The negative market position at the stock market belies ongoing regulatory initiatives and several contrarian stocks with considerable positive returns. In this report, Capital Market Editor, Taofik Salako, reports that low prices, regulatory initiatives and comparably competitive fundamentals of quoted companies have primed the market for a rousing performance in the medium to long term
For investors, quoted companies, operators, regulators and other stakeholders in the capital market, it has been a challenging time. Nigerian equities crashed to three-year low last week after sustained price depreciation brought several quoted companies to their lowest values in recent years. The stock market opens today with a negative average year-to-date return of -21.32 per cent, implying that, on the average, investors have lost more than one-fifth of their investment portfolios so far this year. That was a staggering loss of N2.1 trillion. Against widely held expectations of modest positive return or at worst, a flat performance or slight negative return in 2015, the market appears to be rolling towards a worse performance than 2014, when it lost N1.75 trillion or -16.14 per cent. With inflation rate at 9.3 per cent, inflation-adjusted average year-to-date return at the Nigerian stock market now stands at about -30.6 per cent, simply implying that average investors have lost nearly a third of the real value of their investments.
But the Nigerian market is not alone. Across Africa, 20 of the 24 Exchanges have been experiencing varied forms of downtrend. With the exception of the JSE Stock Exchange of South Africa, African Exchanges have mostly followed their national macroeconomic decline. Other advanced and emerging markets also showed a tinge of the downtrend. In the United States, the Dow Jones Index has returned -8.63 per cent while the NASADAQ Composite Index has lost 2.45 per cent. In the United Kingdom, the FTSE 100 Index UK indicated average year-to-date return of -7.68 per cent.
Macro background to micro performance
Group Head, Financial Advisory, GTI Capital, Mr. Hassan Kehinde, said the stock market, which had been bogged down by political and policy risks during the political transition period, was affected by post-transition uncertainties and foreign exchange crisis, which led to the exit of influential foreign investors.
There is analysts’ consensus on the linkage between the macroeconomic indices and Nigeria’s political transition and the lukewarm performance of the capital market. The fall in crude oil price, Nigeria’s major foreign exchange earning resource, from a $100 per barrel to a $49 sell rate in January, triggered a foreign exchange crisis, which has continued to haunt the country. The price slump meant decrease in the national foreign reserve, which forced devaluation of Naira. With additional pressure on the Nigerian economy, many foreign investors became frightened with the possibility of additional currency risk. The fright-exit of foreign investors, decreased national productivity and uncertain fiscal and monetary outlook combined to create a sustained sell down at the stock market. Instructively, foreign investors account for the largest transactions and trades on the Nigerian stock market.
Anxieties around the elections in April further worsened the run as some investors were worried. To the relief of most Nigerians, the elections were peaceful and a new wave of change was ushered in with the election of President Muhammadu Buhari. The market quickly reacted to this with 8.30 per cent rise in the immediate days after the presidential election in what has been termed the Buhari Bounce. But as the new government struggled with and delayed composition of its executive cabinet, the excitement started to wane.
Analysts at Afrinvest Securities- a Lagos-based investment firm, said uncertainties around fiscal and monetary policies, especially foreign exchange, have been major driving forces for the market downtrend.
“Specifically, the economic and political risk of the country is currently too high for multinational and foreign investors. Factors influencing this includes dwindling price of Brent Crude Oil, uncertainly of the post-election period, decreasing value of Naira and unfavourable foreign exchange. Local investors are further affected by the increased volatility of the market,” managing director, Finawell Capital Limited, Mr. Tunde Oyekunle said.
Diamonds in the rough
The negative overall market performance however belies the resilience of several stocks at the stock market, in terms of corporate earnings and share price appreciation. Most dividend-paying companies have sustained payouts while several stocks currently carry double-digit positive returns. On dividend pay outs, some companies have also maintained their dividend and bonus payments. For instance, Nestle Nigeria paid a dividend per share of N18.50, Total Nigeria paid N8 while Forte Oil distributed a cash dividend of N5.20 per share. Stocks with double-digit returns included Seven-Up Bottling Company, Nascon Allied Industries, Vitafoam Nigeria, Unilever Nigeria, Lafarge Africa, Cutix, Beta Glass and University Press among others.
“Opportunities still exist for investors in stocks, in spite of the current downturn in the capital market. If you look at large, mid and small cap securities; mid cap securities have done well, they have returned about six per cent positive. Now the whole market is about 18 per cent down and that is because of the weight of the large-cap securities. So, it is important for investors to dig deeper and understand the dynamics of the market. Investors also need to understand that there have been significant sell-offs between last year and this year and it could present opportunity,” chief executive officer, Nigerian Stock Exchange, Oscar Onyema said.
Most analysts agreed with Onyema. Most stocks have hit rock-bottom price and several are trading below book value.Shrewd investors that come into the market to buy low now stand to gain more in the medium to long-term. “The rebound in market breadth suggests bargain hunters are already taking position. Despite the decline in earnings, current market valuation of stocks still presents a sizeable upside for long term investor,” Afrinvest Securities, a Lagos-based securities firm, stated. Many pundits hold that this should be the greatest wealth creation moment in the capital market, citing the typical Warren Buffet style. Globally regarded as the oracle of stock-picking, Warren Buffett’s fond saying is: when the mood of crowds is at its darkest, that’s the time to buy; when the masses are in a trading frenzy, run for the exits.
In August 2015, the NSE, South Africa’s Johannesburg Stock and Kenya’s Nairobi Stock Exchange announced a collaboration to improve liquidity on Africa’s exchanges through cross listings of Exchange Traded Funds (ETF’s). Executive Director, Business Development, NSE, Haruna Jalo-Waziri , said the collaboration underscores the commitment to provide investors with a wide range of investment products to help them realise their financial goals. “ETFs are becoming attractive to many investors offering them portfolio diversification and reduce cost of investing. We are proud once again to be collaborating with reputable exchanges in Africa to bring this new and exciting investment opportunity to bolster trade across multiple markets,” Haruna Jalo-Waziri said.
Strengthening the regulatory framework
As share prices continue to totter on the negative, capital market regulators have stepped up efforts to improve the market technological and regulatory architecture. These past 11 months have seen several initiatives by the NSE, Securities and Exchange Commission (SEC) and the all-stakeholders committee, otherwise known as Capital Market Committee. The NSE has begun implementation of its Minimum Operating Standards (MOS), which seek to ensure stockbroking firms have adequate technology, human resources and structures to safeguard investors’ interests. The NSE also recently coordinated central launch of online mobile stock-trading portals that promise to bring the tech-savvy generation into the market. The Exchange has won several accolades for its regulatory enforcement and strict insistence on best practices and good corporate governance. So far this year, the NSE has received four awards. These included “Best Corporate Social Responsibility Award” at the 2015 African Business Awards in New York, “African Regulator of the year award” at the 6th African Business Leadership Awards organised by African Leadership magazine in London, Lagos Chamber of Commerce and Industry Award “for promoting best practice reporting and corporate disclosure and the “financial institution of the year” by the Oil & Gas Year (TOGY) Nigeria.
The CMC, where the NSE plays a major role as a self regulatory organisation (SRO), has spearheaded the implementation of the 10-year capital market master plan. Director, general, Securities and Exchange Commission (SEC), Mr. Mounir Gwarzo, outlined that seven major initiatives are expected to be fully implemented by the end of this year. These priority areas included dematerialisation, e-dividends, direct cash settlement, reduction of transaction costs, unified licensing model across money and capital markets, obtaining liquidity status for non-interest capital market products and strengthening market institutions by completing the recapitalisation exercise.
“Our focus at SEC, the NSE and other stakeholders is to continually engage and bring the domestic investors back to the market as we think they are very critical in lifting the market up. The market is well regulated and operators are following a strong regulation regime and we are putting in strong processes to make sure the operators are fit, strong and proper. Markets go up and down, what is more important is the fundamentals of the market,” Gwarzo said on the outlook of the Nigerian market. The electronic dividend (e-dividend) portal, which basically automatically transfers dividends to a shareholder’s bank account, whatever the status or type of the account, has been launched. Direct cash payment is scheduled to take off by January 2, 2016. As against the current general practice whereby the payments for investors’ transactions go into the accounts of the brokers for onward disbursement to their clients, the general practice under the ‘direct cash settlement’ will be to send the net proceeds directly from the clearing and settlement system straight to the investors’ accounts. SEC had in September concluded the recapitalisation exercise for market operators and it is currently undertaking post-recapitalisation audit preparatory to the release of the final list of compliant market operators later this month. SEC, after CMC quarterly meeting two weeks ago, launched the Capital Market Master Plan Implementation Committee- a highly influential advocacy group for the market; Corporate Governance Scorecard-a review mechanism for best practices and the National Investor Protection Fund (NIPF)-a fund dedicated to compensating investors for non-market risks. SEC provided the NIPF with take-off grant of N5 billion.
But there is need for government to align its fiscal and monetary policies with the yearnings of the capital market. Several years after privatisation, privatised companies have demurred from listing their shares, other nationally strategic companies see no incentives to list, listed companies receive little or no special status from national economic policies and the capital market is relegated to the background in government economic management. These have compounded the shallow domestic participation in the Nigerian capital market. Less than three per cent of Nigerians are participating in the Nigerian stock market, less than 0.2 per cent of Nigerians have ever invested in collective investment schemes otherwise known as mutual funds and foreign investors account for some 60 per cent of retail transactions at the market. Beyond the efforts of SEC, NSE and the CMC, government needs to stimulate the market with friendly policies. Notwithstanding the foggy pre-dawn, the daybreak appears near for the market.
