Peter Egwuatu
15 September 2008
opinion
Recently, the Association of Issuing Houses of Nigeria, which you are a prominent member and former Chairman recently partnered with the regulators to organise a conference on financing the 7-Point Agenda of the Federal Government through the Capital Market, what do we expect now after the conference?
The Association of Issuing Houses (AIHN) in conjunction with SEC and the NSE prompted the conference on "Financing the 7-Point Agenda of the Federal Government through the Capital Market". The aim of the conference was for stakeholders to articulate ideas on how the capital market can assist the Administration to source funds for financing the Federal Governments 7-Point, as well as to highlight the enormous potential that is beginning to unfold in Nigeria's economic development firmly within the ambit of the slightly more mature growth that the capital market has evinced over the last decade or so. Globally, countries are encouraged to explore the capital market for financing, particularly the medium to long term projects that can bring about economic growth and development.
Going forward, we expect the government to put all the necessary frameworks (policy and regulatory) in place to drive the public sector initiative and investment in the nations infrastructure and other priority areas.
How far do you think the capital market can go in this infrastructure financing which you know is a huge challenge?
The landscape for infrastructure investments is rapidly changing all over the world. Today, it is not uncommon to see fund managers allocating 5-10% of their investment portfolio to infrastructure, and this proportion is expected to grow. Stakeholders in Nigeria recognise the value and the benefits of developing deep and liquid capital markets for infrastructure financing. We believe that Real Estate Investment Trust or REIT markets, as well as Insurance and Pension funds will significantly aid in this regard. A special case will need to be made to compel pension funds to invest in infrastructure projects that have high investment grades. The current PFA asset allocation will need to change to a situation in which a sizeable amount of funds are invested in infrastructure projects.
The Federal Government should expand its focus for capital funding support to cover the international capital markets. This can be achieved by the following: Deepening transparency and accountability; Improving continuously prudent financial management; Encouraging the quick internalisation of the Nigerian capital market; Sustaining enhanced sovereign rating; Presenting government financial information in accordance with IFRS standards to make it easy for international fund managers to invest.
As a seasoned operator in the market, how would you describe the current state of the Nigerian Stock market?
The Nigerian Stock Exchange (NSE) All Share Index (ASI) has shed about 20% from its All-time High of 66,371.20 points attained on March 5, 2008 to the current 45,500 points. Market Capitalisation has also slumped by 18.3 per cent to N9.21trillion from the All-time historic peak of N12.64 trillion , that is, about N 3.432trillion was lost in eight months from December till date.
This slack in trend of the NSE in 2008 is not new. Typically markets tend to adjust which often leads to an up and down movement as correction takes place. The Nigerian capital market has witnessed a fair share of downward spiral of prices in the past and has consistently picked up as shown from the figures below-
In 1997 the market lost 35% between April 4 and December 22. In 1988, the market lost 12% between March 4 and May 25. In 1999 the market lost 14% between Jan 6 and May 25. In 2005 the market lost 13% between January 12 and April 6.
For 2008 the market has lost 37% between March 5 and August 22, however in our own view we see the market trend in 2008 as a temporary market slump, an inverse of the market boom experienced in 2007.
Several reasons have been adduced for the persistent fall, what in your opinion are responsible for the bear run?
The present lull in the market can be attributed to the following factors: Illiquidity in the system due to lack of credit. New regulations putting more pressure on liquidity and other speculative activities - Suspension of margin facility and the minimum trade to move prices.
Possible effect of global economic crisis i.e. the sub prime effect Panic disposal of stocks by bank loan funded investors.
Do you think some government policies contributed to the slide?
Yes. In a way, some of these policies were speculated to an extent that they affected the stock market performance.
If yes, what are these policies and how do the regulator guard against such in future?
Not enough new listings of companies in the secondary market. Companies in primary market offering cannot absorb more than 25% of the oversubscribed funds.
A significant number of private placements are yet to list and as such monies removed from the secondary market to fund these private placements are yet to find their way back to the secondary market. A company will not be allowed to raise fresh funds from the capital market until one year after listing. Uniform accounting year end of banks, abolition of preferential allotment window for primary market offers, Restriction of dollar proceeds of stock sales to $10,000 per day/week, Unnecessary advertisements/caveats by the regulators on private placement offers, as if private placements are offered purposely to defraud investors. Those that have been suspended after wide consultations are. Margin Trading suspension. Registrars will not be allowed to provide services to their parent companies. All these are some of the policies that may have impacted on the market.
In addition to the above, CBN should tacitly encourage banks' to increase lending for capital market activities.
From every indication, the regulators have taken adequate measures to address some of the issues thought to have caused the down-turn, but why has the market not responded positively?
It is true that the regulators have taken measures to address some of these issues and have acted to stabilise investor's perception of the market. Going forward, regulators need to be more proactive and come up with various scenario analysis that will tackle unwarranted situations even before they arise. The 2007 market explosion attracted several investors to the Nigerian Capital Market, some of whom did not understand the dynamics of the market; once they noticed a slight market lull, they quickly offloaded their investments. We will need to educate these investors and attract them back to the market.
Market price stability can only be achieved on a sustainable basis through the instrumentality of demand side and supply side management. The present legislative constraints that prevents companies from "buying back" their shares thus limiting all the correlation efforts only to demand management. Legalizing share buy back by companies as is done in some advanced economies will help companies stabilize their price through supply management
Also, companies have been coming out with impressive results, yet the market is still going down. Could you explain why this is so?
The truth of the matter is that companies' cannot operate in isolation from the market. As soon as liquidity returns to the market these companies' will be properly priced. The lack of positive market response in the face of impressive corporate actions is not an isolated event. It is a sum total of the various reasons we have adduced and investors' reactions to these factors that have led to the current situation we are experiencing. The most conspicuous of these instances is the DBA audited half-year interims with a declaration of a 1 for 2 stock dividends and a N0.25 interim cash dividend. There is also the investors' reaction to First Bank's audited year-end results, where they declared N1.20 cash dividend and a 1 for 4 stock dividends.
Investors involved in this capital flight from the market are seeking alternative investment outlets with offer of good returns such as the bond market and real estate. Nevertheless, BGL strongly believes there is a need for investors' re-orientation in Nigeria. Investors have to be educated on the ways and means o| the capital market. Investors have to be enlightened that the stock market is not a place for short-term exponential returns but a place for long-term capital deepening and appreciation.
In recent times, there has been huge number of private placements in the market. Could this have also been responsible for the lull in the market?
From October 2007 to date, about N700 billion has been raised through about 320 private placements. A significant amount of these monies actually came from the secondary market. This is a positive development since most companies will move to the official market after the private placement.
About 50% - 75% of the 320 companies raising shares privately will become listed within 12 months. However, we have a situation whereby a large number of private placements are yet to be listed and as such the monies are yet to return to the secondary market. The NSE should endeavour to review its listing requirements and reduce costs considerably to attract all or most of the 320 companies to become listed on the Exchange. This will assist in the achievement of the target of 1000 listed companies within the next 24
months. Accordingly, NSE should allow companies to list by introduction at prices that the companies (Issuers) and Issuing Houses/Financial Advisers professionally determine and allow market forces to accept or reject the price by their market actions
Foreign investors have been accusing the Federal Government of policy inconsistencies do you in your opinion think this has contributed too?
I don't believe we have witnessed any policy inconsistencies. Rather what we have had is a situation whereby the current administration may have been a bit slow in policy implementation, due to its desire to correct previous wrongs.
How soon do we expect a recovery?
We should expect a recovery very soon. The market has assumed a new level after the long bearish period and many of the blue chip stocks are currently trading below their fair values. We expect the market to recover in the medium term given a renewed up-tick of real economic activities in the country.
What can turn around the market is a change of the bandwagon "sell propensity" by investors into a bandwagon "buy mentality". It is the collective action of investors buying that will make the market rebound. Accordingly, operators' and regulators (SEC, CBN and FMF) must come out publicly and regularly through advertisements and talk shows to talk about the underlying strength of the economy and the opportunities the market presents at this time. The truth of the matter is that investors like to regularly hear from the regulators as it serves as an assurance measure.
What in your opinion is the explanation for the high activity in the primary market?
The primary market tends to have a lower PE ratio as well as more investment options than the secondary market. Furthermore there is an investment psyche, especially in the Nigerian investment environment, that wealth is more preserved in the medium to long term by investing in Public Offers and Private Placements rather than playing active speculative role in the secondary market.
The relationship in activity level between the two components of the stock market - primary and secondary markets - has always been of inverse nature when there are no any exogenous factors. This is evident by the fact that companies accessing the primary market for fresh funds usually consider the timing as one of the critical success factors for the new issues.
The present trend of increased activities in the primary market confirms the fact that investors consider the present lull in the secondary market as a temporary phenomenon.
What is your advice to investors while we wait for a recovery of the market?
Investors are advised to reach out to their financial advisers to help reevaluate their portfolios. They should also trade with caution and take advantage and invest in blue chip stocks riding on strong fundamentals. In addition, diversifying portfolio by playing in bonds, real estate assets and fixed income securities has assumed an attractive alternative. Finally investors should be patient and not panic. The capital market is primarily a market for long term returns, hence investors can increase the tempo of buying so they can lower their average cost of investment so they can position to start to reap profits from marginal upward movement in prices by the time the market starts to turnaround.
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