59 years after, stock market still bogged down by neglect, crisis of confidence, illiquidity
Presently, increased volatility and illiquidity have continued to trigger persistent downturn in the Nigerian Stock Exchange (NSE), raising more questions regarding the timeframe for the end of the current weak performance.
Indeed, the persistent apathy and waning investor confidence that have bedeviled the nation’s stock market in the past few years continued to reflect on market indices and trigger persistent fall in share prices of listed firms as most bluechip stocks have fallen 10 year low.
According to the NSE, polls trading figures from market operators on their Domestic and Foreign Portfolio Investment (FPI) flows, domestic transactions in the nation’s bourse decreased by whooping 66.68 per cent from N3.556 trillion in 2007 to N1.185 trillion in 2018.
The country’s capital market has continued to trail behind that of peer countries. The flagship securities exchange, the NSE, is small compared to the major international exchanges, with a total market capitalisation of about N13 trillion, compared to the Johannesburg Stock Exchange (JSE) for example with equities capitalisation alone a little shy of $1 trillion representing over 280 per cent of South Africa’s GDP and over 380 listed companies not to mention the New York Stock Exchange (NYSE) whose market capitalisation is about $21 trillion with more than 2000 listed companies.
The current size of the capital market constrains its role in national economic development. Market liquidity as measured by trading volume and turnover is comparatively low.
The issuer base is not diversified. More specifically, industry composition in the stock market is concentrated in a few sectors namely Dangote cement, Nestle MTN Nigeria and Airtel Africa.
The major equity index (NSEASI) has significant weights in banking stocks, which are sensitive to business cycles. In contrast, agriculture and technology sectors critical for economic diversification take up a much smaller proportion.
Most of the systemically important corporations such as the International Oil are not listed on the stock market.
Foreign investors are significant players in the equities market often dictating the pace of market activity.
This leaves the market vulnerable to external shocks. Local institutional investors such as pension funds and mutual funds are less active in the equities market with asset allocation concentrated in government bonds and Treasury Bills generally considered safe and liquid.
How the nation’s stock market came into existence
The Nigerian stock market was established in September 15, 1960 with the establishment of Lagos Stock Exchange, which became operational in June 5, 1961.
In December 5, 1977, following the recommendation of the government financial system review committee of 1976, the Lagos Stock Exchange was renamed and reconstituted into the Nigerian Stock Exchange.
It is worthy of note that since 1977, there has been a decline in the share of government stock in the stock exchange.
The growth of government stock started decreasing while industrial equities and bonds as well as second tier securities market continued to increase yearly.
But the internationalisation of the market in 1995 accentuated the interest of the private sector investment in the stock market. Conspicuously, as government stock traded in millions during 1995 , industrial equities accelerated to billions .
Within the period, the total market capitalisation increased tremendously. From N16348.40 million in 1990, it increased to N466058.70 million in 2000 and in 2006, the figure rose to N5.12 trillion.
The market enjoyed a decade- long boom and attained its highest growth in March 2008, with the All-share Index (ASI) of the NSE hitting 66,000 points with a value of daily transactions reaching over N12 billion.
The effect of the 2009 global financial crisis on NSE
Unfortunately, the bubble of 2008-2009 global financial crisis instigated a worldwide economic recession, bringing to a halt more than a decade of increasing prosperity for western economies and wiping a staggering $1 trillion off the value of the world economy.
In the aftermath of the crisis, equity capital formation started receding as financial assets took flight to safety in fixed-income securities. The stock market started declining and has currently suffered its worst bearish run since the inception.
Consequently, the NSE, which grew steadily from N35.7 billion in the year 2000 to the highest point of N2.6 trillion in 2008 receeded, asthe All Shares Index (ASI) shed more than 70 percent of its value between March 2008 and April 2009.
Foreign investors, who realized the danger posed by the on-coming financial turmoil, withdrew their funds, depressing the stock market further.
The unprecedented lull triggered panic in the stock market within the period. The level of panic was such that it induced a spate of suicide among traders. Retail investors also suffered a stroke due to a loss of investments.
This is because the financial fortunes of many retail investors are tied in some way to the market either directly through investments or indirectly through the pension funds.
Therefore, the collapse of the market reverberates through the whole of society. Subsequently, Nigerians have developed an aversion for the stock market, as many of them have not recovered from the losses.
Govt. unfavorable policies and neglect of the stock market
It is worthy of note that 12 years after the 2008-2009 global financial crisis, Nigerian investors are recounting their loss, even as they battle with perennial issues bedeviling the nation’s capital market.
This is due to what capital market stakeholders described as an abysmal neglect of the market. The stakeholders had stressed the need to prioritise the sector and unlock its potentials.
According to them, despite efforts by the Securities and Exchange Commission (SEC) to undertake a number of initiatives to boost investors’ confidence, the capital market continues to trail behind its peers in other countries in volume, liquidity and sectoral representations.
Integrating the Nigerian capital market master plan into the country’s Economic Recovery and Growth Plan (ERGP) will position the market for sustainable growth.
Regrettably, government’s ERGP seems not to recognise the place of the capital market in capital formation and economic growth. Throughout the 140-page ERGP document, no mention was made of government’s plan for the capital market.
In contrast, in Malaysia and other emerging economies, sections of even annual budgets are devoted to addressing government incentives for the capital market. The 2018 Malaysia budget for example, has a section on ‘Tax incentives for Malaysia’s capital market’ in which the budget proposes a three-year exemption on stamp duty for exchange-traded funds in order to promote Malaysia’s capital market and make it internationally more competitive.’
In addition, the budget offers tax relief for venture capital companies and income tax deductions for environmentally and socially responsible islamic bond issuers”.
The stakeholders suggested that government must replicate the successes recorded in other sectors of the economy on the market to grow the economy.
The stock market had long lost some gains recorded during the boom period to the global financial crisis of 2008.
NSE embroiled in crises of confidence and other perennial issues
As industry regulators were struggling to restore investors’ confidence in the capital market, the market was embroiled in crises of confidence and other perennial issues.
The crisis ranges from over N700 billion trapped in private placement scams during the era of stock market boom to the sale of the three nationalised banks. Also the case involving 300 investors of Partnership Investment Plc whose stocks totaling N4.8 billion were involved in a ‘shady’ deal with the crises of confidence rocking Oando Plc and allegations of fraud against the Director-General (DG) of the Securities and Exchange Commission (SEC), Mournir Gwarzo.
Companies, which had undertaken private placement during the stock market boom period, had tied down funds without listing the shares on the exchange to generate returns as, stated in the prospectuses.
The situation thus created much liquidity problem for the equities segment and further depressed the market, as these retail investors did not have the purchasing power to patronise the market after the global financial crises.
Consequently, whopping N700 billion investors’ funds were discovered to have been trapped in private placements by firms. The affected investor, therefore, urged industry regulators to wade into the perceived scam.
Trapped funds in Nigeria’s capital market, especially when it happens in less than transparent manner is considered a failure of regulation.
Part of this contributed to the market crash 10 years ago. Continued scam in Nigeria’s ailing capital market could also have eroded confidence and deprived the NSE of the much-needed recovery.
Checks by The Guardian revealed that many of the firms were successful in their bids and sourced over N700 billion, but a large portion of the money was diverted into other investment outlets outside the objectives declared in the prospectuses.
The shareholders, who spoke through a telephone interviews with The Guardian said the situation had created much liquidity problem for the equities segment and further depressed the market, as these retail investors do not have the purchasing power to patronise the market.
Retail investors, still grappling with the loss of investment, occasioned by the global financial crises were faced with the dilemma arising from the sale of the three nationalised banks: Keystone Bank Limited; Mainstreet Bank; and Enterprise Bank.
The shareholders of the banks have found themselves in dilemma as they lost their investments estimated at N83 billion. Investigation had shown that one of the reasons why retail investors had shown apathy to the Nigerian stock market since the meltdown in 2009 was because of the issue of nationalised banks.
Another issue that eroded confidence in the nation’s stock market was the case of the N10 billion scandal, relating to diversion and misappropriation of funds by Partnership Securities Limited (PSL), and its sister companies – Partnership Investment Company Plc; Life Care Partners Limited; and SBDC Microfinance Bank Limited where over 300 investors of Partnership Investment Plc whose stocks total N4.8 billion are involved in a ‘shady’ deal.
According to investors, the SEC’s inability to upgrade its operational guidelines by using modern Information Technology (IT) facilities to monitor day-to-day market operations, especially the trading platform would continue to undermine efforts to restore confidence in the market.
These investors who used partnership Securities Limited as their broker said they were persuaded by the company to deposit their portfolio with the Partnership Securities Deposit Account (PSDA) for trading activities.
A shareholder with investment portfolio worth N36 million said that when it was obvious that the company was no longer following the terms of agreement, he wrote a letter to the company, demanding a termination of his investment.
According to him, he requested that the shares should be returned to the Central Securities Clearing System (CSCS) to enable him to claim the shares but the request was not granted.
Few months after the incident, crises erupted in Oando Plc where aggrieved shareholders of the company, apparently worried about the future of the oil company, in view of the unresolved corporate governance issues relating to the group’s financials stormed the venue of the Group’s Annual General Meeting (AGM) in Calabar, Cross River State.
In a letter read out by the leader of the shareholders, Clement Ebitimi, had accused the Oando management of mismanagement, following allegations of infractions filed against it by Ansbury Inc., and Alhaji Dahiru Mangal on Wednesday, October 18, 2017.
Subsequently, the NSE, with a directive from the SEC, announced the suspension of trading in the shares of Oando Plc from October 20, followed with a forensic audit of the company to the tune of N160 million.
Afterwards, Oando filed a court order restraining the suspension of its shares on the exchange, accusing SEC of bias in the management of the crises noting that the penalties for the alleged infraction far outweighed the offence.
Shortly after the event followed another saga in the nation’s capital market, involving N104 million-severance package fraud against the DG of the SEC, Mounir Gwarzo.
With the barrages of crises rocking the nation’s capital market, investors who spoke with The Guardian maintained that poor regulatory roles, coupled with sleaze and mismanagement in the affairs of listed firms’ and government neglect of the capital market have caused Nigerian investors intense hardship.
The local investors who are basically retail investors are shying away from the market due to various crises and policies that has subjected them to hardship in time past.
They urged federal government to tackle challenges of confidence and trust in the nation’s capital market in recent times.
President Buhari’s inauguration and subsequent political risks
After the inauguration of President Buhari in 2015, stock market investors heaved a sigh of relief. Hopes of increased market liquidity and investors’ confidence were rekindled.
Unfortunately, expectations that President Muhammadu Buhari’s administration would spur activities in the market and restore the exchange to a path of sustainable growth were dashed, as the nation’s capital market contributed very little to the economic development of the country in recent times.
The initial enthusiasm that immediately greeted his victory in 2015 has since faded because investors were unable to identify any value addition to the capital market by his government.
The situation was exacerbated by political intrigues ahead of the 2019 general elections, causing stock market investors to lose virtually all their investment.
contrary to general expectations of positive earnings in 2018, as the once-troubled economy emerged from a recession at the end of 2017.
Analysts, operators and investors linked the decline to ‘extraneous factors’ and ‘profit taking’, because the subsisting market’s fundamentals and upbeat economic data failed to support a much-expected healthy stock price recovery.”
This gives credence to the fact that investors are concerned about the political risk associated with general elections, which is linked to the decision by investors and traders (mostly foreign) to sit on the fence.
For instance, after posting a 26 per cent loss in 2016, the Nigerian equities market gathered momentum in 2017 with an increase of N4.5tr in market capitalisation.
This was from N9,158 trillion at which it opened the year on January 3, 2017 to N13.519 trillion as at December 28, 2017. The All-Share Index (NSE ASI) rose by 43 per cent in 2018n financial year from 26, 616.89 to 37,990.74.
The rally extended to the current financial year, as market capitalisation of listed equities stood at N13,617 trillion as at January 2, 2018 and rose by N2,074 trillion or 13.2 per cent to N15,691 trillion as at Friday, January 26, 2018.
Also, the ASI, which opened the year 2018 at 38,264.79 rose by 5,508 points or 12.6 per cent to close at 43,773.76. Surprisingly, after the January and mid-February 2018 rally, the market recorded unprecedented reversal in performance contrary to analysts’ predictions.
The capitalisation, which stood at N15,549 trillion as at Wednesday, February 28, 2018, depreciated to N14,820 trillion as at Thursday, May 10, 2018, representing N729 billion or 4.9 per cent loss.
Also, the ASI declined by 2,415.6 points or 5.9 per cent to 40,914.94 from 43,330.54, achieved as at February 28, 2018.
The analysts blamed the flattish look of the market on the tension that has plagued the political space in recent times. They said killings by Fulani herdsmen and cases of political thuggery aggravated apathy in investment, especially on the part of the foreign investors.
Stock prices record free fall across every segment
There has been an astronomical fall in the share price of listed firms across sectors on the NSE in the past five years, owing to illiquidity and low investors’ confidence triggered by the current weak macro-economic situation of the nation. Shares of listed equities in all segment of the market have continued to tumble in the last five years of President Buhari’s administration.
For instance, the logistics industry, like any of its peers is currently faced with various challenges ranging from high interest rates and high fuel cost and stringent government regulations.
Indeed, poor transportation infrastructure is considered to be the most significant challenge facing logistics provider, which must be addressed if further business opportunities would be unlocked in the industry.
The above factors had been listed as the major ills militating against the growth of the industry, just as the sector had witnessed sustained sliding profile in the last few years.
Specifically, Associated Bus Company Plc, also known as ABC Transport Plc, a Nigerian transportation company has continued to diversify its operations over the years, expanding into such areas as cargo services, haulage services, importation/sale of vehicle spare parts, assembling of heavy-duty trucks, and installation of vehicle speed devices.
But the company is currently hit by harsh operating environment, which has adversely affected its financial performance and stock prices on the Nigerian NSE.
A look at the five-year financial reports (2013-2017) for ABC Transport (the company) shows that revenue began to decline in 2016. Note that this is around the same time GIGM Motors had just unveiled its rebranded and refocused business model.
The company’s (group) revenue for full year 2017 stood at N7.1 billion, against N6.7 billion recorded for it in 2016. Profit after tax for the group in 2017 was N513 million, compared to N599 million in 2016.
For its Q1 2018 result released earlier this year, reported revenue stood at N1.4 billion, compared to N1.7 billion reported for the same period in 2017. In the same vein, profit after tax was N65 million compared to N192 million reported for Q1 2017.
Similarly, the effects of challenging operating environment has continued to assail the operations of the nation’s conglomerates sector, just as the bottom-line of the industry’s quoted companies in the last few years had remained subdued, occasioned by assessed policy issues.Worsened by parlous infrastructure, which has inevitably transferred the high production cost to consumers, the companies are now less competitive, with shrank profit margins, as naira depreciation takes its toll on imported raw materials.
Indeed, increase in Nigeria’s exchange rate has forced most conglomerates and manufacturing sector to borrow at a high rate, compelling them to raise cost of production.
Most hit within the period were the share prices of these companies on the trading floor of the NSE, which have remained stagnated at the nominal value year to date, following negative sentiments that have enveloped the demand for the stocks.
For instance, from a nominal share price value of 59 kobo in September 2017, to 26 kobo as at close of trading on Thursday, September 19,2019, large Nigeria-based conglomerate, A.G. Leventis (Nigeria) Plc has continued to battle with lower sales and declining bottom line, posting a loss position in 2016, closed 2017 in the same trend and continued the 2018 unimpressively, finishing both first and half quarters of the year with a loss after tax.
Stakeholders blame market woes on govt. policies, proffer solutions
Analysts, operators and investors who spoke with The Guardian on the issue said the nation’s stock market is still very far from attaining the heights it got to before the global financial crises in 2008.
Specifically, a Professor of Corporate Law and Governance at the Department of Business Law, College of Law, Igbinedion University, Okada, Prof. Nat Ofo maintained that virtually all the initiatives introduced by the team of competent professionals manning the NSE at the moment have not yielded the desired results.
“This is not surprising as the nation’s stock market is generally a reflection of the economy. It goes without saying that the Nigerian economy is in shambles, barely climbing out of an unfortunate recession.
“In spite of massive budgetary figures, the hardship in the land does not seem to be abating anytime soon.
He added: “Deliberate policy decisions must be made to revive the Nigerian capital market. Without such policy, it does seem the gloom would be around much more than is tolerable.”
The Chief Research Officer of Investdata Consulting Limited, Ambrose Omodion said the nation’s stock market has failed to recover since after the global financial crises due to government abysmal neglect of the market, in addition to the nation’s to poor economic environment.
He regretted that the capital market, which is supposed to be the parameter and engine growth of the economy has been neglected and given little attention by the government.
He argued that the economy reflects the capital market and vice-versa, because Nigerian economy is the outcome of commercial activities in the country, even as the market remains a critical hub for commercial deals and parties to such transactions.
“Yes, the Nigerian stock market after the global financial meltdown has failed many attempts to recover due to policy summersault and poor leadership.
“It is true that regulation and transparency had improved after global financial crisis but low liquidity and low market depth have impacted negatively on the market.
“This is because the number of active listed companies had remained low. While fewer new companies are listed, the old ones are delisting for one reason or the other.
“More so, shallow knowledge of the rudiments of stock market have led to low patronage and over dependence on foreign investors in the nation’s stock market.
He continued: “Due to lack of investment education and government failure to woo retail investors back to the market through appropriate incentives and favorable policies, the market has been dominated by foreign portfolio investors since after the meltdown.
“But if the needful is done by the regulators and government through initiating appropriate policies that would support the capital market, it would surpass the previous peak, drive job creation and spur national growth,” he added.
The National Cordinator of Progressive Shareholders Association, Boniface Okezie said the Nigeria stock market has not fared well since after the global financial crises of 2008.
According to him, while other global markets like the London Stock Exchange (LSE), NYSE and even the JSE have wriggled out of that crisis, the NSE is still wobbling under low patronage and illiquidity.
He identified low patronage, unfavorable operating environment, lack of incentives, fewer product offerings and inconsistent government policies as factors inhibiting the growth of the nation’s capital market and consequent contributions to the economy.
He said: “The NSE has not recorded this level of unprecedented lull witnessed currently in the market. For the past 10 years, investors have been losing their investment in the market.
“I have not seen it so bad like this since I entered into the stock markets as an investor. With this level of governments neglect on the market, I do not see the market rebounding soon to contribute meaningfully to the economy.
“ The needed rebound we are yearning for can only be achieved unless government decides to replicate the reforms achieved in other sectors of the economy like the telecoms and aviation in the market.”
“ Again, the industry as a whole has failed to live up to expectations in their over sight regulatory functions.
We can only hope and pray that government will do the needful by addressing issues confronting the economy so the market can improve.”