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Nigeria's Stock Market out of Doldrums

19 Dec 2012

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A few days to the end of 2012, the stock market is set for a record growth, four years after a major downturn, Goddy Egene writes
The Nigerian stock market is set to record its highest growth in four years since the down turn that hit the market in 2008. After a superlative growth of 74.7 per cent in 2007, the market dipped by 45.7 per cent in 2008, 33.7 per cent in 2009. It recovered by 18.9 per cent 2010 before falling again by 16.3 per cent in 2011.


However, from all indications, the market will grow by almost 30 per cent at the end of 2012, only a few days away. By the end of last Monday, the market growth, measured by the Nigerian Stock Exchange (NSE) All-Share Index (ASI) was already over 33 per cent.
And the President of the Chartered Institute of Stockbrokers (CIS), Mr. Ariyo Olushekun, declared that there was no likelihood of any major negative development in the market that could reverse this performance and make the market to close negatively this year.


Given the efforts of regulators aimed at repositioning the entire financial system and the capital market in particular, market analysts were optimistic that a positive growth would be recorded this year. However, they never expected the huge growth that is about to manifest.
In the Beginning


When the year began, analysts from three leading investment banking firms, FSDH Securities Limited, Meristem Securities Limited (MSL) and FBN Capital Limited projected a growth of below 15 per cent for the year.


For instance, analysts at FSDH Securities Limited, projected that the market would close at 13.3 per cent. Those at MSL envisaged 13.5 per cent while FBN Capital Limited projected a growth of 14 per cent.


In projecting the robust outlook for 2012, analyst at MSL said their bullish sentiments were driven by expected performance of the financial service (majorly banks) sector of the market among others.


According to them, Nigeria’s stable foreign exchange market, expected downward trend in yield on fixed income instruments and anticipated positive macroeconomic performance also influenced their bullish tendency.


“Our valuation suggests a robust 2012 return of 22.53 per cent for the NSE index, which we believe is justified by the attractive valuations of our coverage companies (which represent 90 per cent of the entire market).However, we are inclined to adopt a conservative outlook.

This is informed by the outlook on global economy and the increased possibility that the Nigerian market might witness reduced foreign participation in 2012. We therefore discount our forecast by 40 per cent to arrive at an adjusted 23,532.91 index level,” they said.
The analysts explained that their sectoral returns distribution showed their upside bias for the financial service sector particularly the banks, given their fundamentals, weight and volatility.


According to them, they expected sector to dictate and lead market performance in 2012. Our 22 per cent target return is 82 per cent overweight on the financial sector particularly the banks.


“We will however, subject our forecast and underlying assumptions to testing and review as events in both the economic and financial markets warrants. Our understanding of market performance and returns distribution is that market returns are always skewed towards a short period of time, and this is expected this to play out in 2012,” they said.


On their part, analysts at FSDH Securities had said that 2012 would be better for investors in equities as the global and domestic economies were set for improvement.


Their optimism was based on factors such as improved corporate earnings, less aggressive monetary policy implementation by the Central Bank of Nigeria (CBN) among others.


“Other catalyst for the market in 2012 is: improved disclosure by quoted companies as they adopt International Financial Reporting Standard (IFRS); concerted efforts of the Federal Government of Nigeria to improve infrastructure in the country; the current low valuation of quoted companies. On account of these factors, our forecast growth rate for the NSE All-Share Index for 2012 is 13.3 per cent,” they said.

Quarterly Market Performance
Indications that the market was coasting to a positive close this year came out the end nine months to September 2012 when the market posted a growth of 25.5 per cent.


However, the growth of the market on a quarterly basis has been gradual. The market actually opened the year with decline of 0.37 per cent in the first quarter (Q1). This improved to a growth of 4.5 per cent in Q2 when companies released their 2011 audited results with many declaring dividends for shareholders.


The performance was consolidated upon in Q3 with a huge leap of 20.4 per cent following impressive half year corporate results. This brought the aggregate growth for the nine months to 25.5 per cent. Despite the profit-taking by many investors, the market’s growth improved to over 33 per cent as at last Monday.

The Bull Drivers
A look at what has happened in the market this year, showed that factors such as sustained patronage by foreign investors, impressive corporate financial results by listed companies and impact of reforms by the management of the NSE and the Securities and Exchange Commission (SEC) have engendered the growth.


However, one of the obvious initiatives that helped the market was the introduction of market-making, which eventually commenced on September 18, 2012.


The market-making programme, which commenced with securities lending and short selling, is believed to have brought fillip to the market.
When the programme began less than a month ago, market operators had expressed optimism that it would boost the market performance.


A director of Dunn Loren Merrifield Securities Limited, Mr. Idowu Ogedengbe, said market-making would help to remove imbalance and ensure stability of the equities market as it was expected that there would always be a primary market maker who was obligated to give a two-way quote on the selected securities.


According to Ogedengbe, market-making would stem the excessive volatility in share prices. “As market makers trade within a tight bid and offer spread, prices of securities should be less volatile. The incidence of undue appreciation in share price without any fundamental reason will be significantly reduced. When a stock is either undervalued or overvalued, it is expected that the market maker will be able to price such stocks appropriately,” he said.

Operators’ Views
Assessing the performance of the market so far, a leading capital market analyst, Mr. Bayo Rotimi of Quest Advisory Service Limited, said one of the factors for the performance was the clean-up of the banking industry through the efforts of the Central Bank of Nigeria (CBN) and Asset Management Corporation of Nigeria (AMCON).


“This has resulted in stronger corporate earnings driven by the removal of toxic assets from the balance sheets of banks, improved risk management and corporate governance, greater disclosure and financial reporting standards,” he said.

Rotimi added that improved regulatory oversight and coordination between the various regulatory authorities had also contributed to the positive performance in the market.
The, regulators, he explained have adopted a zero-tolerance for infractions

“The introduction of market makers, short selling and securities lending. Significant inflow of foreign direct investment into the Nigerian capital markets, which demonstrated the continued confidence by foreign investors in the Nigerian capital markets equally helped in what we are seeing today,” he said.


In his opinion, the Managing Director/Chief Executive Officer of Partnership Investment Company Plc, Mr. Victor Ogiemwonyi, said the growth in the stock market this year could be attributed to several factors which included a stabilising market after the crash.


“The economy has also shown promise despite the many challenges, it is the opportunities that have attracted many foreign investors to the market. They now constitute over 70 per cent of investors in the market. The clean-up in the banking industry has also spurred investors, especially following the good results they have also published confirming that they are now truly healthy. The work of regulators in pushing through reforms has also helped in bringing confidence back to the market. The current surge can be attributed to the forbearance for stockbrokers which has finally removed the debt overhang that weighed on the market these last three years,” he said.

Sustaining the Growth
While the growth is good news for the market, it is believed that sustaining it will be another challenge. But Rotimi said the upswing could be sustained through the continuation of the ongoing reforms and the faithful implementation of the capital markets reform roadmap.

He said: “The introduction of new products will help deepen and broaden the markets and ensure continued inflow of funds into the capital markets. New listings especially by telecoms, power, transportation and other infrastructure companies would undoubtedly boost market performance in the coming years. Enhanced market liquidity through the injection of long-term funds arising from the review of the investment guidelines by Pension Fund Administrators, the Sovereign Wealth Fund and the ongoing reforms in the
insurance industry will also help.”

Rotimi added that the gradual restoration of investor confidence in our markets though the activities of the SEC and NSE is expected to drive the return to the market of local individual and institutional investors


“The performance will also be sustained through investor education. Harping on the benefits of investing in the capital markets through registered fund managers as opposed to investing directly in the market will significantly increase the number of participants in the market,” Rotimi said.


Speaking in the same vein, Ogeimwonyi said the current growth trajectory will be sustained, given the many positive developments in the economy.


“We may not see this steep upward growth we have seen in the last few weeks, that is not also very good as that will not be sustainable. We are going to see a broad growth upward movement and will carry all the stocks along as well many listings that will hit us next year. The clean-up in the banking industry means that banks will report very good results in 2013. This will encourage investors to come to the market. The reforms are also taking hold and those who still have any reservations about the market will have reasons to come back,” he said.


Tags: Nigeria, Featured, Business, Nigeria Stock Market, Doldrums

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