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.
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