Goddy Egene harmonises the views of stakeholders on how the stock market can attain full recovery.
Given the performance of the stock market last week, when the benchmark indicator climbed to an 11-month high, there is the tendency to take it for granted that the market is heading for a full recovery.
The Nigerian Stock Exchange All-Share Index closed last Friday at 22,741.06, which brought the year-to-date (YTD) increase to 9.6 per cent. Ordinarily, this was supposed to be good news, pointing towards the recovery of the market. However, considering that this level of growth that was attained early in May this year before, then it would be too early to celebrate. Besides, the market has not performed well in the second half of every year in the recent past.
Confirming the swings between the first and second half year-on-year, Managing Director/Chief Executive of Financial Derivatives Limited, Mr. Bismarck Rewane, had said that average first half (H1) returns between 1986 and 2011 stood at 16.9 per cent while average second half (H2) returns was 7.5 per cent. According to him, between 2008 and 2011, the market gained 1.15 per cent in the first half of the year while second half recorded a negative 21.4 per cent growth.
It is believed that for the market to remain on the path of full recovery following its downturn since 2008, a lot more still needs to be done. The Managing Director of First Bank of Nigeria Plc, Mr. Bisi Onasanya, a seasoned banker, recently had the opportunity to give his own recipe on how the market can recover. As guest lecturer at the recent 2012 Pearl Awards Annual Capital Market lecture, he admitted that the market was still suffering from low patronage from local investors, many of whom are first-timers who got their fingers burnt when the market crashed in 2008-9.
Low Local Investor Participation
According to statistics by the NSE, foreign investors currently account for over 70 per cent of the transactions on the floor of the exchange, while prospective local investors watch from the sidelines. This is partially responsible for the high volatility witnessed in the market. The trend is once prices drop, foreign investors move in buy and wait for any opportunity for capital growth. Once the stocks achieve some appreciation, they exit, which in turn depresses the market.
However, apart from the above scenario, Onasanya noted that for institutional investors, lack of confidence still abounds, notwithstanding certain factors. These factors include the establishment of the Asset Management Corporation (AMCON), various regulatory actions and reforms which are aimed at improving financial disclosure, transparency and governance among financial institutions and listed companies, and institutionalising effective regulatory oversight.
"Not only do foreign institutional investors still entertain doubts as to the efficacy and reach of these initiatives, especially the weak judicial system that leaves most breaches unpunished, they also have very good reason to be concerned about the rising state of insecurity of lives and property in the country," he said.
The FBN boss added that the low patronage in the market has been caused by the high borrowings by the Federal Government, a development that has impacted positively on yields on government instruments to the detriment of equities. "As the Federal Government has borrowed more it has seen an increase in the yield on its borrowing instruments. These rate rises, in turn, have increased the attraction of government debt instruments, pushed the private sector out of the business of issuing bonds, and diverted domestic savings away from the capital market to the money market," he said.
According to him, the decision by some quoted companies - Ecobank Nigeria and the Nigerian Bottling Company (NBC) - to delist from the market have equally affected the fortunes of the market, declaring that these reasons, among others, have clearly hindered the prospects of a market recovery.
Resolving the Debt Overhang
But all hope is not lost as Onasanya proffered some solutions that could lift the market finally from the doldrums. He decried the absence of an intervention fund for the equities market, saying there was need for the Federal Government to intervene to trigger a full recovery.
According to him, across the Nigerian economy, regulators in other sectors have taken action that stemmed the losses in those sectors. He cited the banking and aviation sectors as examples, explaining that the intervention by AMCON was instrumental in the quick recovery of the banking, while the aviation fund has had a positive impact on the airlines.
"Within this context, it is difficult to understand the continuing absence of an intervention fund for the capital market. I note, in this regard, the Coordinating Minister of the Economy and Finance Minister's (Ngozi Okonjo-Iweala) reiteration of the Federal Government's plan to work out a forbearance package for stockbrokers as part of measures to stimulate confidence in the Nigerian stock market and increase liquidity," he said.
According to him, "The fact that the capital market crisis has dragged on for so long, suggests that we might not be looking at the broad range of policy responses needed to solve this crisis."
In view of the experience in other sectors of the economy, this is indeed a surprising turn of events. The issue of debt overhang arising from margin loans is one of the contentious issues that has slowed down recovery, and on which the government is said to be working a forbearance package.
However, Onasanya noted that although details of this package are still being worked out, at the very least, the package must include two ingredients. "First is the provision of funds at concessionary rates. These new levels of liquidity will help brokers begin the balance sheet adjustment necessary to return to functional levels of liquidity in the market. Nonetheless, funds at concessionary rates would still be inadequate to address the over N300 billion operators' debt overhang. In order to address this, the capital market would need forbearances on the debt owed by operators, including long-term restructuring of margin facilities," he said.
To the President of Chartered Institute of Stockbrokers (CIS), Alhaji Ariyo Olushekun, the market needs a stabilisation fund, which will buy up the excess shares in the market. According to him, similar to the quantitative easing being implemented in some developed economies, it is essential that AMCON or any special body is empowered to intervene in the market by purchasing and warehousing undervalued securities with strong fundamentals.
"These can subsequently be sold at a profit in a systematic and orderly manner. This matter is crucial as domestic investors have abandoned the market having lost money in recent past," Olushekun said.
The CIS president noted that one of the ways to facilitate the market's recovery is through investor education, saying that all over the world, investor education remains a key pillar of market activities and development. "In particular, investors' attention must be drawn to the fact that since the decline started in 2008, major companies accounting for the bulk of our market capitalisation have been declaring improving results year in year out.
"This implies that their fundamentals are positive. More investors, therefore, need to be encouraged to change their investment horizon to long term. Less knowledgeable investors need to be advised that it would be safer for them to channel their investment activities through collective investment schemes managed by well qualified and adequately regulated fund managers," he said.
Speaking in the same vein, Onasanya said that in the light of the lessons learned from the stock market collapse, there is a strong requirement to strengthen the exchange's investor education/awareness function, especially for retail investors. He explained that the task was not to help retail investors choose which stocks to invest in, but to help prevent their being defrauded.
"In particular, a key deliverable is to bring retail investors up to scratch on the long-term nature of investments in the capital market. This will help dispel the sense that evolved on the back of the rapid price gains in the market during the heady days leading up to 2007 that the exchange was a source of quick, high yielding returns," he said.
While some of the measures may be seen as long term, the FBN boss said, a number of additional reforms recommend themselves over the medium-term. "These include the possibility of government injecting new capital into the market to provide liquidity and shoring up prices; encouraging the sovereign wealth fund to invest a certain proportion of its wealth in equities quoted on the stock exchange; transferring unclaimed dividends into a trust fund and removing the requirement to charge value added tax on capital market transactions," he said.