22 June 2008
editorial
Lagos — On Monday June 9, 2008, the Nigerian Stock Exchange, NSE, did the unexpected. It ruled that stocks must not trade below their previous day's closing price. This was done apparently to prevent the market from crashing.
The market indicators have been heading in the negative territory since March this year. But given the market fundamentals which were considered to be quite strong it was thought that before long, the trend would be reversed. Usually at this period most stocks perform very well. Investors are expectant that companies with December and March end of year would be returning results. The expectation was not cut short as most companies have been announcing very handsome results but the bullish run expected in the market to accompany such good results was not seen.
For nearly four months now the share price depreciation has continued. It came to a head when all the gains recorded during the first quarter of the year were not only eroded but also the market actually recorded a negative return of 3.03 per cent. This, as would be expected, triggered the alarm and the NSE suspected that it could be presiding over a possible crash of the market.
The director general of the NSE, Prof. Ndi Okereke-Onyiuke, has since given reason for the intervention. She said the downward trend in the market was caused by malfunctioning in the trading engine of the Central Security Clearing System, CSCS, which gave opportunity for indiscriminate sale of stocks, even below the expected prices.
She further said that there was no stock market in the world where the managers would sit down and watch the market crash. "If we see something wrong going on in the market, we must intervene," she added.
Although the House of Representatives Committee on Capital Market has frowned at the action of the NSE, we believe, however, that what the market managers did was not unprecedented. The United States stock market crisis of October 19, 1987, was mitigated by the direct intervention of the country's financial authorities. Arising from this, the then US President, Ronald Reagan, had to set up a Presidential Working Group, PWG, to avert future financial market melt down. The PWG was to act as the invisible regulating the market.
Robert Heller, the Federal Reserve Governor between 1986 and 1989, who acted actively to prevent the crisis, said this about the episode: "Everybody's attention was tightly focused on containing the damage and preventing a spread of the financial disruptions throughout the financial system. At that time, we were also dealing with a severe crisis that was leading to almost 200 bank failures per year. Without swift supportive action on behalf of the Fed, the stock market crash could well have been the straw that broke the back of an already weak camel."
So what the NSE did was not new to the capital market. What we, however, find unacceptable is the fact that it took only a downwards plunge of the market for the managers to know that the system was faulty. All through last year, several observers had noted that the market boom was not realistic. In fact, a good number of them foresaw the crash but rather than read the hand writing on the wall and tread cautiously, the market managers said then that there was no crash in sight. "Our capital market cannot crash because the fundamentals in terms of price, capacity for growth, listed companies' potential and the economic horizons are all in favour of the market," Okereke-Onyiuke was quoted as saying.
It is true that a lot of Nigerians did borrow heavily to invest in some of the quoted stocks. A crash of the market could therefore mean so much to both investors and the banking system. In fact, it took a directive of the Central Bank of Nigeria, CBN, for banks to stop the practice of lending to investors in the capital market.
There is nonetheless a school of thought that believes that what is happening to most stocks in the market may well be 'market correction mechanism' to readjust the share prices to their real values. There is the belief that most of the shares must have been over valued during the period of sharp price increase. This school believes strongly that what is at play are simply demand and supply forces and there was nothing wrong with the market. There seems to be some logic in this line of thought.
With most stocks at peak prices, investors must have reasoned that the next direction would be downwards. This must have led to offload of shares by investors to enable them take advantage of other stocks and diversify their portfolios. Naturally, such huge supply of stocks if not matched with commensurate demand could lead to downwards movement of prices.
The market itself does not appear to be as open as it is made to believe. The incidence of insider abuse is not strange to the market. While the uninformed operate on the surface, the well informed could go to great depth to make easy money from the market. There are instances where prices of certain stocks are manipulated and before you knew it, a stock that was selling for peanut not long ago is now at roof tops. All of these are done to benefit some few individuals who may want to profit from the market.
It is against this backdrop that fears have been expressed that the whole aim of the NSE intervention may well be to protect the interest of some individuals that are likely to lose so much from a possible crash of the market. These are probably the same individuals that manipulated the market in the past and reaped bountifully from the rising share prices.
From this stand point therefore, we would want to call on the Securities and Exchange Commission, SEC, to thoroughly investigate the NSE intervention and to ensure that no selfish interest is being served by it.
Be the first to Write a Comment!
Copyright © 2008 This Day. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
