Repositioning NSE for contribution to 2020 growth plans

It is widely agreed among analysts that the reforms on the Nigerian capital market since the global financial crisis have been helpful in raising the level of transparency and investors’ confidence. This has equally primed the market to play a more significant role in the economy than ever before.

For the Nigerian Stock Exchange (NSE), which is most developed platform in the nation’s capital market, it has been a story of progress in its mission to provide capital formation. It has provided issuers and investors with a responsive, fair and efficient securities market, using cutting edge technology, and providing local and foreign investors access to Nigerian securities market in an environment of strong regulatory framework and reliable trading and settlement systems.

The NSE currently has a more attractive portfolio of services and products, although investors have maintained a strong appetite for equities.

The success of the equities market was driven by investors taking advantage of relatively undervalued stocks listed on the bourse.

In addition, the management of the NSE has committed resources to setting up a structure to enable the exchange play a bigger role in funding the growth of various sectors of the economy .

However, while acknowledging the progress made so far at the nation’s bourse, analysts and operators still hold the view that the market has a long way to go to play a bigger role in funding the growth of the economy.

Indeed, Nigeria’s capital market has been operating under a tough economic climate in the last few years as evident in incessant bearish trend witnessed up till 2019, before the policy of the Central Bank of Nigeria (CBN) on Open Market Operations (OMO) led to the crash of yields on fixed income securities.

Expectedly, investors took to flight for safety and reverted to purchase of equities, with multiplier effects on the rise across various performance indicators.

The stakeholders believed that the outlook for the market in 2020 is attractive, but however, noted that it is contingent on fixing of Nigeria’s weak economy, which Gross Domestic Product (GDP) currently grows at 2.3 per cent, while the country’s population grows at 2.6 per cent.

To ensure that the market contributes meaningfully to economic in 2020, a stockbroker and Managing Director of Sofunix Investment and Communications Limited, Sola Oni, said aside expectations of faithful implementation of 2020 budget, which was approved on record time, government at all levels must take advantage of the market to mobilize fund for development projects.

“However, we expect the market to be driven by a mix of factors. Effects of negative real return on fixed income securities following the new policy on OMO will continue to enhance demand for equities and attract more investors into the market,” he said.

Furthermore, he called for the consolidation of the insurance sector, noting that the market shall witness a flurry of mergers and acquisitions, as well as business combination in a bid by insurance companies to recapitalise in line with the new policy of the National Insurance Commission (NAICOM).

He regretted that many stocks are still trading below intrinsic values, hence, attractive valuation will attract more investors.

“We expect intense competition among Securities Exchanges with the emergence of FMDQ as a full fledged Exchange and Lagos Commodities and Futures Exchange (LCFE), which is set to commence as a Pan African Exchange.

“Already, NASD Plc has raised the bar of Over-The-Counter ( OTC) trading in Nigeria. But we expect the government to intensify efforts on creating conducive business environment through its policy on ease of doing business and building security,” Oni said.

He noted that the Securities and Exchange Commission (SEC) release of the rules on trading in derivatives, which is in line with the plan by the NSE to commence trading in derivatives in 2020, is expected to enhance price discovery and usher investors on the market to modern risk management, whereby they can hedge against volatility.

“We expect introduction of more innovative products to accompany derivative trading. Barring unforeseen circumstances, the exchange is likely to commence demutualisation and this will change the structure of the market as the current owners, the dealing member companies shall become shareholders and thus bring a new era of corporate governance on the exchange,” he added.

He pointed out that with the crash of yields on fixed income securities, pension funds may opt for high-yielding stocks in the securities market and this is expected to boost market activities.

The President of Constance Shareholders Association, Mallam Shehu Makail, said one of the major factors for sustainable foreign inflow into the country involves driving policies that would enable investors to derive consistent value.

He pointed out that the market would impact meaningfully on the economy if investors confidence are restored and sustained in the market.

According to him, when investors are aware that the market operates in confidence, they will come, knowing that there is integrity in the market.

Additionally, he said driving policies for people to attract value in the market in a sustainable way is also critical for both market and economic growth.

He suggested that a more robust capital market that would help boost investors’ confidence, mobilize funds, drive investment in the economy and improve infrastructure must be created.

The Executive Vice Chairman of Highcap Securities Limited, David Adonri, argued that in the capital composition of any economic entity, the debt/equities ratio is a critical factor for solvency, noting that the lower the ratio, the more sustainable the development of the entity.

“The higher the ratio, the higher the risk of failure of the entity. So far in Nigeria, the aggregate level of debt has already surpassed equities.

“At this rate of high debt and the propensity of the public sector to escalate it further, the threat of failure of the Nigerian economy is glaring. To redress this anomaly, he stated that there must be rebalancing of the aggregate debt / equity ratio of the economy.

“If debt cannot be reduced, appropriate macroeconomic policies must be formulated to increase equity recapitalisation of the economy. The yield disparity that places debt at a competitive advantage over equities must be redressed,” he said.

According to him, for the capital market that is sensitive to dividend yield to attract investors, the economic environment needs to facilitate the profitability of companies so that they can assure investors of meaningful returns on their investment.

He added that issuers’ confidence in the economy needs to be restored because equity capital formation through new issues is essence of the capital market existence.

But speaking on the downside effects of the prevalent fraudulent investment outfits in the country, the Chief Research Officer of Investdata, Ambrose Omordion said: “Many people are patronising the outfit because the stock market is down. They don’t have knowledge of what the capital market is all about.

“SEC has warned that Nigerians should be careful about investing in these fraudulent outfits. People that put their money in wonder banks are still complaining. Government should go and find out who are behind this scheme.

“Again, government should make capital market more liquid so that people will not look for alternatives.”

The Managing Director of Cowry Asset Management Limited, Johnson Chukwu, said that investors patronise Ponzi schemes due to ignorance and greed.

According to him, a lot of people who invest in the scheme do so for lack of knowledge of basic economics or business expertise.

“People invest in Ponzi schemes for two principal reasons- ignorance and greed. A lot of people who invest in Ponzi scheme do so for lack of knowledge of basic economics or business common sense.

“For instance, I am not aware of any business venture that consistently generates 50 per cent net annual return (Net Profit Before Interest and Taxes – NPBIT) on a yearly basis.

“So, if a scheme is offering someone a monthly return of 5 per cent, which amounts to an effective annual yield of over 60 per cent, it becomes obvious that such a scheme cannot sustain the payment from its income and therefore, must be creating a deficit, which can only be funded from contributions from other investors.

“The illusion of meeting such payments becomes punctured once the rate of contributions slows down, hence the crystallisation of the always impending default.

“The second reason is that of greed which makes informed people to believe that they can earn the return and exit the scheme before the bubble will burst but sometimes they also get trapped.

“The most appropriate way to checkmate Ponzi schemes is to create enough awareness of the modus operandi of such schemes so that the general public will understand that the rewards offered by Ponzi schemes are not sustainable and only serve as bait to attract uninformed investors.

“It may also be necessary for SEC to set up toll-free lines for investors to confirm the registration status of investment houses seeking their patronage,” he said.

The prolonged downturn in the capital market, induced by significant divestment by foreign investors and compounded by lingering liquidity tightness, waning public confidence, among others has led to significant losses by investors.

The stock market, which remained bullish between December 2005 and March 2008, suddenly became bearish in April 2008 and has remained nearly so since then with only marginal recovery.

Unfortunately, with the unprecedented lull in the market, many investors have fallen victim of scams and Ponzi schemes that suggest invested money will yield quick capital appreciation, sometimes as high as 90 per cent of the original deposit. The law is very stringent on requirements for operating collective investment schemes in Nigeria.

SEC said it has not relented in its efforts at sealing up their premises and going further to educate and enlighten Nigerians on the dangers of such activities.

The commission has issued several warning notes to the investing public, urging them to refrain from investing their money in outfits not registered with the commission.

The SEC has also advised the public not to subscribe to any financial investment plan without first checking the registration status of the operating company on the commission’s website.