Another Year of Losses for Stock Market Investors

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Goddy Egene writes that in 2016, the Nigerian stock market recorded its third consecutive yearly decline

The last trading day at the Nigerian stock market will be Friday December 30, 2016. Going by the year-to-date (YTD) performance of the benchmark index, the Nigerian Stock Exchange (NSE) All-Share Index (ASI), the market will close the year on a negative note. As at last Friday, the ASI had recorded YTD decline of 7.5 per cent.

Considering the fact that only three trading days are left, it is very certain that the 7.5 per cent decline already recorded would not reversed for the market to close the year with a growth.

This implies that for the first in many years, the nation’s stock market would be posting negative performance for three years in a row. The market had suffered a decline of 16.1 per cent in 2014, 17.4 per cent in 2015 and is now recording the third decline, though better than the two previous years.

Although the decline recorded 9n 2014 and 2015 depressed most prices of stocks and created an entry opportunity for investors, most investors stayed away due following economic headwinds. Lack of fiscal direction, declining oil prices, policy reversal by the Central Bank of Nigeria (CBN), naira devaluation and persistent liquidity challenge in the foreign exchange market combined to dash hopes of the market recovering in 2016.

NSE Early Optimism

At the beginning of the year, the Chief Executive Officer of the Nigerian Stock Exchange (NSE), Mr. Oscar Onyema raised optimism that with greater clarity on policy direction, investors who had remained on the sidelines throughout 2015 would return to the market in 2016.

“This return is predicated upon return of investor confidence as a result of: effective implementation and communication of the government’s economic blueprint; credibility in monetary policy stance; relative stability in the macro economy (oil price stability above benchmark targets, increase in tax collection to gross domestic product among others) and improved security,” he said.
According to Onyema, the exchange would focus on executing its strategy in order to continue to provide a credible platform for financing the economy.

“To this end, we intend to intensify engagement efforts with the federal government. We have also prioritised three initiatives for 2016 aimed at achieving the exchange’s three strategic objectives of increasing the number of new listings across five asset classes, increasing order flow in the five asset classes operating a fair and orderly market based on just and equitable principles,” Onyema said.

He noted that state of the market created both challenges and opportunities for investors.
“We believe that taking a portfolio approach to investing provides the best risk adjusted alternative for participating in the capital market. As such, we want to ensure that the NSE provides a repertoire of products that will allow investors to create well diversified portfolios of uncorrelated asset classes,” he said.
However, the expectations of the NSE were not met as the market remained under pressure of weak demand for stocks from both domestic and foreign investors due to the economic challenges.

Unfavourable Policies

In the past the market was highly driven by foreign investors. However, the policy of the CBN that restricted forex and exchange volatility prior to June 20, 2016 discouraged most foreign investors. Unfortunately, domestic investors, who ought to have taken advantage of the low prices of stocks, were handicapped by reduced disposable income and high inflation. Besides, the increase in monetary policy rate (MPR) to 14 per cent swayed many investors to fixed income securities, making the equities market less attractive. Besides, the high rate of MPR shot up the cost of borrowing, a development an economist and Director General of the Lagos Chambers of Commerce and Industry (LCCI), Mr. Muda Yusuf, said was detriment to the capital market.

According to him, the tight monetary policy in form of high cash reserve ratio, liquidity ratio, MPR has led to an increase in interest rate and better returns on investment in the money market.
“This is a disincentive to investment in the capital market. High interest rate is not good for firms in the real sector, many of which are listed on the NSE. This has implications for Return on Investment (ROI) for those firms and by extension ROI on investment on those equities,” Yusuf said.

The negative impact of the monetary policies combined with naira devaluation led to poor results by many listed companies, a development that further discouraged investors from staking their funds on equities.
The foreign exchange losses that followed the devaluation of the naira affected the bottom-lines of many companies with some ending the nine months period with losses.

Regulatory efforts

Amidst the challenging environment, regulators in the capital market, the Securities and Exchange Commission (SEC), which is the apex regulator and the NSE, which is a self-regulatory organisation (SRO), made efforts to sustain investors confidence in the market by embarking on various initiatives. For instance, discovering that one of the reasons investors have stayed away from the market was frustration in having access to their dividends, SEC introduced the electronic dividend platform. Although the e-dividend was launched late last year, the commission embarked on public awareness campaign in this year in Abuja, Kano and Lagos.
According to the Director General of SEC, MounirGwarzo, e-Dividend platform will enable investors have direct access to their dividends.

“Once the e-dividend is in place, the issues surrounding stale dividend warrants will be a thing of the past, similarly, the challenges of travelling from one place to another to deposit dividend warrants would be completely eliminated. This process would eliminate all challenges associated with payments of dividends in our markets,” he said.

He added that the quantum of unclaimed dividends in the market would be reduced.
“This is because unclaimed dividends are an off-shoot from dividends of small stakeholders who have been unable to claim them,” Gwarzo said.
Also, before now, less than 20 per cent of investors had dividends posted directly to their accounts. Investors suffered from inefficiencies of the warrant and postal systems, which contributed to the growth of unclaimed dividends. However, SEC’s partnership with the CBN and the Nigerian Inter-Bank Settlement System (NIBSS), to develop the e-dividend mandate system has changed the narratives.

Investors can now pay dividend warrants into savings accounts while over 1.6 million accounts have hooked to the e-dividend platform, just as over 1.4 million accounts have been attached to BVN.

Another positive development during the year was the increased in dematerialisation of share certificates.
Less than 40 per cent of share certificates were dematerialised as at June 2015 after 20 years of the introduction of Central Securities Clearing System (CSCS) Plc.

However, SEC set up a committee to fully focus on dematerialisation, which has resulted in the dematerialisation of 98.7 per cent of share certificates has been fully dematerialised
Similarly, the commission introduced the Direct Cash Settlement(DCS) that will enable investors to receive proceeds of the share sales directly into their own accounts.

Currently, payments are made into broker’s account before being remitted to be investor, a system that opens doors for abuse and infractions. Substantial number of complaints received from investors involved delayed or no remittance of funds from the brokers. In order to address the complaints the commission set up a committee and the DCS would fully become effective April 1, 2017.

On the part of NSE, it has deepened products offering, providing a repertoire of products that will allow investors to create various portfolios. The exchange has become a multi-asset class exchange offering exposure in equities, fixed income, Exchange Traded Funds (ETFs-Golds, Bonds, Equities, real estate, REITs among others.)
The NSE introduced ETFs in 2011 and they have increased to eight ETFs.

“The existence of ETFs in our market is beneficial to retail and institutional investors, as ETFs offer a direct and inexpensive way to attain diversified exposure to an index, commodity, sector or region. Aside diversification and tradability, ETFs also offer additional benefits of low expense ratio as compared to mutual funds and increased liquidity, and can be used to execute different investment strategies,” Onyema said.

And in a bid to broaden and deepen the Nigerian capital market, the NSE partnered ETFs, issuers, Vetiva Fund Managers Limited, Lotus Capital Limited and Stanbic IBTC Asset Management, to organise the 2016 NSE Exchange Traded Funds Workshop last November.

Also, the NSE intensified efforts around market data services by organising the inaugural market data workshop in in collaboration with Independent Software Vendors (ISVs) and Market Data Vendors (MDVs) in October.
The aim of the workshop was to increase awareness on the critical role of market data in making sound investment decisions on both the buy and sell sides.

After two years, the NSE recorded a fresh listing as The Initiates Plc was listed on the Alternative Securities Exchange Market(ASeM). Equally, the exchange listed the N6.295 billion Series 1:7-Year 18.50 per cent Fixed Rate Bond Due (2023) under the N50.000 billion Wema Funding SPV Plc Debt Issuance Programme.
The 2016 was also memorable for the NSE as it hosted the Speaker, Yakubu Dogara and capital market committees of the House of Representatives and Senate to an interactive session.

It also hosted Vice President Yemi Osinbajo to an interactive session with listed companies and capital market operators with a view to addressing the headwinds in the capital market.

During the year, the NSE also revised its listing and trading fees for securities listed and traded on its Fixed Income Market. Under the revised fee structure, the NSE no longer charge trading fees on fixed income traded on its platform. The initial flat listing application fees of 0.15 per cent for all bond types has been replaced with variable listing application fees.

As part of efforts to further provide timely information for investment decisions as well as enhance the protection of investors in the capital market, the NSE introduced enhanced Compliance Status Indicator (CSI) codes on the ticker tape for listed companies.

Under this initiative, the exchange tags all listed companies with a three character code that indicates the compliance status of the listed company at any particular point in time. This compliance code will enable investors to make informed decisions whilst ensuring a transparent market guided by timely information.

Stakeholders’ Comments

Commenting on the performance of the market, the Managing Director of APT Securities and Funds Plc, Garba Kurfi, said the market has never in the past 25 years experienced three consecutive years of decline. He added that the daily turnover has reduced to about N1 billion from a peak of N10 billion in 2008.
“Most of the stocks are in their lowest prices of over 15 years or even more. The foreign investors that used to patronise the market with over 50 years turnover have moved elsewhere. However, once the recession is over, hopefully, by next year, the market will also improve,” Kurfi said.

In his opinion, the Managing Director of Highcap Securities Limited, Mr. David Adonri, the market has declined in 2016 and the primary market, where capital is formed has been dormant.

“As the economy moves out of the stagflation, the market will recover,” he declared.
Also expressing their views, shareholder activists cited various reasons for the lackluster performance of the market. Some of them even rated the regulatory bodies, saying how their actions and inactions affected the market.
In the views of a founding member of Nigeria Shareholders Solidarity Association (NSSA), Alhaji Gbadebo Olatokunbo, the market is always the reflectors of every nation’s economic indicators and since we are in recession, we couldn’t have performed better. He noted, however, that we may be on the way out of the woods.

Although he said speculative trading had taken the back seat, the truth is that we still refuse to take stock and learn from our past mistakes. While SEC has introduced some initiatives that would help restore investor confidence and drive growth in the market, Olatokunbo said one of the regulator’s undoing is its non-acknowledgement of domestic investors/shareholders as part of the stakeholders in the industry.

“We were never consulted on any policy being made for the interest of capital market in order to serve as a guard to the formulation of such policies, but we were expected to comment on what had been concluded as new policy,” he said.

He added that apart from SEC, NSE and Financial Reporting Council (FRC) and most regulatory agencies adopt the same attitude towards the Nigerian citizens whom they are supposed to protect.
According to him, there is the need to be more concerned on the protection of investors on risk management to their wealth in the companies.

“Companies shouldn’t get approval to be quoted and then goes to bed on ROI. No company without proper planning on returns should be quoted while their exit should be based done in a way that investors are protected,” he said.
The shareholder noted that initial pricing of companies being listed on the NSE should not be too high so that more domestic investors can embrace them.

“SEC should focus more on how to solve the problems of unclaimed dividends while the NSE should stop behaving like headmaster without responsibility to the pupils with the delisting of companies without recourse to the interest of shareholders. SEC and NSE should not forget that they stood sureties for the companies before the involvement of the investing-public. Therefore, they must work out risk management issues with quoted companies before and after quotation in the interest of shareholders,” Olatokunbo said.

In the opinion of Mr. Adeniyi Adebisi of Independent Shareholders Association of Nigeria (ISAN), the stock market has lived up to its major characteristic of price fluctuation, noting that in 2016 the market experienced more of ‘downs’ than ‘ups.’

“This is the year the retail or small scale shareholders qualify more to be described as an endangered specie. We have had more sellers than purchasers of shares thereby depleting the ranks of this vibrant class of players in the capital market. There has been nothing of note to persuade big and foreign investors to come back to the market since the collapse that followed the pre and post 2008 boom. No thanks to the officially declared economic recession which is yet to show any signs of going away,” Adebisi said.

According to him, the regulators – SEC, CBN, NSE, FRC, and even the Corporate Affairs Commission had more than enough attention from corporate bodies they are regulating, shareholders’ groups and the National Assembly.
“This attention has severely put the regulators on their toes and this situation is likely to continue for a long time to come. It is perhaps the beginning of good things to happen to the capital market,” he said.

However, Adebisi decried that despite various spirited efforts being made by the relevant committees of the National Assembly, SEC and recently the Capital Market Correspondents Association of Nigeria, to ‘deepen’ the capital market, it is not likely that much will be achieved along this line.

“This is largely because the present administration of President Muhammadu Buhari has not come up with any clear cut economic policy which investors can take cue from besides the rather nebulous declaration on ‘diversification of the economy,” the ISAN boss stated.

The newly elected Chairman, Ibadan Zone Shareholders Association of Nigeria, Mr. Eric Akinduro said the year started with hope and aspirations from investors particularly for the local investors but due to the current recession market came down below expectations.

“However it is the reflection of the economy. Idle funds are not in pockets of investors coupled with non- payment of salaries to workers. Quarterly reports of companies, apart from few are not attractive. Their exposure to forex is very high and the losses recorded on forex is really affecting their performances. However, Nigerian capital market is still very promising when you consider the equity prices particularly companies that are less in exposure to forex and importation of raw materials,” Akinduro said.

Also commenting, Mr. Oderinde Taiwo of Proactive Shareholders Association of Nigeria said the nation economy, which is crude oil dependent experienced a decline due to a fall in price of crude oil in the international market and this impacted negatively in our capital market by experienced bearish run throughout the year with market capitalisation drop from about N13 trillion about N9 trillion.

“Two, Nigerian capital market was over regulated by the regulatory authorities, especially the code of corporate governance compliances. Among them is the FRC’s code of corporate governance that is under debate by the capital market stakeholders. To me these regulations will make some companies to delist from our market because our country’s regulatory templates are gradually becoming risks themselves,” he said.
Taiwo added that the inability of governments at the federal, state and local government level to meet their financial obligations such as non-payment of salaries, contractors, among others also affected the market directly and indirectly.

“Therefore, there’s investor apathy in the market. But I believe the year 2017 will be better than the year 2016 because of the lessons we have learnt as stakeholders,” he said.
To Mrs. Bisi Bakare of Pragmatic Shareholders Association of Nigeria, the market performed poorly due to the economic recession, poor financial results of most companies and investor apathy.