NSE DG, Oscar Onyema

A renewed demand for equities pushed the market growth in the year so far to 14.5 per cent last week. But Goddy Egene writes that it is not yet uhuru for investors

A sustained  demand for shares by investors last week led to a growth of  1.5 per cent in stock market, thus pushing the year-to-date (YTD) growth of the market to 14.59 per cent.  The Nigerian Stock Exchange (NSE), All-share Index (ASI), which measures the aggregate growth of the market closed last Friday at 23,750.82, up from 20,730.63 at the beginning of the year.

An Encouraging Growth
Considering the fact that the YTD performance of the market was  below five per cent some  months back, the new high of 14.59 per cent has rekindled   confidence of stakeholders  that the market may close the current year on a positive note while significant recovery would be recorded in  investments.

Investor confidence for a sustained growth has been boosted by the fact  the  expected profit-taking after the  bull-run of  July did not  wash off most of  the gains recorded.

After the market recorded a growth of 6.8 per cent in July, engendered by  investors’ reactions to impressive half-year results, profit-taking was expected. However, the market was able to  maintain a growth of  2.9 per cent in August, a development, analysts said, was better than the growth of   2.6 per cent recorded in March, appreciation of 0.7 per cent in January and 0.09 per cent in May.

The months of   February and June witnessed decline of 3.6 per cent and 2.1 per  cent respectively. An analysis of the market performance this year so far showed that the highest growth has come during the earnings seasons when listed companies throng the market with their quarter results.

The growth of   6.7 per cent last April came after companies announced their first quarter results. Again, the growth of 6.8 per cent recorded in July followed the release of half-year results by companies.

Although   it will be difficult to be sure of the sustainability of the current growth, some investors have witnessed significant recovery in their investments especially in the consumer goods and banking sectors of the market. This recovery is reflected in the sectorial indexes, which have outperformed the ASI.

For instance, the Consumer Goods Index posted a  YTD performance of 243 per cent as at last Friday, while the Banking Index posted a YTD growth of 34 per cent.
Only the Insurance and Oil and Gas indexes that measure the performance of companies listed in the sectors, have remained negative since the beginning of the year. The Oil and Gas index recorded a YTD decline of 25.4 per cent while the Insurance index declined by 13.6 per cent.

Although not all the stocks in the banking subsector have regained lost grounds, many of them have witnessed significant recovery, ranging between 24 per cent and 60 per cent. In the consumer goods sector, some stocks have appreciated   between 21 per cent and 56 per cent.

Some market operators said sustaining the upbeat witnessed in the market  so far would  be difficult considering the several challenges still confronting the market. According to them, the growth current growth is being fuelled by few stocks patronised by foreign investors and institutional investors given the fact retail and domestic investors are yet to return to the market.

“And given the behaviour of  the foreign and institutional  investors, who are  known for  profit-taking at any given opportunity,  the  continuous upswing  in the prices of the some of the stocks is not guaranteed,” a stockbroker, Mr. Ayo Oguntayo, said.

This implies that it is not yet uhuru for investors who  would  have to wait longer for the full recovery of the market.
While other markets are experiencing some level of recovery,  the Nigerian market has been affected  by many factors.
 
Factors Delaying Market Recovery
Analysts have said that key among the inhibiting factors include Central Bank of Nigeria (CBN)’s monetary tightening policy  to protect the naira. Also, the Federal Government’s   constant borrowing from the domestic market through bonds,  has affected the Nigerian equity market.

These two factors, according to market operators, have pushed interest rates in  fixed income  securities to attractive levels, making the equities market less attractive.

The Monetary Policy Committee (MPC) of the CBN, has raised  the monetary  policy rate (MPR) from 6.25   per cent to 12 per cent  between January 2011  and now while banks are now borrowing among themselves at rates above 20 per cent.

To Mr. Michael Oyebola, of FBN Capital Limited, the  high  interest rates  and the risk/reward ratio favour  deposits, bonds and treasury bills. According to him, no investor would ignore investment in such instruments.

Oyebola noted that   transparency   in reporting and corporate governance  were still issues  also impeding the  recovery of the market.

Apart from the FBN Capital chief, another  financial analyst with a leading   international investment firm,  stressed that  so long as interest rates remained  high in the money market, no investor would look the way of the equities market.

The analyst added that the economic crises in Europe and some other developed economies had  also  affected the level of offshore investors coming to the Nigerian market.

“Offshore investors have   been the ones driving the market since 2009. But with the crisis in Europe and United States, the investors have been very cautious and are holding  on to cash for fear of  another global  major economic crisis,” the analyst said.

Another   factor contributing to the long wait for the recovery of the market is lack of leverage in the market. It has been established that the boom witnessed in 2007 and early 2008 was fuelled by unprecedented   inflow of funds from banks to the  stock market.
“But as at today, such funds are no longer in the market because no bank is lending  for the purpose of investing in the stock market. The funds have dried up and there is no liquidity that could drive the share prices to the levels we saw in 2007,” the analyst said.

While banks are not lending and offshore investors are not raising their level of patronage just as retail investors appear to have been completely wiped out of the market.

“Many of the retail investors who rushed into the market and took margin loans without understanding the implications had their fingers burnt and are very reluctant to return. And ironically, most of the foreign investors  always watch the local investors before increasing their stakes in any market. Once they realise that the local investors  not are playing in the market, they would not be encouraged as well,” a financial analyst said.

But just like Oyebola said that corporate governance issue was one  factor  to contend with, another analyst added that  issues of full disclosure and transparency in management of  some listed firms are  needed to be looked into.

According to him, while the fundamentals of most of the companies are strong,  investors are looking beyond the fundamentals and assessing the level of disclosure and transparency being adopted by the managements.

“Investors do not invest only invest because of  the  financial results but also the management of the companies.  They look at the pedigree of those managing the companies they are investing in. That is why some multinationals, which managements are controlled by  foreign investors enjoy more  patronage because investors are more confident in  their disclosures,” the analyst said.

Resolving the Debt Overhang
However,  while  it may be difficult to sustain the  positive trend due to  factors, considered to be outside  the Federal Government’s  control,  one issue that will  give fillip to the  market in general is  the  resolution of  the  debt overhang in the market.

Although the  issue of debt forbearance, is still under consideration, it is believed that the magic wand  will be    the injection of funds into the market  by the Federal Government.

Already  the stockbroking community and other stakeholders have all made a case for the intervention of  the government through  direct fund injection or other  means  of  reducing the burden on the stockbrokers.

For instance, the Group Managing Director/Chief Executive Officer of First Bank of Nigeria Plc, Mr. Bisi Onasanya,  once said there should be the provision of funds at concessionary rates in the market.

“These new levels of liquidity will help  stockbrokers 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.

The President of Chartered Institute of Stockbrokers (CIS), Alhaji Ariyo Olushekun, said  the market needed a stabilisation fund, which would buy up the excess shares in the market.

According to him, similar to the quantitative easing being implemented in some developed economies, it was essential that AMCON or any special body was 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 former Director-General of the NSE, Ndi Okereke-Onyiuke and President of Association of Corporate Trustees, Mrs. Oluwatoyin Sanni, believed direct fund injection would lift the market.

“Only direct physical injection of funds can change the direction of the capital market just as Asset Management Corporation of Nigeria (AMCON) did for the money market. No amount of workshops and discussions will avail. A strong government bail-out as obtained in United States, Britain, Russia, Singapore among others is the magic wand needed,” Okereke-Onyiuke said.