How govt policy affects stock market

• Market capitalisation shed N0.604 trillion in Nov.
The claim that the capital market normally thrives or shrinks on information and government policy has manifested overtly in the stock market performance since the new administration of President Muhammadu Buhari started in the country on May 29, 2015.

A thorough examination of the Nigerian Stock Exchange reports on equities’ price movement since April 30, 20015 to November 30, 2015 showed that the various segments of the market have been experiencing dwindling fortunes.

Market operators, investors and observers, who spoke to The Guardian on the trend, heaped the blame mainly on the new administration’s tardiness and also on the falling crude oil prices in the international market.
An examination of the Nigerian Stock Exchange (NSE) data from April 30, 2015 to November 30, 2015, showed that the capitalisation of all the equities dropped from N11.796 trillion as at April 30 to N9.424 trillion on November 30.

This translated to a loss of N2.372 trillion in seven months (an average of approximately N339 billion per month) since the new administration came into existence.
The capitalisation, which pegged at N10.028 trillion at the beginning of November, declined to N9.424 trillion as at November 30, losing N0.604 trillion.

…illiquidity happens where everybody in the market does not have enough to buy and does not have enough to sell. The investors, who have the stocks of the firms that are doing well, do not want to sell the stocks. They are holding on to them because the companies are doing well and those who have the shares of the companies that the share prices are depreciating, are finding it difficult to sell their stocks because nobody is interested in acquiring such shares now. This leads to illiquidity in the market

Further examination of the affected shares revealed that those of the banks dipped more because of the recently introduced TSA (Single Treasury Account directive), which involved the removal of government deposits in banks to the Central Bank of Nigeria (CBN).

Mr. Paul Uduehi, a Lagos-based businessman and a discerning stock market investor, observed that the TSA directive removed substantial amount of money from the banking system and forced many investors, who borrowed money from the banks to sell off their shares to liquidate their indebtedness to the banks so as to enable the banks remit government funds in their position to the CBN.
“Not only that, even the foreign portfolio investors, who were apprehensive of the adverse effects that the TSA directive might have on the equities market/economy proactively offloaded their portfolio investments and flew away,” he said, adding, “right now in the country, there is no liquidity anywhere to do meaningful business. The stock market, in view of its volatility, is worst hit by the cash crunch because, even those interested in acquiring the shares of some companies whose future looks very bright, are not able to source money anywhere in the country to invest. And no foreign investor is willing to bring in money to do business in the country because no one knows the focus of the government yet.”

Corroborating Uduehi’s views, Mr. Olu Abayomi Sanya, Managing Director/CEO, Goldbanc Management Associates Limited, (Member of Nigerian Stock Exchange), said the major challenge in the stock market currently is liquidity.

He declared: “Lack of liquidity is crippling the market. What I mean by no liquidity is that when I have stocks to sell I should be able to sell. I should not be hindered from selling because of illiquidity. I should also be able to get enough to buy when I need to buy large volume of shares. There is no liquidity in the system. Even the market makers in the market are facing the same liquidity challenge because the structure of the market is such that you can’t get the stocks you want to buy or sell in large volume at a go. The liquidity crisis has gotten to a point where the people that are willing to sell are not able to sell and the people that want to buy are handicapped by the same liquidity problem.”

According to him, illiquidity happens where everybody in the market do not have enough to buy and do not have enough to sell. The investors, who have the stocks of the firms that are doing well, do not want to sell the stocks. They are holding on to them because the companies are doing well and those who have the shares of the companies that the share prices are depreciating, are finding it difficult to sell their stocks because nobody is interested in acquiring such shares now. This leads to illiquidity in the market. The regulators and operators must come together to address this problem.”

Mr. Femi Ekundayo, a notable investment expert and Chairman, Resort Group of Financial Services firms said: “The government after introducing the TSA and realising that it is adversely affecting the cash resources of the banks and their ability to play their roles in the economy, came out through the CBN to cut the MPR from 13 per cent to 11 per cent and the cash reserve ratio from 25 per cent to 20 per cent to enable the banks perform their function of mobilising deposits and lending for short-term and long-term investments.
“What the CBN needs to do now is to ensure the banks do the needful to achieve the purpose for reducing the rates.”

He revealed that if the CBN had failed to reduce the rates, a lot of banks could have been in financial crisis by now. He, however, advised the government to begin immediately to refuel the economy by embarking on projects that will create employments to enable people get income to save so that the banks can get funds to do business.