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Published On: Mon, May 29th, 2017

(Interview) The many pitfalls of budget 2017 — Johnson Chukwu

Johnson Chukwu, Managing Director, Cowry Assets Management Company Limited, is easily one of the most cerebral investment advisers in the country today. He brings to equity trading a suaveness and grit that is uncommon and uncanny. His calls on stocks have been slightly short of prescient and his views on the economy have always been sharp, thoughtful and brilliant. In this interview with Business Hallmark’s Senior Money Market Correspondent, FELIX OLOYEDE, Chukwu x-rays recent developments in the capital market and gives his take on the broad economy. Excerpts:

What childhood experience of yours that is still influencing your perception about life to this point in time?

It is something that happened when I was at the age of 13 years and that was during my secondary years. Two of my tutors had a dispute and as my class captain, I went to the staff-room to call a teacher that was supposed to come before the next subject, because he didn’t come on time.  So, I met that particular teacher and another teacher changing words. It was very uncommon, because in secondary you declare not fight. For teachers to be in most a physical was a very strange occurrence to a 13 year man. At some points, one of the teachers who was very slim and gaunt looking threatened to beat the other teacher who by every physical appearance was appeared to be stronger. He also made a statement that if he beats his colleague, the school authority would dismiss the two of them and he was coming to get a job the next day, but the other teacher would not get another job in his life. I was then surprised that why one teacher would get another job the next day and the other one would never gets a job. So, later I approached our guidance and counselor and asked her why if two teachers leave the employment of the school, one would get not get another job and the other would get another job almost immediately. She explained that the teacher threatening to fight studied Accounting; you know accountants can work everywhere, because every company requires an accountant. But the other one studied English Language, therefore, was only primed to teach in schools. So, if the education board should dismiss me for fighting, he won’t get another teaching job. It was not the era of private schools. Schools were basically government-owned.

That was a defining moment in my life. At that point I made up my mind that I was coming to be an accountant. And it has influenced everything I did. So, I learnt during that altercation that the choices you make would determine the options you have. Human success is just an accumulation of choices we make as people.

The Stock market is presently showing signs of rebounding. How sustainable do you think this would be?

The stock market is subject to the economic policies of the government. If the government initiates positive policies, the market will react confidently. The positive movement that we have seen in the capital market has been largely driven by two factors. One, the decision by the Central Bank to introduce a foreign exchange window for exporters and portfolio investors that is matched to the market, an exchange that is market reflective. That way the investors have the comfort that they would exchange their money at a rate that is not below the market value. The good thing about this is that it gives you an assurance that whenever you sell your investment, you have a liquid market to convert back to foreign currencies and the further depreciation of the local currency below the market reflective rate is minimal.

The second factor that is responsible for the movement is that there is operation guideline that would come into operation very soon issued by the Pension Commission that makes it compulsory for pension administrators to invest certain percentage of their growth portfolio in equities.  These two factors are contributory to what we are seeing in the market today.

If the FX policy continues and the economy turns a corner and move from a contraction to a rebound, then, you are going to see a further interest in the equities market. But should any of the policies be reversed, then it would affect the market negatively.

Do you think foreign portfolio investors are beginning to have confidence in the market?

There are different risk appetites among foreign portfolio investors. Those who have very strong risk appetite would consider Nigeria, giving the devaluation of the equities as very attractive. Portfolio investors that only invest in stocks that qualify as investment instrument in certain indexes like the JP Morgan emerging market Index, Barclay Index or some other indexes or that follow portfolios issued in countries that have strong country risk ratings would not come to Nigeria now. But the key thing is that we keep improving our macroeconomic environment. As we keep doing that, our instruments would become appealing to international institutional investors and other portfolio investors.

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The MPC met and decided to retain rates for the fifth straight time. What do you think about this?

The environment we are in today has made it imperative for the Monetary Policy Committee (MPC) to retain rates. Like the Central Bank Governor said, the base effect of inflationary decline has been exhausted. What means is that you may not see further sharp decline in inflation as one would have expected. If you look at the decline of inflation in April, it was 0.02 percentage point from 17.26 percent to 17.24 percent. And if you look at food inflation it was 19.06 percent, it means we still have a very significant inflationary pressure. In such situation, it would be difficult for the Monetary Policy Committee to reduce rate and inject more liquidity into the economy that could exuberate the inflationary pressure. Also, Central Bank is just getting a hand on the exchange rate. We are just a gradual appreciation of the naira. It would be unadvisable to the monetary authority to push more liquidity into the system that would lead to pressure on the foreign exchange and cause reversal of the little gain we have recorded in  exchange rate. So, these are the factors that informed the decision of the MPC to retain rates at the current level.

The Stock Exchange recently decided to introduce demutualization. What benefit do you think this holds for the market?

The benefit of demutualization is that introduces a high level of efficiency in the market in sense that the exchange would be listed on itself and its shares could be traded on its floor and it could also be listed on other exchanges. The transparency associated with being listed make that particular exchange more attractive investors that are concerned about corporate governance, transparency and maintaining high ethical standard in the exchange. So, the listing would impose the corporate governance standard required of all quoted companies and that means the market would in effect regulate the exchange. What that means is that should the market perform below expectation, the market would punish it by dumping its shares, which would reflect in its price. And that could lead to shareholders requesting for change of management. So, the exchange would be subject to the discipline of quoted companies when demutualization fully takes place.

Some analysts are advising investors to jettison short-selling that was recent introduced into the Nigerian bourse, because of some inherent challenges associated with it. What is your position on this?

I don’t why they would say people should not embrace short selling. I can say one of the ingredients of short selling is still not well developed in the market and that why is why you have not seen a lot of activities at that segment of the market. For you to have a market that allows short selling there should be a complementary stock lending in the market. Today, there is no stock lending. Institutional investors like AMCON, pension fund administrators, the condition for which HNIs can  lend stock is   very stringent, so it would be difficult to see HNIs that meet this condition and who are willing to lend their stocks to short selling. Behind short selling is a short lending. Until that happens, you may not have a large volume of transactions that are driven by short selling.

Moody’s recently said the liquidity squeeze in the forex market would linger till 2018. Do you share this sentiment?

I don’t think it is out of place to expect the liquidity squeeze would linger till 2018. In the first place, for you to clear the liquidity pressure, you have to clear all the arrears of unmet demands. As long as the arrears persist, anything you bring to the market would be snapped up. I don’t know the volume of the arrears, but until that is cleared so that you would only have fresh demands in the market that is when you begin to see the liquidity pressure ease. It would take some time to see portfolio inflow that would upset any deficit in balance of trade. Currently, if we allow the normal volume of import, I don’t think our crude oil export earnings is enough to meet our demand for foreign goods. It is the invisible segment that should be upsetting any shortfall in trade balance. It would take some time to achieve that volume of capital importation and I think that was why Moody’s was saying it would in 2018 that the foreign exchange pressure would ease.

A lot of companies are presently trying to raise fresh capital through Rights Issue. How successful do you think they would be? 

The interesting thing about right issue is that companies issue rights when they don’t want the dilution of the shareholdings, particularly when we have seen shares trading below their intrinsic value. So, any attempt by quoted companies to issue fresh equities through public offer would mean they would be underselling themselves, because of the difficulties the capital market experienced in the past couple of years. For this reason, companies that are in dire need of fresh capital to avoid the admission of fresh shareholders the most appropriate route if they must issue fresh equities is to go through right issue option. So, the shareholders would decide if they want to take their rights or forfeit them. That is why you can see a lot of companies embracing right issues now.

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Whether they would be successful would depend on the composition of their shareholders, their dividend history and the industry where these companies belong to. If the companies belong to a closed sector where investors are not interested in immediate reward, but are hopeful reasonable gain in the future, such investors would be glad to pick their rights. If the company belongs to a matured industry, but has a good cash dividend policy, the investors would see at its dividend history and they want to pick up their rights. They have to look at the economic situation of existing shareholders, so, these are the factors that would determine if the right issues would be successful or not.

The budget has not been signed into law almost six months into the year. What does this portend for the economy?

It is a no-brainer that we are not feeling the impact of the fiscal authority. Whatever positive we are getting that is driving the economic recovery is coming from policies from the monetary authority. We have seen the policy gaps on the fiscal side and the failure to sign the budget and have it implemented has disturbing consequences on our economic recovery. I thought having done through the same thing last year that we would have avoided it this year.  Failure to have a budget signed into law and implemented, subtracts from the momentum we could have built if the monetary and fiscal authorities were complementing themselves.

How would you assess the performance of the APC-led government in the last two years that it has been in charge of running the country?

On security, the government has scored appreciably well. It has scored above a mere pass mark. I would give them an A on security. The military has taken back authority in the North-East. Before the coming of the present government, we saw a hopeless situation. Boko Haram was the supreme lord in the North-East. The government has done very well in fighting insurgency. The present policy has reduced and if not eliminate spate of militant attack on oil installations in the Niger-Delta. They initially made some mistakes in managing the crisis. But they are getting it right now. We have also seen a drastic reduction in kidnapping in the South-East.

The government has also done fairly well in the fight against corruption. Towards the tail end of last administration, corruption was on rampage. Those who were corrupt were ready to rub it in all our faces. But we have gone pass that. Now we are dealing with a situation that even though corruption exits, it is no longer fragrant. It is no longer at a level where nobody gives a damn. I would recommend that the government put in place structures to sustain the anti-graft campaign.

It is in the area of the economy that the government has been below par. If you look at all the economic indicators: unemployment was 7.5 percent in April 2015, when the government took over in May. At the end of the third quarter in 2016, unemployment was 13.9 percent. Inflation was single digit when the government took over. It was about 9 percent. Inflation figure for April 2017 was 17.24 percent. In terms of GDP growth, in 2014, the GDP grew by 6.22 percent, it dropped to 2.78 percent at the end of 2015. The government was only in charge for seven months of that year. Its first year that it was fully in charge, the economy contracted to -1.58 percent. And at the first quarter of this year, we are still dealing with a contraction of -0.52 percent. In terms of economic growth we have seen a contraction.

In terms of exchange rate, one would not just blame the government solely, because the exchange rate has to align with macroeconomic variables. But we are dealing with an exchange rate of N305 per dollar at the official window. These empirical and objective assessment criteria and they are all pointing southward. So, in terms of economic management, the government has his work cut out for it.

I am happy that the government has come out with the Economic Development and Recovery Plan and it has signed some executive orders that would lead to improvement in the ease of doing business in Nigeria and improve the country competitiveness in the global competitive index.






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