Poor regulation, others stall NGX full recovery 15 years after
Poor regulation, harsh economy and other perennial challenges bedeviling the capital market have continued to hurt retail investors’ participation in equities 15 years after the global financial meltdown even as the market continues to lose an average of N2 billion to the segment’s apathy daily.
The losses are calculated based on the sector’s contributions to daily market trading before the crisis and current percentage.
Already, operators are worried that the drop in retail investors’ activities, which had constituted a large chunk of the total transactions, would further depress the equities market. This is because retail investors dominated the equities market after the indigenisation exercise of the 1970s up till the year 2000, contributing almost 70 per cent to volume.
However, the upsurge in foreign portfolio investment from 2000 to 2007 watered down their contributions to about 40 per cent. Regrettably, the segment’s contribution to the equities market currently is less than 10 per cent.
Consequently, the All-Share Index (ASI), which grew steadily to the highest point of 66,000 points receded, shedding more than 70 per cent of its value between 2008 and 2022.
Considering the gap created by foreign investors’ exit from the market, which has remained largely unfilled and continued to suppress transaction volume, the operators urged the government to create appropriate measures to restore their confidence.
Vice President of Highcap Securities Limited, David Adonri, said if retail investors’ participation in the market increased to 40 per cent as recorded before the global financial crisis, their daily contribution to the market would be more than N1 billion, considering the average daily value of equities transactions of N2.5 billion.
Adonri argued that, hitherto, Nigerian retail investors had an affinity for equities as very few of them understand debt instruments.
He pointed out that the segment of investors was the driving force of the equities market for several years as a result of their concentration until the global meltdown.
According to him, while retail investors dominated the equities market, their financial contributions to the equities market were very significant, causing their aggregate investment sentiments to direct the movement of the market, just as their steady investment stabilises the market and enhances liquidity.
In addition, he affirmed that retail investors’ transactions stemmed from the volatility of the market, contributing immensely to the success of public offerings, thereby keeping the primary market activity and making the capital market attractive to issuers during the period.
Adonri argued that despite the perceived confidence-boosting changes that have occurred in the market, retail investors are not likely to return if the market is not profitable.
According to him, the profitability of equities stems from appropriate monetary policies that give higher yields to equities over debt and foreign exchange.
He pointed out that the fundamental of the capital market, judged by the profitability of listed companies, which translates to profitable dividend payouts, is a crucial factor in attracting retail investors to the equities market.
“The performance of listed equites depends on several macroeconomic and social factors. Government policies and actions can influence these factors and hence shape the socioeconomic environment that makes businesses flourish.
“Other than the challenges posed by pervasive insecurity, the excessive taxes and levies on businesses and capital market investments continue to serve as a disincentive to investments,” Adonri said.
Furthermore, he warned that the profitability of listed companies could further be constrained this year if subsidy is removed without total deregulation of the power and energy industries.
This is because deregulation, which will ensure cost-reflective tariff takes effect, will motivate investors to put their money into all areas of the electricity value chain, and also ensure that electricity consumers have value for their money.
Also, he identified engineering infrastructure deficit as another challenge that must be surmounted to sustain the profitability of businesses.
He also added that the consolidation of government’s budget and discontinuation of excessive public borrowing, which crowds out the production sector as well as equities, can make the market more attractive to retail investors.
A stockbroker and Chief Executive Officer of Sofunix Investment Limited, Sola Oni, admitted that retail investors’ participation contributes to trading volumes, arguing that there are fundamental issues, which investors consider too sacrosanct to ignore before final decision to invest in the capital market is made.
Specifically, he pointed out that retail investors are worried because of perceived lack of transparency, price manipulation, inadequate disclosure of companies, insider trading, fears of takeovers and mergers of quoted companies, inadequate trade settlement mechanisms and poor handling of investor grievances.
According to him, these issues should be addressed and communicated through investor education to secure investor confidence.
In Nigeria, some retail investors had lost their pension to the market due to expectations of exponential returns. Experts said many low net-worth retail investors, especially in the emerging markets, have no investment objectives just as they lack basic knowledge of risk tolerance and time horizon.
This is because this class of retail investors hardly seek professional advice from securities dealers. They often play the capital market in the short term and expose themselves to all forms of investment risks, including mismatch by obtaining short term loans to invest in long term assets.
In advanced economies such as the United States, equity culture is widespread while retail investor presence is substantial. For instance, Russell 3000 US News & World Report said retail investors account for 10 per cent of daily trading on the wide-ranging U. S. stocks index.
Although NGX has adopted various measures to ensure that the participation of retail investors is on a sustained upswing. It has used technology to democratise trading processes and make the market more appealing to millennials. The exchange has continued to put investor education on the front burner to grow its shareholder base.
The latest in the series of strategies by NGX to attract retail investors was the Webinar powered last month, themed: ‘Sukuk and Green Bonds: More than Just Investing’. The NGX also launched its enhanced version of X-Mobile, which the Chief Executive Officer, Temi Popoola said “would enable capital market players and potential investors to have requisite resources to engage more with the market”.
The App, which was first introduced in 2019, is designed to provide “market participants, especially retail investors, with convenient, faster and real-time access to information about NGX, its listed securities and Trading License Holders.”
Investor Education in Nigeria is also strongly reinforced by the Chartered Institute of stockbrokers (CIS) and the Association of Securities Dealing Housed of Nigeria (ASHON).
Yet, the President of the New Dimension Shareholders Association, Patrick Ajudua argued that there is a need for the regulators to put a structure in place that would ensure that retail investors are not allowed to bear the burden of losses arising from unforeseen circumstances alone. He said the capital market can boost local patronage by ensuring that there are proper incentives such as good and operational corporate governance practices, favourable policy and social-economic environment, appropriate and fair tax system as well as stable monetary and fiscal policies.
“The financial meltdown was an unimaginable blow to retail investors. There is a need to bring retail investors back to the market. Government should review tax impose on proceeds from the sale of shares as well as exempt investors from paying Valua Added Tax on share transactions.
“On the part of the operators, there is a need to improve the quality of financial advice offered to retail investors, so that jointly, they can reposition the market for the benefits of all stakeholders.”Ajudua.
An investigation had shown that major reasons retail investors developed apathy to the Nigerian stock market since the meltdown in 2009 were because of confidence crisis that rocked the nation’s capital market, coupled with other macroeconomic challenges constituting disincentive to investment.
For instance, investors, still grappling with the loss of investment from the global financial crisis, were faced with the dilemma arising from the sale of the three nationalized banks: Keystone Bank Limited; Mainstreet Bank Limited and Enterprise Bank. Shareholders of the banks had lost their investments estimated at N83 billion.
Also, companies that 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 information materials.
Consequently, a whopping N700 billion investors’ funds have been trapped in a private placement frenzy. The affected investors urged industry regulators to wade into the perceived scam. Trapped funds in Nigeria’s capital market, especially when it happens in a less than transparent manner, are attributed to the failure of regulation.
Checks by The Guardian revealed that many of the firms were successful in their bids but a large portion of the money was diverted into other investment outlets outside the objectives declared in the prospectuses.
Another issue that erodes confidence in the nation’s stock market is the case of the alleged N10 billion scandal, relating to 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.
The investors who used partnership Securities Limited as their broker said they were said to be persuaded by the company to deposit their portfolio with the Partnership Securities Deposit Account (PSDA) for trading activities.
A shareholder with an investment portfolio worth N36 million said that when it was obvious that the company was no longer following the terms of the agreement, he wrote a letter, demanding the termination of his investment.
According to him, he requested that the shares should be returned to the Central Securities Clearing System to enable him to claim the shares but the request was not granted.
The Chief Research Officer, Investdata Consulting, Ambrose Omordion, said if the government can empower retail investors by providing some form of incentives, it would help restore their confidence in the market.
“Some portfolio investors are coming to take advantage of the market and the moment they exit, the market moves to square one. We have to get the underlining market strengthened, and make the real sector productive.”
He noted that foreign investors were concerned about the adverse effect of Nigeria’s macroeconomic challenges, especially the stability of the monetary and exchange system on investment, adding that the foreign-induced sell pressure presents opportunities for local investors to build up their portfolios at good prices.
The President of the Standard Shareholders Association of Nigeria, Godwin Anono, said despite the economic meltdown that hit local investors, they are not being encouraged to increase their participation in the market.
He said: “They depend on foreign investors, who, when problems arise, simply offload their portfolio, which is why the market continues to slide. Retail investors suffered calamitous losses in the equities market during the global meltdown in 2008, which forced their exit from the market.
“To date, a lot of them are yet to recover from that shock while those who managed to return have developed apathy on the market. They need incentives to increase their patronage in the market.