7 November 2012

Nigeria: NSE Rebound, Driven By Reforms and Economic Fundamentals

Eromosele Abiodun writes that the growth of the Nigerian stock market in 2012 is neither based on sound economic fundamentals or recent reforms but a mixture of both

Whatever yardstick any analyst around the world will want to measure the performance of the Nigerian equities market with, one can confidently say that the capital market has done remarkably well this year.

Experts have ascribed the performance to economic growth and international investment, but recent reforms have also increased stability, security and investor confidence. Among the many steps taken by the management of the Nigerian Stock Exchange (NSE) are market making and short-selling.

The entire process started in April this year when the Securities & Exchange Commission (SEC), mandated 10 investment bodies as Primary Market Makers (PMM), which gives investors greater freedom to trade with the aim of maintaining liquidity and volumes. PMMs can manage portfolio and trade risks by mapping open positions, borrowing and lending stocks, and through collateralised obligations. They are also the only investors permitted to engage in naked short-selling.

To set the ball rolling, the NSE commenced the market making initiative on September 17, 2012 with 16 stocks and added nine other stocks two weeks later.

In line with the phased introduction of additional stocks to the list of stocks in the basket of market makers on the exchange, three stocks, all from the banking sub-sector of the bourse, were added on Thursday, October 18, 2012. The stocks were: United Bank Plc; Ecobank Transnational Plc and Skye Bank Plc. The additional three stocks now bring the number of stocks that market makers are making market on to 28.

The NSE in a statement noted that the addition was in tandem with the promise made by the exchange that all the stocks quoted on the NSE that are trading above par value would be added to the market making programme over a period of six months. The stocks covered by the initiative now are: PZ Cussons Nigeria Plc; Nigerian Bag Manufacturing Company Plc; Presco Plc; International Breweries; Lafarge Wapco; Fidson Healthcare Plc; Redstar Express Plc; Zenith Bank Plc; Sterling Bank Plc; D.N.Meyer; Diamond Bank; FCMB; Fidelity Bank Plc; Nigerian Breweries Plc; Guaranty Trust Bank Plc and UAC Nigeria Plc. (UACN).

Others are: Access Bank; Academy Press; Custodian & Allied Insurance; First Bank Plc; Dangote Sugar Plc; Union Bank Plc, NASCON and Nestle Nigeria Plc as well as AIICO Insurance Plc and the three newly added ones.

Market Performance

A review of the performance of the stock market since the commencement of market-making on the Nigerian bourse showed that the nation's stock market had been reacting positively, adding about N700 billion.

For instance, the market capitalisation and All-Shares Index that stood at N8.077 trillion and 25,373.83 respectively at the commencement of the initiative, rose to N8.628 trillion and 27,077.66 at the close of trading activities on Monday, October 15, 2012, representing an increase 6.8 per cent.

However, before the commencement of market-making, the Nigerian bourse achieved 25.5 per cent value growth in the first three quarters of 2012.

This has fuelled speculations that the exchange's success has been as a result of rising interest from both individual and institutional investors. Some reports suggested that the strong growth this year indicated the NSE was putting the damaging crash of 2008 behind it while others insist the market was benefitting from reforms brought in since last year to strengthen regulatory infrastructure.

Foreign Participation

Speaking at an investors' forum in Lagos recently, the President of the NSE, Mr. Aliko Dangote, noted that foreign investors continued to dominate the exchange and account for 70 per cent of ownership.

Dangote however stated that the high level of foreign participation indicates confidence in the Nigerian market, but added that the increase in the proportion of stocks owned by Nigerians from 20 per cent to 30 per cent was also a positive sign, as domestic investors were now willing to return to the market.

"Certainly, there are good reasons to be confident about Nigeria's future. Economic growth has averaged 7 per cent over the past decade, and the IMF expects a rate of 7.1 per cent this year. Nigeria is Africa's most-populous country and as a result a huge market, and it has achieved greater economic and political stability in recent years, though serious challenges and the threat of violence in some regions remain, "he said.

On his part, a major market player and the Managing Director and CEO of Goldbanc Management Associates, Mr. Olu Abayomi Sanya, said "market makers" also played an important role in keeping the exchange on a steady course.

He said: "From our point of view, PMMs are useful as they maintain an inventory of shares that they can immediately sell to buyers, while buying shares from sellers to add to their own portfolio. In some cases, PMMs can just match up a seller with a buyer. This maintains liquidity and permits large blocks of shares to be traded. The system tends to increase investor confidence, as there is a likelihood of an immediate buyer being found should the holder of shares wish to exit quickly."

Reform to Boost Liquidity

Lack of liquidity was a contributing factor to the 2008 crash, which started as a correction after several years of rapid growth -the All Share Index (ASI) rose 225 per cent in the four years prior to 2008 -but was exacerbated by the effects of "margin lending." This phenomenon saw banks lend to brokers who then purchased shares in the same banks, which were doubly hit by the sell-off as brokerages defaulted on their loans. The ASI lost two-thirds of its value as a result. The past years have not been easy, with investor aversion to Nigerian risk, increased by the global financial crisis and economic slowdown, though the 2010 listing of Dangote Cement Plc, which then accounted for one-quarter of market capitalisation, provided a lift.

While the 2008-2011period was indeed difficult, it brought real gains in capital market regulation, with the SEC, NSE and the Central Bank of Nigeria (CBN) all spurred to action by the crisis. A raft of measures brought in to increase market stability helped restore a degree of confidence in the security and stability of the NSE.

Investor Protection Fund

Another effort that has helped the market to sustain the growth was the introduction of the Investor Protection Fund (IPF). The SEC had late last month launched the IPF, which will help compensate investors in the event of losses incurred from bankruptcy, insolvency, negligence or wrongdoing by listed firms.

The SEC has however made it clear that the N625 million ($3.89 million) fund was not there to bail out rogue investors, or those who had made bad decisions, but to provide some financial recompense if the firms in which they had invested encountered difficulties.

While opinion differs as to what is responsible for the growth in the market, experts at Oxford Business Group (OBG) believe the growth is driven by a mixture of economic fundamentals and recent reforms.

According to OBG, "The NSE has grown impressively in 2012, based on sound economic fundamentals and recent reforms although the ASI is still below its pre-crisis peak. Now that the foundations have been laid, the authorities should be looking to other medium- to long-term objectives, including increased liquidity and participation of domestic individual investors; encouraging more small and medium-sized enterprises to list; and developing a derivatives market. Developing these areas will take time, but progress made in reforming the exchange, and rising foreign and domestic interest, bode well."

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