NSE DG, Oscar Onyema


The 25.5 per cent growth recorded by the Nigerian stock market in nine months has raised the hope that the market is on the way to final recovery, writes Goddy Egene

Stakeholders in the Nigerian capital market are feeling more comfortable since the third quarter (Q3) ended penultimate Friday.

The reason for this is simple: the impressive performance of the market as at the end of the third quarter, which ended September 30, 2012.

By the close of trading on the last day of the Q3, the market was up by 25.5 per cent. And with three months to go in the year, stakeholders are relieved that the Q3 performance is a sign that the market would close 2012 on a positive note; compared with 16.3 per cent decline posted in 2011.
Comparatively, by the end of Q3 in 2011, the market was down 17.6 per cent, and little growth witnessed in the remaining part of the quarter reduced the decline to 16.3 per cent  in that year.

However, all indications point to the fact that the Nigerian bourse would end 2012 on positive note. Analysts said that supported by new initiatives, improving confidence of domestic investors and sustained foreign investors patronage, the current bullish trend is likely to last for the better part of the last quarter.

A breakdown of the performance of the market showed that the Nigerian Stock Exchange (NSE) All-Share Index (ASI), which opened at 20,730.63 in January, ended September at 26,011.63, translating into a great improvement of 25.5 per cent.

Similarly, the market capitalisation of equities rose from N6.53 trillion to N8.28 trillion, showing a growth of 26.7 per cent or N1.75 trillion. Going by the performance so far, projections early made some analysts have been surpassed.

Early Optimism
At the beginning of the year, securities analysts who have been watching the market had projected a growth of the below 15 per cent for the market. For instance, analysts at FSDH Securities Limited, projected that the market would close the year with a growth of 13.3 per cent, while those at Meristem Securities Limited (MSL) predicted 13.5 per cent. Analysts at FBN Capital Limited projected a growth of 14 per cent.

In projecting the robust outlook for 2012, analysts at MSL, said their bullish sentiments were driven by expected performance of the financial service (majorly banks) sector of the market.
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.
“Though we remain watchful on the economic climate given the increasing level of uncertainties that overshadow 2012, we anticipate a fragile first quarter rally and a much stronger rally in the second half of 2012,” they said.

In a similar vein, analysts at FSDH Securities Limited 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 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.”

Rising Hopes
Although these projections appeared unrealisable by the end of June, which was the first half of the year, the improvement recorded between July and September has raised the hope of surpassing the projections.

The market had posted a growth of 4.2 per cent by the end of June 30. But within the months of July, August and September, the market recorded a growth of over 20 per cent, raising the hopes of investors for recovery of the market this year. A monthly analysis of the market performance in the July, August and September showed growth of 6.7 per cent, 2.9 per cent and 9.5 per cent respectively.

Bull Drivers
The growth witnessed in Q3 is propelled by 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. The most obvious of these initiatives is the market making, which eventual commenced 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 is expected that there would always be a primary market maker who is 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.

Speaking in the same vein, Mrs. Oluwatoyin Sanni of UBA Global Services, said market making would provide liquidity in the market by giving investors easy entry and exit in the assigned securities.

“This is because market makers will be expected to make a two-way quote on those securities at any point in time. They are expected to increase activities on the exchange significantly, enhanced by the introduction of covered short selling coming on board at the same time. On the whole, trading volumes are expected to increase and our market should be well on the path of renewed vibrancy,” Sanni said.

Operators’ Assessment
Looking at the performance of the stock market in the past nine months, a leading stockbroker and Managing Director/Chief Executive Officer of Partnership Investment Company Plc, Mr. Victor Ogiemwonyi, said the market has begun to respond to all the industry reforms going currently.

According to him, the bullish trend is propelled by the slowly but surely improving economic environment.

“Interest rate is now moderating in money markets, inflation is slowing, foreign reserves are rising, bringing with it stabilising of exchange rate. The policy thrust of government is also very consistent and this is helping to give companies clearer vision in their planning, while electricity   privatisation is on track and already showing good results,” he said.

Ogiemwonyi added the Nigerian market has also gained from the crisis in Europe as portfolio investors are looking to Nigeria as the next big economy to profit from. “Our banking industry is now fixed and that is always a hint of good things to come,” he declared.

To the Managing Director/Chief Executive Officer of Investment Centre Limited, Mr. Ifeanyi Odunwa, the performance of the market so far is beyond expectations.

According to him, for the first time since the meltdown, combination of several strategies and innovations introduced into the market as well as positive assurance on forbearance for stockbrokers have buoyed and sustained investor confidence resulting to the bulls taking the center stage.

“It is also important to note that the prices of most quoted stocks are undervalued and thus driven by the new found confidence in the market, investors did not hesitate to ride the tide on positive sentiments. Most reassuring of all these is the commencement of operations by the appointed market makers,” he said.

Odunwa noted that the market has really embarked on the expected journey of full recovery, declaring that the recovery would become steadier if all stockbrokers have the liquidity.