Inflation, uncertainty put Nigerian stock market behind peers

Prolonged high inflation and uncertainty in the business environment are taking a toll on the stock market as capitalisation and activities in the country continue to trail behind those of other countries.

With a capitalisation of $56.6 billion or a paltry 13 per cent of the gross domestic product (GDP) and 177 listed firms, experts said the market does not reflect the huge potential of the local economy.

The figures are low when compared to the Johannesburg Stock Exchange (JSE) with a total capitalisation of $1.06 trillion, representing over 235 per cent of the country’s GDP and over 370 listed companies.

The volume of activities at Nigeria’s market pales into insignificance when compared with the New York Stock Exchange (NYSE) whose market capitalisation is about $21 trillion with over 2,000 listed companies.

Nigeria’s Exchange has made remarkable progress in capital market development and the menu of available asset classes has been expanded to include exchange-traded funds.

The market infrastructure has also been modernised and strengthened with platforms for over-the-counter (OTC) trading.

Yet, at less than 15 per cent of the country’s GDP, the current size of the market in volume, liquidity and sectoral representation is said to have constrained its contribution to national economic development.

The top four capitalised stock exchanges in Africa are in South Africa, Egypt, Morocco and Kenya. Each of them is ahead of the Nigerian Exchange Limited (NGX) in market cap.

Before the 2007 financial crisis, South Africa’s market cap was $828 billion while the country’s GDP was $300 billion. In 2020, the country’s GDP was $301 billion whereas the market cap of JSE ballooned to $1.05 trillion, representing 235 per cent of the country’s GDP.

In the case of the Egyptian Stock Exchange (EGX), 238 companies are currently quoted with a total market cap of $731 billion as of October 2021. The market cap is 12 per cent of the GDP.

Morocco’s market cap hit $58.9 billion at the end of October 2020, an equivalent of 53.7 per cent of its last year’s nominal GDP or 54.4 per cent of 2019 GDP.

In 2007, Kenya’s GDP stood at $31.96 billion with a market cap of $14.46 billion. Last year, the country’s GDP had increased to $98.8 billion while the capital market cap was $21.4 billion or 21.6 per cent of the GDP.

Nigeria’s GDP in 2007 was $275.6 billion while the market cap represented 30 per cent of GDP. By 2020, Nigeria’s exchange market cap stood at $56.6 billion or 13.1 per cent of GDP.

According to figures obtained from the World Federation of Exchanges, South Africa’s listed companies as of 2003 were 473 but the figure declined to 365 in 2020 while Egypt recorded about 255 in 2018, a figure that declined to 240 in 2020. In 2020, 60 companies were listed in Egypt while 177 quoted companies were listed in Nigeria.

Between 2010 and 2019, African Exchanges floated a total of 202 IPOs amounting to $88 billion. South Africa accounted for 71 per cent of the $12.3 billion raised in sub-Sahara Africa while Kenya raised 13 per cent or $1.5b billion. Egypt had 23 IPOs, raising $2.2 billion. Due to the dual listing of Airtel Africa, Nigerian companies raised only $687 million from Initial Public Offering (IPO) in 2019.

Nigeria’s market lags behind others despite efforts made by the management of the NGX to improve liquidity and make it competitive in the global market.

For instance, as part of the aftermath of the global financial crisis, the management of the exchange in 2013 selected 10 stockbroking firms in the country to take responsibility for market making in the equity market.

Chief Executive Officer of the then NSE, Oscar Onyema, said the selection process of the 10 out of the 20 applications were those who met the minimum N570 million net capital base, compliance history, operational capabilities as well as technological capacity.

The 10 qualified market makers were Stanbic IBTC, Greenwich Securities, Renaissance Capital, CSL Stockbrokers, FBN Securities, WSTC, ESS/Dunn Loren, Future View, Vetiva and Capital Bancorp. Each of the selected stockbroking firms was required to select their basket of securities in a blind drawing ballot system.

The primary role of a market maker is to maintain a fair and orderly market in its particular securities of responsibility and, in general, to contribute positively to the operation of the overall market by ensuring that buyers and sellers of securities can transact.

Regrettably, the market-making initiative did not achieve the expected result as most of the firms that signed into the programme incurred heavy financial losses and subsequently abandoned the responsibility.

Another factor that impacted negatively on market liquidity is the delisting of listed firms from the daily official list of the exchange. Data collated from NGX showed that a total of 36 companies were delisted from the market between May 2016 and May 2021.

Of the 36 companies, 23 were forced to delist, nine delisted voluntarily while four exited the exchange as a result of mergers.

Operators have also alleged abysmal neglect of the market, urging the government to prioritse the sector and unlock its potential. This, among other alleged failures by the Federal Government, follows the non-integration of the capital market’s Master Plan into the country’s Economic Recovery and Growth, which has become a concern to stakeholders.

They suggested that the government must replicate successes recorded in other sectors of the economy on the stock market to grow the economy.

Director-General, Securities and Exchange Commission (SEC), Lamido Yuguda, said the Commission had been working collaboratively with the exchange, adding that it will continue to support the NGX to grow the market capitalisation and reduce the incidence of delisting.

“We will ensure that the market develops into what Nigeria truly needs,” he said at the enlightenment tour of the Committee on Capital Market and Institutions, House of Representatives and the SEC to the Exchange,” he said.

The Nigerian stock market enjoyed a decade-long boom, which culminated in its highest growth in March 2008 when the all-share index (ASI) reached 66,371 points and the market cap hit N15.64 trillion.

The market began unimaginable growth in 2007. While 36.7 billion shares valued at N470.25 billion traded in 2006, 138.1 billion shares valued at N2.1 trillion were traded in the secondary market of the NGX in 2007.

The meteoric rise in share prices, coupled with heightened activities in the primary market where N2.4 trillion of new issues were listed drove the ASI and market cap at the end of 2007 to 57,990.22 points and N13.295 trillion respectively.

The bubble bust occurred in April 2008 following the devastating effect of the global financial crisis at the NGX, with cut-off of credit from the equities market due to recall of margin loans and continued exit of foreign investors.

Consequently, the ASI declined to 31,450.78 points and the market cap plunged to N9.56 trillion at the end of the year. In 2008, the ASI fell by 46 per cent making the NGX the worst-performing market in the world.

The fall eventually bottomed out when the decelerating ASI reversed at 19,000 points and market capitalisation at N4.5 trillion in March 2009, having caused massive wealth destruction, credit contraction, impairment of banks and loss of investors’ confidence in the capital market.

The impact of the reversal caused severe damage to the balance sheet of banks and the near-collapse of the stock market. Although the market has substantially recovered from that life-threatening distress over the years vestiges of the impact remain. Up to date, retail investors who were severely wounded in the market are yet to return.

Issuers’ confidence is yet to be restored, making the primary market of equity offer for subscriptions inactive. This has reduced the capacity of the Nigerian economy to form vital capital direly needed for the generation of productive employment.

As at the second half of 2021, the ASI stood at 37,907.28, recording a year-to-date decline of 5.9 percent. The market cap was N19.76 trillion or $48.1 billion. The total number of listed securities was 373 (156 equities, 129 Bonds, 12 ETFs and 76 funds).

Vice-Chairman of Highcap Securities Limited, David Adonri said Nigeria has suffered two major economic crises since the devastating global meltdown in 2008, noting that the combination of the 2016 and 2020 crisis wreaked untold havoc on the market.

According to him, if the nation’s capital market is deepened to serve as a barometer of the economy, its market cap can compete with Kenya where it was over 55.83 per cent of GDP in 2012 or $1 trillion market cap of South Africa.

He pointed out that the NGX market cap bottomed out at N4.5 trillion in March 2009 during the meltdown and has since risen to N21 trillion in December 2020.

However, he noted that most of the listings are not IPO but through new listings by introduction.

“Development capital is formed through new issues and between 2010 and 2020, new issues declined drastically throughout Africa and the fate of Nigeria was not different.

“However, high Investors’ confidence and good macroeconomic conditions are crucial for the revival of the new equities issue market. These have largely been absent in Nigeria since the meltdown.

“Also the interplay between the debt and equities markets in terms of yields can influence the direction of capital formation. Yields have not favoured equities since the meltdown.”

He added that the quantum leap of Nigeria’s GDP after rebasing in 2014 from $270 billion to $510 billion diminished the contribution of Market Cap to GDP, unlike in other African economies.

Professor of Economics, Olabisi Onabanjo University, Ago-Iwoye, Ogun State, Sheriffdeen Tella said because Nigerians are risk-averse, it took a long time for investors to return to the stock market after the 2008 crisis.

He also argued that Nigeria had witnessed two additional recessions after the global financial meltdown, in addition to the exchange rate crisis, which has been depreciating and scaring foreign investors away from the market.

“Those other countries do not have these problems as they are industrialised and have diversified stable income like South Africa. Their exchange rates are relatively stable with less capital flight.