AlI has not been well with the capital market since the third quarter of last year. What is ailing the market? Bukola Aroloye writes on the market’s intricacies
FOR many operators in the capital market, these are really tough times. From the third quarter of last year, there have been signs that the market was in dire straits. with eight months almost gone in 2015, the ill-wind has yet to blow over, indicating that things are really bad.
How it all began
The unfolding crisis in the Euro zone following Greece economic problems and the rout in China stock market had effect on the Nigerian stock market given the fact the local bourse is still dominated by foreign investors.
But particularly, issues of the recapitalisation of market operators and the implementation of minimum operating standards will bring about a new capital market beginning from the fourth quarter.
Trading activities on the nation’s capital market, which opened the third quarter of the year as at last month July the weak numbers, continued culminating into a loss of N42 billion.
Misplaced optimism
The positive expectations which heralded the victory of President Muhammadu Buhari at the April 2015 general elections drove the bullish sentiment that pervaded the market early in the second quarter.
As a result, the market ended in the green zone in April with the All Share Index gaining 9.15%. This positive sentiment was soon to reverse as investors became apprehensive of the new government and decided to play on the sideline pending a pronouncement on the economic thrust of the Buhari administration.
Unfortunately almost 42 days after inauguration, the government is yet to unveil its economic blueprint.
A total 106 stocks traded in the period under review out of which 43 appreciated in prices. Forty-six stocks depreciated in prices while 17 stocks recorded no movement in their share prices in the entire six month to June 2015.
In spite of the reign of the bears resulting from sell downs and weak demands for equities, some investors reaped bountiful harvests from some stocks in the form of capital gain.
In the view of analysts, it appears that the bearish mood in the Nigerian capital market will linger for a while until investors are sure of where the government is going in terms of economic policy.
Market analysts believe investors, especially foreigners, were unlikely to make significant investment in the market until they had a clear picture of the policy direction of the government, which is yet to name its economic recorded the previous day.
Just as operators were at a quandary as to what mold the economy would take, the naira’s fate has being hanging in the balance what with the free fall it has had to endure since last quarter 2014.
Commenting on this development, Aminu Gwadabe, president of the Association of Bureaus de Change of Nigeria, said, it is anybody’s guess why the naira has suffered an eclipse.
The currency declined to N215 per dollar from N226.
The currency traded at 215 per dollar last week before the new restrictions, Gwadabe said.
In interbank trading, the naira advanced 0.1 percent to N198.85 per dollar in Lagos. The nation’s foreign-currency reserves have declined 16 percent this year, to $29 billion.
Also tougher regulation and policies by the Central Bank of Nigeria, the devaluation of the naira and other economic headwinds have changed the fortunes of Deposit Money Banks in the country significantly, it has been gathered.
The banks, which have mostly battled in futility to grow their profit margins in recent times, have seen their share prices and market capitalisation decline as well.
Between January 1, 2014 and February 28, 2015, the total market capitalisation of the banking sub-sector had declined by 24.5 per cent or N720bn to N2.219tn. This is despite the rights issue embarked upon by some of the banks, which significantly increased the capitalisation.
The dwindling fortunes of the banks are also reflected in the Nigerian Stock Exchange Banking Index, which is designed to provide an investable benchmark to capture the performance of the banking sector.
The index, which comprises the 10 most capitalised and liquid companies in the banking sector, emerged the Exchange’s worst performing sectoral index in 2014 after it fell by 21.53 percent
According to the Exchange, the FPI outflows include sales transactions or liquidation of portfolio investments through the stock market.
The N482.91 billion withdrawn by the foreign investors between January and August represented a 35.4 per cent increase on the N356.64 billion FPI outflow reported for the same period of 2013.
The rise in the outflows comes on the back of a 0.4 per cent year-on-year drop in FPI inflow.
According to the data, foreign portfolio investors staked N389.06 billion on equities on the NSE between January and August, compared to the N390.59 billion they spent on equities in the corresponding period of last year.
The development was a marked departure from the situation in 2013 when the FPI inflow exceeded outflow. As of August 2014, the FPI outflow accounted for 55.4 per cent of the N871.97 billion total foreign transactions, while the FPI inflow represented 44.6 per cent of total inflow.
Economists and analysts said the increase in FPI outflow and decrease in inflow could be attributed to concerns over developments in the global and domestic economies, especially the build up to the general elections in the country.
The Chief Executive Officer, Financial Derivatives Company, Mr. Bismarck Rewane explained that preparations for the elections and the declining oil prices were likely factors for the rise in FPI outflow.
He said, “Last year, the market gained over 40 per cent; this year, the market has lost about four or five per cent. So, investors that came in last year made gains; but this year, the market has been very soft.
“Secondly, this is a year of elections. Thirdly, the price of oil, which is the underlying strength of the economy, is declining. So, if you are an international investor, you will take a position; you will be more tentative in what you are doing.”
Rewane stressed that the development was not a sign of loss of confidence in the country, adding that in any case, if people were worried that things might not be great, they had a right to reduce their investment in a country.
A review of trends in the similar period of 2014 revealed that the market recorded 4.27 percent YTD loss, a clear indication that the level of uncertainties surrounding the forthcoming general election, among other factors, has contributed to the current trend in the Nigerian capital market.
The losses recorded till date in the year cannot be disconnected from the trend observed towards the end of the year in 2014, which eventually culminated in the loss of 16.14 per cent.
Further analysis of the yearly performance review of the NSE index from 2010 till date shows that towards the buildup of the 2011 general elections, the market closed the year 2010 with 18.93 percent gains while the election year closed negative with 16.31 percent loss.
However, the market recorded strong resilience in 2012 and 2013 with +35.45 percent and +47.19 percent gains recorded respectively.
According to analysts at Proshare, the fall in oil price has also affected market performance and it has also resulted in government revenue reduction and by extension affected overall liquidity in the Nigerian economy.
Analysis of trading patterns in the previous election period before now revealed that the stock market gained 6.88 percent in January 2011 after a 2010 gains of 18.93 percent.
Afterwards, the market started adjusting in anticipation of the elections in April 2011. The market recorded 4.90 percent losses in February 2011 and a similar pattern was also witnessed in March with a loss of 5.36 percent. In April, the election month, the Nigerian stock market lost another 3.77 percent in 11 trading days before the presidential election held.
Nonetheless, the stock market presently exhibits an “unpredictable” behaviour in a way that saw the market gain 9.13 percent in the last 10 days in February 2015 to reduce the loss from 17.90 percent to 13.14 percent.
Market Efficiency
In an attempt to explain the prevailing scenario at the stock market, a research analyst with Proshare Nigeria Limited, Mr. Taiwo Ologbon-ori said two key things were involved, and needed to be addressed.
The first, according to him is what he called market efficiency. This, according to him, has to do with how efficient the market is in terms of accessing and pricing all available information about a particular stock. As we know, market discounts all information available.
“In the case of the NSE, information is either scanty/inaccurate or not available at all. We expect this to be corrected by the licensed market makers but the situation is yet to change, since there is no means of assessing accurate information about business performances of these listed firms. The financials and market announcement only cannot help the situation.
“The companies are not communicating at all, though it might be expensive to maintain interactive relationship with the investing community but the information is very crucial to maintain fair valuation. The little and inaccurate information available within the investing community determine the valuation we are currently seeing on the bourse – Bargain hunters would not trade outside the available information.
“Please note that information required here are more than market announcements or financials. It includes full and detail information about business and industry knowledge; this will aid investors’ knowledge and understanding in pricing the share price of the firm fairly,” he said.
Market psychology
The second factor he identified is what he called fair value. He said this had to do with “market psychology – a function of how information is interpreted, which we don’t have control over. Though, it takes its feed from processed information (market efficiency) available to aid a valuation processes. In this regard, the key is how the information is interpreted. Some people hear news and choose to be aggressive and buy. Some hear the same news and choose to be conservative by either holding or selling.
“In my opinion, the current undervaluation of quoted firms on the exchange will persist and bargain hunters cannot change the outlook. Robust information about the quoted company is very key for fair valuation. Nigerian quoted firms need to understand this. And is high time, NSE and SEC should compel and enforce investors relation principles on Nigerian bourse. It is very crucial and necessary.”
Negative sentiments
In the opinion of the Managing Director, Proshare Nigeria Limited, there is so much negative sentiments affecting the market.
According to him, all the companies are declaring reasonable profits yet there is little to show for it for two reasons.
He said the first reason for the regime of decline share performance in the market was the election circle that normally affects the market, noting however that the effect is more severe this year because of the prevailing negative sentiment in the polity.
He said, “Whether we like it or not, the impact of the so-called missing money led to the position of Standards and Poor’s that Nigeria is generating oil revenue but yet they can’t see it as it does not reflect in the nation’s foreign reserves.”
The implication, according to the Proshare chief, means by borrowing more money, it means we are putting ourselves under pressure.
“We argued we have not over-borrowed but they are worried that our ability to generate revenue is declining. So, any reasonable person will say why will I be encouraging you to borrow when your ability to pay is doubtful and these foreign investors make most of the market. They are the ones driving the market so they are a little bit cautious,” he explained.
A capital market analyst pointed out that no economic activity operates in a vacuum.
According to him, markets react promptly and uncharacteristically to rumours of war, changes in regulatory environment; political climate seen as a negative factor by the business (investing) community; and interest rate variation to general performance of the economy.
He added that it was a common trend for stock prices of some quoted companies to rise and fall or fall and rise twice or thrice within a year. The stock prices of quoted companies on the Nigerian Stock Exchange (NSE) are affected either positively or negatively by a number of factors occurring within and without the economic system.
Investment in stock market is long-term in nature; any development that could affect the stability of the economy usually has serious impact on the stock prices. In recent times, the NSE has consistently lost points and the prices of stocks have experienced sharp decline.
Commenting on the performance of the market, a stockbroker and managing director of Lambeth Trust and Investment Company Limited, Mr. David Adonri, was quoted as saying the equities market entered 2014 overheated.
“Subsequent market correction cooled down in January. Series of events since February have added in taking the breath out of the entire financial market. Notable among which were tightened monetary policy and sudden suspension of the CBN governor. These were the factors that forced the market into decline,” Adonri said.
