in further FX restrictions, as it removes the incentive for the government to liberalise foreign exchange.
Yvonne Mhango at Renaissance Capital says:
Now that JP Morgan has removed Nigeria from the EM bond index, we think there is even less reason/urgency for the CBN to allow the naira to depreciate, and to relax the FX restrictions.
The risk is we may see further FX restrictions being imposed in the near term, given that Nigeria will lose about $2bn of capital at a time when the CBN is avidly trying to conserve reserves.
An auction of Nigerian bonds scheduled for next week could be hit by the exclusion. Mr Gadio at Standard Chartered said the Debt Management Office may cap yields at the auction. He said:

when markets are extremely volatile, they may sell less than initially advertised which allows to issue the bonds at lower yields than required by investors. For example, this happened in July.

Source:

http://www.ft.com/fastft/389131/nigerian-bonds-slide-after-jpmorgan-index-exit

JP Morgan to remove Nigeria from government bond index

JP Morgan will remove Nigeria from its Government Bond Index (GBI-EM) by the end of October, the bank said on Tuesday, after warning the government of Africa's biggest economy that currency controls were making transactions too complicated.

Godwin Emefiele, CBN Governor

The removal will force funds to sell Nigerian bonds, triggering potentially significant capital outflows and raising borrowing costs for the government.
Struggling with a plunge in vital oil revenue, Nigeria had imposed currency restrictions to defend the naira after the burning of dollar reserves failed to halt a slide.
The JP Morgan index tracks around $210 billion in assets under management.
Some bonds will be removed from the index by the end of September and the rest by the end of October, JP Morgan said.
The bank had warned Nigeria that to stay in the index, it would have to restore liquidity to its currency market in a way that allowed foreign investors tracking the index to conduct transactions with minimal hurdles.
Nigeria became the second African country after South Africa to be listed in JP Morgan's emerging government bond index, in October 2012, after the central bank removed a requirement that foreign investors hold government bonds for a minimum of one year before exiting.

 Source:
http://www.reuters.com/article/2015/09/0
8/nigeria-bonds-index-idUSL5N11E3Y320150908

Business-Like Investing Can Help You Pick Better Long-Term Stocks

The high priest of value investing himself, Benjamin Graham, taught us that, “investing is most successful when it is most business like.”  That makes sense because investing in stocks is, quite literally, the act of buying an ownership stake in businesses.  Whether you own 100% of the shares of a local jewelry store in your hometown, or 1,000/4,405,893,150th of The Coca-Cola Company based on its total shares outstanding in the last 10-K filing, the end result is much the same: There are only three ways you can make money from your stock.

This simple distinction makes it easier to spot flaws in an investment portfolio because it changes your behavior.  You suddenly demand a margin of safety in your purchases because you expect to be compensated for the different types of risk to which you are exposing yourself and your family.  You require evidence based on facts rather than hope for high growth assumption rather than getting swept away in the euphoria of crowds.  During stock market crashes, you can remain rational and buy ownership positions in quality companies at bargain prices despite everyone else rushing for the exit in panic.  You seek to understand things such as how the firm generations its underlying cash flow, what types of assets makeup the balance sheet, and whether management is following capital allocation and dividend policies that are friendly to you and other owners.
If you don't currently treat your stocks like this, I urge you consider a paradigm shift.  On my personal blog, I've spent the past few years driving home the concept by running case studies of stocks as viewed through the lens of business-like investing; looking at the long-term results generated by holding ownership stakes in businesses as diverse as Chevron  General Mills, McDonald's, Clorox, Hershey's, Nestle, Colgate-Palmolive, Procter & Gamble, Coca-Cola, Tiffany & Company, and the now-bankrupt Eastman Kodak.

http://beginnersinvest.about.com/od/investstrategiesstyles/a/aa101805.htm?utm_content=20150811&utm_medium=email&utm_source=exp_nl&utm_campaign=list_beginnersinvest&utm_term=list_beginnersinvest

Role for Proxy Advisory Services in Nigeria

The recent tirade by Jamie Dimon of JP Morgan directed at shareholders for voting against executive pay rise as advised by proxy advisory services brings to focus the role and or activities of these advisory services and what they can accomplish in a country like Nigeria where corporate governance is at its infancy.

James Dimon, Chairman/CEO, JP Morgan

Proxy advisory Services are firms hired by shareholders of public companies (in most cases an institutional investor of some type) to recommend and sometimes cast proxy statement votes on their behalf, according to Wikipedia.

The vote at JP Morgan, the US Financial Institution, was on whether or not to hike executive compensation and whether or not to separate the roles of Chairman and CEO as currently held by Mr. Dimon.

 “The vote against the executives’ pay package at JPMorgan’s annual meeting last week was 38.1 per cent, a sizeable revolt from major institutional investors”, reports the FT.

 According to the English Newspaper, some 35.9 per cent contradicted the Board’s wishes by voting in favour of installing an independent chairman after Mr Dimon retires. He currently holds the roles of both chairman and CEO.

In reaching this much reviled decision (by the Board), shareholders primarily took advice from Institutional Shareholders Services (ISS), who believed that a $7.4m cash bonus for 2014 was not justified. Mr. Dimon also made $1.5m in base salary and $11.1m in restricted stock.

ISS advice is followed by many large pension plans and other institutional investors across the United States and beyond.

With the decision to go against the Board, shareholders are in effect expressing displeasure with the pay structure for Mr Dimon and other executives; they want rewards tied to a predetermined performance metric, like Return on Equity (ROE).

This may just be the way to go in a developing market like Nigeria where Good Corporate Governance is yet to take solid foot.  In this economy, much of corporate compensation are done arbitrarily regardless of value creation. Sometimes corporations reward failure.

It is now an imperative for shareholders to engage advisors to help determine metrics upon which to gauge Board performance after all skills for determining ROE, market share and profit margins and efficiencies are not exactly common place.