Leadership (Abuja)
Jerry Uwah
18 November 2008
opinion
Investors in the Nigerian capital market heaved a sigh of relief last week as market indices, in the words of an advertising campaign of the defunct Gateway Bank, started "looking up".
The capital market was plunged into a financial meltdown by an odd combination of fraudulent price manipulation by banks in collaboration with stockbrokers, the exploitative tendencies of a handful of greedy investors and the passivity of a derelict regulator.
The recovery started on Wednesday, November 5, 2008, a few days after the Nigerian Stock Exchange (NSE) reluctantly removed the price depreciation benchmark derisively tagged "circuit breaker".
The NSE had, in August 2008, reviewed its longstanding policy on share price movements by placing a one per cent benchmark on share price depreciation in the exchange as part of the measures slapped together by the committee set up by the federal government to halt the financial meltdown in the market. Under the new dispensation foisted on the market by a desperate attempt to halt five months of relentless bear run, share prices could appreciate by a maximum of five per cent but could only depreciate by a maximum of one per cent.
While the mechanism served the designers' intention of slowing down share price depreciation, stockbrokers and other market makers complained that the so-called "circuit breaker" was unnecessarily delaying the day of reckoning in the exchange.
They argued that investors were convinced that given the dearth of confidence in the market, which had triggered crippling liquidity problems, share prices were bound to tumble further. It was therefore clear that even as investors were willing to enter the market, they would only do it when the prices bottom out.
The NSE in its own native wisdom insisted that a return to five per cent as the benchmark for share price depreciation would herald a crash. The jig-saw puzzle between the brokers and the NSE persisted for weeks until a fresh meeting of the federal government intervention committee made up of the members of the Financial Services Regulatory Committee and some prominent market players eventually pressured the NSE into changing its position on the matter as purchase orders to stockbrokers fizzled out.
Last week, market capitalization of the NSE once again leisurely crossed the N8 trillion mark. Capitalisation of the Nigerian market had peaked at N12.6 trillion in the middle of March 2008 before the meltdown initially triggered by the flight of hedge funds rocked the market.
The massive depreciation that had rocked the market for seven months seemingly bottomed out on Tuesday, November 4, 2008, when market capitalization hit N7.4 trillion. The following day saw some passive gains by a handful of blue chips after several days of zero gain in the market.
The question on the lips of investors and market operators is: how long will the recovery last? Pessimists in the market, drawing from experience of what happened in the closing days of August after the federal government intervention package foisted a measure of confidence on the market, argue that the recovery may not last longer than two weeks.
The capital market had responded to the federal government intervention package in August with massive gains that saw capitalization sailing perilously close to pre-depreciation levels. The gains lasted less than 10 days and fizzled out. Would the current recovery follow the same path?
There is also a school of thought in the market made up of die-hard optimists who believe that the evil days of the Nigerian capital market were over and that share prices were set to climb with minor fluctuations along the line.
However, even the optimists do not expect share prices to return to the March 15 level when market capitalization was at an all-time high of N12.6 trillion. The pessimists among the operators of the market contend that the current recovery and build-up of capitalization may not last longer than two weeks because the factors that fizzled out the August recovery were still lurking around.
The argument of the pessimists is that the current players in the market lack the financial muscle to sustain the bullish posture of the market. Right now, the key players in the market are the pension fund managers who have little or no options except to invest.
The Pension Act of 2004 makes it mandatory for pension fund managers to invest 35 per cent of the funds in the NSE. However, the terms dictated by the Act is so stringent that only 25 of the more than 300 companies listed in the NSE are qualified to attract pension fund.
Consequently, even if the funds were seemingly unlimited, there is a limit to how far the pension fund managers can go in stimulating the market. The logical conclusion therefore is that although the market may no longer witness the type of financial meltdown of the last seven months, capitalization may not cross the N10 trillion mark. In other words, we may see the capitalization of the market inching perilously close to N9 trillion before fluctuation sets in. So, we may have a situation where highly liquid stocks like First Bank, Zenith Bank, and Union Bank hover around N27 and N30 for a pretty long time. They may find it difficult to hit the N40 mark.
The pessimistic view of the market recovery is based on the fears that though some of the hedge funds needed to sustain the current recovery have started trickling in, they are too intermittent and paltry to conjure the earthquake that could push capitalization to the level it was on March 15.
Aside from the fact that the crisis of confidence bedeviling the Nigerian capital market is yet to go away, the foreign portfolio investors are bugged down in their own crisis at home. The credit crunch in the U.S. , Europe and Asia is a major discounting factor for the Nigerian capital market. They just do not have the money to throw around. Besides, events of the last seven months have shaken the confidence of some hedge fund managers in the Nigerian capital market. In a situation where some of the emerging markets are so attractive and pose considerably less risk, the NSE would have to work two times harder to restore foreign investors' confidence.
Perhaps the most dangerous of the competitors for funds with the NSE is the boom in the nation's property market. Right now, even pension fund managers are being tempted by the boom in the property market. Nigeria is believed to have a housing deficit of 16 million housing units. At least 90 per cent of that figure is required in the lower rung of the social strata.
However, most of the investment in property in the country now is for the middle and upper income bracket. Even with the high concentration of investment in the development of housing units for the middle and upper end of the market, the housing deficit in the highly favoured income bracket is still palpable.
The situation is so tense that property in highbrow areas of Lagos State like Victoria Island, Lekki and Victoria Garden City are priced in U.S. dollars. For instance, a 4-bedroom duplex on Oko Awo Street in Victoria Island attracts a princely annual rent of $25,000.
With returns on investment in the property market so attractive and the risk seemingly low, the capital market would continue to attract mandatory investors like pension fund managers and a handful of lightweight investors.
The logical conclusion from the above indices is that while the challenges of the NSE are not insurmountable, the days of 200 per cent capital gains may be gone.
Be the first to Write a Comment!
Copyright © 2008 Leadership. 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.
