The decline in the Nigerian Stock Market which began in 2008 has continued unabated and experts think it is not likely to stop soon

The crash of the Nigerian stock market, which began in 2008, as a result of the global financial crisis, has continued unabated. The value of 250 securities quoted in the Nigerian Stock Exchange, NSE, in 2011, stood at N10.28 trillion, which was 0.48 percent lower than the 2010 capitalisation. These securities are made up of 201 equities with N6.54 trillion market capitalisation, 25 federal government’s bond with N2.09 trillion market capitalisation and 11 state and local government bonds with market capitalisation of N31 trillion as well as 12 corporate bonds with market capitalisation of N1. 34 trillion.

The NSE lost N1.48 trillion of its equities market capitalisation, which declined from N7.92 trillion in 2010 to N6.54 trillion in 2011. This represents 17.42 percent loss. The NSE all share index also declined by 16.31 percent when it dropped from 24,770.52 to 20,730.63 in 2010 and 2011, respectively.

Oscar N. Onyema, chief executive officer of the NSE, attributed the sagging fortune of the exchange to volatile market conditions and waning investors’ appetite for share as well as disinvestment from the Nigerian market  by foreign investors. According to him, the Nigerian stock market was depressed by the absence of large companies in the market, margin loan overhang and the absence of loan facilities from the banks to support trading in the market.  There was also no clear policy by the government to uplift the capital market. “Local institutional investors were on the sidelines, preferring debt products offering double digit return,” he said.

These made a glaring negative impact on the trading activities in the exchange.  The number of listed companies declined from 217 in 2010 to 198 in 2011. Furthermore, the total volume of shares traded in the exchange dropped from 93.34 billion to 89.58 billion while the total value of trading went down by 20.39 percent dropping from N797.55 billion to N634.92 billion between 2010 and 2011. Also the value of transaction decreased from 2.73 percent of the gross domestic product, GDP, in 2010 to 2.39 percent of the GDP in 2011. Nevertheless, the number of listed bonds grew by 9.09 percent from 44 in 2010 to 48 in 2011. The NSE also experienced an inflow and outflow of foreign portfolio investment of N478.62 billion and N312.65 billion in 2011, respectively. This leaves a net inflow of N165.97 billion during the year under review. 

Even with this glooming picture, Onyema is hopeful that the Nigerian stock market would witness a slight recovery in 2012. This expectation is based on the initiation of more market reforms, deregulation of the downstream oil and gas sector through the eventual passage of the Petroleum Industry Bill, PIB anticipated reversal of the federal fiscal policy and the launching of the Sovereign Wealth Fund, which is expected to take off this year.

Josephat Madueke, a financial analyst and managing director of Cash Express Bureau De Change, told Newswatch that one of the factors responsible for the decline in the fortune of the NSE is that Nigerians who lost their investments to the global financial crisis in 2008, have not regained the confidence to return to the stock market. Another reason for the decline in the fortunes of the exchange is the current financial crisis plaguing the European market, which has led to the divestment of equities held by foreign investors in the Nigerian capital market. The impact of the exit of foreign investors became more telling in October, when the share price of First Bank of Nigeria traded for as low as N7. The concern it raised led to an investigation which indicated that the bank’s shares were being sold by foreign investors. “Before, we had the impression that foreign investment in the Nigerian stock market was below 20 percent. Now the thinking is that it is in the excess of 70 percent. So, unless the European economies recover, our capital market will never recover,” Madueke said.

The problem of the stock market is further compounded by the inability of the government to stimulate the economy and empower the citizens to earn money that could be invested in the capital market. The current government, he said, does not seem to have a focus in spite of the array of professionals advising it. “You cannot look at the government and say ‘this is the direction it is going.’ Sadly, there are too many economic advisers in government who are self-serving.” Hence, the Nigerian economy lacks predictability, a vital ingredient that gives investors confidence to invest in any given environment.  “Will you invest if you cannot predict which sector will do well?” he asked.

Moreover, some of the current monetary and fiscal policies of the federal government have conspired to deny the stock market needful investment.  Currently, there is a boom in the money market where the Central Bank of Nigeria, CBN, is selling treasury bills, a monetary instrument for mopping up excess liquidity from the economy, which previously was three percent at 15 percent interest rate.  This has made it more attractive to banks at the expense of lending to the real sector of the economy for the following reasons. Income earned from investing in treasury bills are exempted from taxes.  The risk associated with the investment is nil and it does not require any provision for loss of investment.

“There is a correlation between the money market and the capital market. Whenever the money market is doing well, the capital market is contracting. This is not helped by the fact that the money CBN mopped out is not channelled to the productive sector to stimulate the economy and boost activities in the capital market,” Madueke said.

Boniface E. Okezie, national chairman of Progressive Shareholders Association of Nigeria, PSAN, blamed the poor showing of the stock market on the fiscal policy of the government that encourages extensive local borrowing to finance deficit budgets.

Furthermore, the Nigerian stock market does not have market makers. Even though some firms were nominated to play that role, none of them has taken off.  He said that it would take the CBN granting forbearance to stock brokers who are still struggling with the repayment of the margin loan to see the emergence of market makers in the exchange.

He also note that the declining confidence in the exchange would not be reversed until the Securities and Exchange Commission, SEC, hands off completely from the running of the exchange and concentrate on regulating the capital because “the NSE is not a department in the SEC. It is a private entity.”

Okechukwu Unegbu, chief executive officer, of Maxifund Investments and Securities Plc, agreed that a better working relationship between the SEC and the NSE was required for them to carry out their functions harmoniously like a train in motion so that once the engine moves all the coaches would follow. “This is the kind of relationship we should be endavouring to create between SEC and the NSE. The engine of the capital market is the SEC that sets the policies and regulates the market. While the NSE and market operators are the coaches. So, I think that we have to find a way to ensure that the engine moves with the coaches,” Unegbu said.