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Daily Independent (Lagos)

Nigeria: Again, Stock Market At Mercy of Speculators

Kingsley Ighomwenghian

25 November 2008

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Stocks listed on the Nigerian Stock Exchange (NSE) behaved true to type last week, as investors almost wiped off the memory of the gains recorded between November 5 and 17 as the sign of declines set in last week Monday. The decline cut short the celebration that the market had bounced back after almost eight months of huge losses, with investors seeking the exit door as panic selling characterised market activities. At the close of trading last weekend, equities capitalisation had lost a total of N659.91 billion, representing 66.97 per cent of the N985.376 billion recovered, just as the All-Share-Index, once more, inched closer to its 52-week low level of 33,754.11 points attained on November 5. Last week, the index closed at 34,660.65 points after dropping 3,215.41 basis points or 8.48 per cent from the 4,264.33 points or 12.63 per cent garnered within the period while the rebound lasted. Last weekend's slide means the index closed 40.23 per cent lower than the level at the beginning of this year.

Last week Monday's robust growth especially in the value of listed stocks was enhanced by the 2.251 billion shares added to those outstanding in the name of Union Bank of Nigeria, following the directors' offer of a bonus of one new share for every six held as at Monday November 17, 2008.

Equities' analysts were quick to warn their clients at the weekend that the situation would continue in the coming days, especially as the Yuletide approaches, aside from the Muslim festival, leading to the New Year celebration and then the season of fees and sundry payments that could further negatively impact on the market indicators. The market is also expected to see some rebounds now and again until the indicators reach their support levels and "gradually move to a positive territory in the week ahead."

Bearing this in mind, analysts are agreed on the need for investors to see the situation where none of the stocks is trading at a new highs with most of them undervalued instead, as an opportunity to position for the impressive growth ahead when the market returns to full steam in the months ahead. Investors are currently being schooled on the need to maintain a medium to long term view of the market, just as expectations are that "smart investors (would) take advantage of the current undervaluation for strategic position in some stocks that have good fundamentals and have prospect for growth in the medium and long term," noted analysts at FSDH Securities Limited at the weekend.

In its own report, analysts at UBA Global Markets Limited listed stocks that have not only hit their 52-week low, but have become under valued, thereby presenting an opportunity for discerning investors in the process. First City Monument Bank, for example, closed at 593 kobo on Friday, coming within earshot of its 2005 closing price of 511 kobo each, just as the stock is believed to be trading at a robust discount of 60.89 per cent to actual value. Benue Cement Company at last weekend price o N26.00 each, closed N11.00 or 30 per cent lower than the 2006 end price of N37.00, just as Cement Company of Northern Nigeria, another competitor, at last weekend's 798 kobo closing price was trading just three kobo shy of the 795 kobo it closed at the end of December 2005. The case of Lafarge Cement WAPCO, another building materials making giant, appears worse hit by the meltdown, going by the fact that it is trading N28.85 or 53.43 per cent discount to the 2006 year end price of N53.99, just as its N25.14 price last week, makes it 50.18 per cent under-valued according to UBA Global Markets' analysts.

Others trading at their 52-week low level at the weekend also included conglomerates- PZ Cussons Nigeria, which closed at N17.08, slightly high than the N16.20 per share closing price at the end of December 2005, while at 652 kobo each, National Salt Company also attained a new-year low, just like Vitafoam Nigeria at 645 kobo. Intercontinental Bank hit a new bottom at N13.70, meaning that it is 60.07 per cent undervalued; meaning that it was worse hit than sub-sector peers PlatinumHabib Bank, which closed on Friday at 996 kobo, traded at a discount of 56.14 per cent; and Access Bank at 813 kobo, a level analysts at UBAGML believe means it is trading at 52.52 per cent.

The insurance sub-sector was not left out, as the table indicated that some players in the sub-sector traded at new-year low and continue to trade at a discount to fair value. For example, Linkage Assurance, at 111 kobo each, is believed to be trading 61.33 per cent below fair value; UNIC Insurance, at 177 kobo follows at 50.48 per cent; among others.

Perhaps realising that the gains recorded since November 5, may not be sustainable in the face of liquidity crunch and loss of confidence pervading the market, there were hints last week that the House of Representatives ad-hoc committee on the global crisis met with stakeholders in the economy. A source at the meeting explained that the Abuja meeting was part of pre-emptive measures to ensure that the economy, beyond what the regulators are saying, is considerably safe from the effects of the global economic crisis. The meeting had top officials of the Federal Ministry of Finance, regulatory agencies like the Central Bank of Nigeria (CBN), the Securities & Exchange Commission (SEC), chief executives of banks and top economists. The meeting, which was a follow up to an earlier debate, some months ago, about the health status of the nation's economy, was also to give the committee members an opportunity to review actions of government's and the various agencies, since the global crisis which began with the sub-prime mortgage crisis in the U.S. became full blown.

One issue that may have received attention at the meeting was the indirect injection by the CBN of liquidity into the banking system with the aim of ensuring that it flowed into other aspect of national life.

Explaining the measure taking as a direct reaction to the liquidity crunch in the system, CBN Governor, Prof. Chukwuma Soludo observed recently in Lagos that the liquidity drought, despite the safety of the Nigerian financial system, was due to "the aggressive mop up in the past, as well as the credit crunch in the rest of the world."

This, he added, "has dried up some of the facilities being extended to our banks, (so,) we decided to inject liquidity into the financial system." The reduction in the Cash Reserve Ratio from 4.0 per cent to 2.0 per cent was expected to immidiatelly put in about N150 billion into the banking system, while the reduction in liquidity ratio would make over N1.0 trillion available to the domestic economy in terms of liquid assets.

While addressing media executives and business editors during lunch some weeks ago in Lagos, Soludo disagreed on the need to inject physical cash into the decline stock market as many were already advocating, just like is going on in other advanced economies that have hit by a recession. Any amount, no matter how huge, that is invested in the form of bailout, he said, will be drained by profit takers, a situation that may even leave the market worse off. He added that global fund managers and other foreign investors put pressure on the market, as they sought ways to boost their troubled liquidity position at a time when their assets in the developed markets were daily being eroded

A recent report put the total value of credit lines recalled by foreign banks acting as correspondent banks to the nation's banks at about $3billion in October 2008. This, the Money Market Association of Nigeria (MMAN), made up of treasurers of the various banks, among others, led to an increase in foreign exchange transactions under the Wholesale Dutch Auction System (WDAS), during the month, from about $300 million in September to $3.4 billion in October.

For the market to achieve genuine rebound, stock traders and analysts are agreed on the need for government and the regulators to implement the outstanding parts of the earlier suggested measures to stem the tide. The SEC had earlier released guidelines for the emergence of market makers and share buy-back, just as Lanre Oloyi, spokesman of the commission told capital market correspondents last week at a national workshop that a total of 15 companies applied for licence to play the role of market making. Of this, he said, three have so far been registered, while urging others with the requisite financial muscle to come forward, in a bid to enhance market correction.

The SEC guideline requires a market maker to "be a specialist in designated securities and hold itself out (by entering quotation in an inter-dealer communications system or otherwise) as being willing to buy and sell the designated securities for its own account on a regular or continuous basis."

Such a firm is also expected to ensure continued liquidity in the market at all times, while serving as a source of market information for the designated securities for which it stands ready at all times. It is also expected to facilitate a smooth trading atmosphere and engender market stability as well as promote price discovery. The market maker, according to the rule is under obligation to stabilize the market by ensuring continued liquidity, operate within the established bid and offer spread of a maximum limit of three per cent, subject to review. It is also expected to have the capacity for two-way quotes in relevant stock throughout the trading session, in addition to being under obligation to "have the capacity to deliver and settle transactions within the prescribed (T + 3) settlement cycle."

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