By Arthur Stevens Research
The CBN recently announced that effective 23/10/19, local institutional investors and Retail buyers will NOT be allowed to buy OMO (Open Market Operation) bills in both the primary and secondary markets. The implication is that the only players in that market will be banks, discount houses, and foreign portfolio investors.
Given that banks had earlier been required to meet a 60% loan/deposit ratio, it is safe to assume that the only effective player that will be left in that market will be Foreign portfolio investors.
SO WHY IS THE CBN DOING THIS?
1. The explicit reason is the CBN’s desire to drive more lending toward the real sector of the economy and thereby increase capacity utilization and employment.
2. The implicit reason is the CBN’s desire to drive down high-interest rates on this risk-free instrument and to reduce the pressure on the local currency. It is hoped that the continued participation of the foreign investors in the OMO bill market will increase the inflow of foreign currency and therefore stem the need to contemplate devaluing the naira.
SO WHAT IS THE LIKELY IMPLICATION FOR VARIOUS SECURITIES MARKETS?
1. So, any local institutional or retail investor wishing to buy T-BILLS (Treasury Bills) now is restricted to the bi-weekly public auction. This will likely lead to a downward movement in rates on T-BILLS. This is also likely to affect bank deposit rates.
2. We expect that short-dated bonds will also enjoy more patronage as they are seen as a substitute for the longer-dated T-BILLS. It is likely that the yield on bonds will also drop in the short run.
3. The prices of Blue Chips shares will likely rise as their low valuation and excellent dividend yield will become attractive to investors. The like of ZENITH BANK, UBA, ACCESS BANK are currently trading at dividend yields that are higher than one can get in the treasury bills market and will be expected to see capital appreciation.
SO, IN SHORT, WHAT WILL WE DO?
1. We will stop chasing T-BILLS and look for short-dated bonds to buy.
2. We will quickly increase our exposure to blue-chip shares with attractive dividend yield such as:
STOCKS DIV YIELD AT PRESENT VALUATION
A. ZENITH 17%
B. UBA PLC 14.7%
C. ACCESS BANK 10%
D. DANGOTE CEMENT PLC 12.76%
E. GTB PLC 11.5%
