Excess liquidity, investor appetite drives fixed income market performance

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Ekow Afedzie, Managing Director, GSEEkow Afedzie, Managing Director, GSE

Excess liquidity coupled with investors’ demand for fixed income securities continue to drive the stellar run on the Ghana Fixed Income Market (GFIM).

Data from the June 2021 statistical bulletin issued by the central bank indicate that liquidity had increased cumulatively to GH¢121.9billion as of June 2021 from GH¢100.5billion during the same period in 2020.

The GFIM market cumulative volumes traded from January to August 2021 were almost double compared to the same period last year, closing at a total volume traded at 140.96 billion valued at GH¢146.62billion – from a trade value of GH¢66.56billion in the previous period.

Trades during August 2021 saw a remarkable run, closing at 13.90 billion in volume which valued at GH¢14.42billion.

Commenting on the stellar run of the market, Courage Kingsley Martey, Senior Analyst with Databank – the asset management company, said in an interview that currently commercial banks are more risk-averse to growing their loan books aggressively.

“We have also seen situations wherein commercial banks appear to be less inclined toward aggressive risk-taking; and so, instead of growing the loan book aggressively, banks are opting a lot more for Treasury securities despite the low yield environment,” Martey said.

This mainly means banks are prioritising risk minimisation ahead of profit maximisation. “The positive performance is mainly the result of the significant liquidity that has supported investor demand for fixed income securities.”

All these have supported demand for Treasury securities and pushed up bond prices and lower yields, and translated into the positive year-to-date performance on the fixed income market.

Since the start of this year, the debt market has realised an about-GH¢25.29billion rise in debt stocks from GH¢158.78billion at the end of January 2021 to GH¢180.07billion. These debt stocks include government of Ghana Treasury bills and bonds, Bank of Ghana bills as well as corporate bonds.

Currently, commercial banks hold about 38.98% representing GH¢70.20billion, followed by foreign investors who hold 20.36% equivalent to GH¢36.67billion while other institutions hold the rest.

Short Selling

The Ghana Stock Exchange (GSE) has indicated that the capital market will soon be able to undertake lending and borrowing of securities, following successful introduction of the Global Master Repurchase Agreement (GMRA) that has brought the Ghanaian repo market up to global standard.

This, largely known as short selling, generally occurs when investors sell securities they do not own. This scheme enables the lending of idle securities through the investors by way of clearing corporations or clearinghouses of stock exchanges – Central Securities Depository (CSD) in Ghana – in order to earn a return.

In short selling, investors sell their securities with the belief that the price of the securities in the future will drop lower; enabling them to buy back the securities at a lower price and make a profit.

Indexing on GFIM

The Ghana Fixed Income Market (GFIM) has developed its first set of bond indices, which will be launched by end of this year. Financial indices are designed to provide investors with a way to reduce the complexity and increase the comprehensibility of financial markets.

These indices have been major catalysts for product innovation in the financial services space.

Indexing on the bonds market will serve as a passive investment strategy for gaining targetted exposure to a specific market segment. The majority of active investment managers typically do not consistently beat index benchmarks.

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