Dele Sobowale
28 August 2008
analysis
THE announcement by the Presidential Advisory Team constituted on Tuesday, August 26, 2008 to find ways to stabilise the Nigerian capital market should be regarded as a two-edged sword which could cut both in favour and against the capital market itself.
For a start, it is a novel intervention by the Federal Government in the operations of the capital market. This is worrisome because government intervention in activities that should ordinarily be within the control of the private sector, however well intended, almost always raises the fear of subsequent control that goes beyond mere regulation by government.
Worldwide government intervention in the activities of the private sector almost always fosters suspicion; not the least of which is the introduction of unbridled corruption.
If that apprehension becomes pervasive, this intervention by the Federal Government might actually make the situation worse especially since the measure which could have been taken covertly was loudly publicized.
Furthermore, government intervention, when the Nigerian Stock Exchange has not requested for it, could be interpreted three ways -only one of which is positive.
One, and that is the most damaging, it could be construed as a vote of no confidence in the management of the NSE especially given the controversy surrounding the Director-General of the NSE at this time.
That is the last thing the capital market needs at this time because there is nothing exceptional about the corrections taking place in the Nigeria capital market. It merely mirrors the global trend at this time.
Two, the interception could be misinterpreted as a panic measure by government aimed at securing the interests of pension funds which have invested heavily in the capital market. Granted, given the all-sectors decline in value, the pension funds like others have seen the massive erosion in the value of their portfolio.
But, pension funds, unlike most individuals, are in the capital market for the long time and need not worry about the current situation which will not last for ever.
Three, and this is about the only positive aspect of the intervention, at least investors at home and abroad can be reassured that the Federal Government will not allow the share prices to go all the way to the ground level. That alone will stem the tide of panic sell-offs. But even the benefits of this element must be weighed side by side with the fears that the other two interpretations of the measure will invoke.
However, when we turn to the interim measures taken, one is constrained to question the basis of those decisions. First on the list is the "one per cent maximum downward limit on daily price movement whilst the current five per cent upward movement is retained".
No knowledgeable investor will be comfortable with that sort of arbitrary discrimination between those wanting to sell and those seeking to buy.
As a matter of fact the NSE on its own recently issued a similar order forbidding downward price movements while retaining the five per cent upward price adjustments. The measure almost paralysed the stock market.
It is hard to imagine why the team of advisers assumed that merely allowing one per cent more for downward movement will not produce the same result. Investors will not knowingly purchase securities for more than their perceived value irrespective of who attempts to sell them overvalued shares.
That is a fact which the team of advisers ignores at great peril to their own reputations and potential damage to the interests of investors because it might create massive distortions in the capital market.
At any rate, the measures which have been announced might satisfy the demands of those who want something done quickly. But, it lacks credibility because the team has not undertaken any studies to determine the causes of this downturn.
Among these, and perhaps the most important lies in the fact that share prices in the past have been manipulated by a few individuals; a great deal of insider trading still goes on and many shares are not worth the price at which they sell in the market today. As President Abraham Lincoln, 1809-1865, had warned us: "You can fool some of the people all the time; you can fool all the people some of the time but you can't fool all the people all the time."
All too often, the so called FACTS BEHIND THE FIGURES presented by quoted companies when visiting the NSE might as well be called THE LIES BEHIND THE FIGURES. At least the experience we have had with Lever Brothers (now Unilever) and Cadbury will support this. Only a fool, and most investors are no fools, will assume that the two were or are the only quoted firms falsifying their performance.
As long as there is pervasive suspicion that those figures might not be authentic, the recovery will be delayed.
Similarly, a lot of investors knew about the appreciation of share prices of firms that have not published their accounts for years and even one that was liquidated and they wonder how this could happen in a well-regulated capital market. Unless such anomalies are sorted out, artificially pumping up the All Share Index will not work in the long run.
Finally, asking "Nigerian banks to partner with market makers to inject funds into the capital markets through appropriately structured credit facilities" addresses only the supply side of credit; the demand component has been ignored.
It is doubtful if a lot of investors still licking their wounds from the losses they have suffered so far will again rush to the banks to obtain loans for investment in the capital market given the usurious interest rates banks charge these days. At any rate, the report released recently by the U.K-based and globally-influential THE ECONOMIST paints the picture of a Nigerian banking sector that is sick. Naturally, the banks dispute this.
But, one thing is beyond controversy. Nigerian banks no longer enjoy the trust of their customers. For almost six weeks, text messages to SUNDAY VANGUARD'S "RIGHT OF REPLY" indicate that about 90% of Nigerians are dissatisfied with their banks.
Thus asking the banks to come to the rescue of the capital market might amount to sending a patient, at death's door, from the emergency unit to help someone in the operating theatre. The last thing the banks should do is to pump their money into a capital market which has not bottomed out yet.
The team of advisers, which includes only people from the supply side of credit needs to be expanded to accommodate a few from the demand side; otherwise its view will be jaundiced and might not yield the expected results.
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