Home Edition Capital Market Q1 2018: Sustaining growth despite retail investors’ apathy

Capital Market Q1 2018: Sustaining growth despite retail investors’ apathy


As quoted companies continue to release their financial statements to the Nigerian Stock Exchange (NSE) for the first quarter, 2018, the Bourse closed trading on Wednesday, March 28 with a growth of 6.27 percent. Trading statistics at the close of business on the date showed that the All-Share Index (ASI) grew by 2558.89 absolute points to close at 40,802.08 from 38,243.19 points it commenced trading on January 3, this year.

The market capitalization also improved by N1.13 trillion, representing a quarterly growth of 7.67 percent. The market value, which opened at N13.609 trillion in January, closed trading for the period at N14.70 trillion on March 28.

Available statistics on the trading showed that that the Bourse, which opened trading last year with N9.246 trillion in market capitalisation and 26.874.62 in index at the beginning of trading on January 2, 2017, closed the year on December 29, 2017 at N13.609 trillion and 38,243.19 index points.

Stock market analysts and investment pundits attributed the growth ‘in numbers’ to a rebalance of portfolios from Treasury Bills and Federal Government bonds to equities, owing to the declining rates from yields. Also, corporates have returned to declaring profits and dividends.

According to the investment experts, the switch by the Federal Government in its debt strategy of raising $4.5 billion Eurobonds and subsequent liquidation of short-term treasuries also triggered the market’s sustained growth.

Nicholas Nyamali, Managing Director of Investment One
Nicholas Nyamali, Managing Director of Investment One

Nicholas Nyamali, Managing Director of Investment One, said: “In Nigeria, there are lots of investment opportunities to benefit from. I believe that knowledge about investing should not be limited to a select few. Everyone deserves to know about investment opportunities that exist in this day and age.”

On equities, the investment analyst stated that equity markets are subject to volatilities in the short-term, and therefore advised investors to take a long-term view to investing in equities with a preference for fundamentally-sound quality stocks.

He also advised small-scale investors to look toward the potential in government bonds. However, in the section on sovereign bonds, he cautioned that “given the backing of the Federal Government, fixed income instruments are default risk-free, but are subject to interest rate risk.”

Despite the recent rally in the nation’s Bourse in the past nine years, the stock market had a reduction in its value by over 50 percent.

However, important underlining progress was made at the close of year 2017, as the market ended the financial year on a positive trajectory with a record of N4.363 trillion rise to close at N13.609 trillion in market capitalisation.

The growth in market capitalization during the period was mainly due to sustainable positive sentiment by investors, following impressive half-year financial performances for the period.

As a result, the stock market started the yearly trading from January with a boom, which lasted till February. Although, the bulls held forth till sometimes around the first week of March 2018 before it began to reverse the tempo. The equity market is booming, but the concern here is that the boom is driven by speculation and not by good or strong fundamentals of the listed companies.

Investigations on the market’s trends further indicate that the equities market has apparently one of the widest swinging pendulums between the bulls and the bears in the global financial market.

The market capitalization also improved by N1.13 trillion, representing a quarterly growth of 7.67 percent. The market value, which opened at N13.609 trillion in January, closed trading for the period at N14.70 trillion on March 28.

In 2016, the NSE was rated one of the worst performers in the world’s business of building investment values. In 2017, a drastic swing happened from being bearish to being bullish, which has been sustained so far in 2018. Seemingly overnight, Nigeria now wears the medals of the best performing equities market in the world. Is the stock market that dicey and unpredictable? Or better still, what is the explanation for a so-called long-term market – that builds wealth slowly and consistently, veering far off its normal course?

Charles Fakrogha, a Dealer/Chief Relationship Officer with Foresight Securities and Investment Limited, in an exclusive chat with BUSINESS EYE, admitted that for the stock market to achieve the desired growth and fulfill its role of wealth creation is a function of equity market operators like him, the regulators and of course, the investors.

He remarked: “I don’t have any issue with the market going up or down; my concerns in the market are: Are the regulators playing their roles? Are they ensuring that the market is transparent, free and fair enough to trade in? If all these are taken care of, the up-and-down movements of stock market indices shouldn’t be a problem, because volatility is normal in any given stock market.

“Also, each of the listed companies has their peculiar characteristics. If a company is doing well, there will be a bullish run. In another clime, if adverse news or negative information breaks out of a company, such can as well affect the share price movement of the listed entity on the official list of the Nigerian stock market. Individual securities may be on the upswing, but it is difficult for the benchmark indices to maintain an upward swing, especially in the short-term,” he said.

Reacting to further inquiries on whether or not the regulators of the stock market are doing enough, Fakrogha pointed out that “when you talk of regulators’ efforts towards ensuring transparency in the market, it’s not only the regulators that are responsible for that: the operators matter a lot. We should ask if we do have fit and proper persons on the equity trading floor of the NSE. The regulators are there to put rules and guidelines in place. But as operators, are we playing by the rules put in place by the regulators?” Fakrogha queried.

In his assessment of the market, David Adonri, the Executive Vice Chairman, High Cap Securities, shared similar views with Fakrogha, that the stock market is cyclical by nature.

According to him, given the micro and macro-economic outlooks, the market fundamentals of the listed companies are the factors to which the market is reacting. The economy is still recovering and things are looking up, given the recent developments in the country.

He clarified: “As a result of recovery of the economy and impressive third quarter, Q3’17 results earlier released by companies, the full year performance will be good.

“At full year, most of the banks would have reduced their non-performing assets to the level that should enable them pay good dividends. Full year results so far released by two of the tier-one banks together with proposed dividends have surpassed expectations. Same is expected from tier-two banks. Save for security challenges, corporate fundamentals are expected to improve significantly in 2018 due to further recovery in the macro economy,” the investment expert added.

Market outlook
The Nigerian stock market, like others, is externally dependent. Whether the market looks up or down depends on what position foreign portfolio traders are taking. The traders themselves are continually gauging the foreign exchange market with targets to enter in stable weather and flee well before the Naira begins to run depreciation temperature.

Apart from being averse to exchange rate risks, portfolio traders are as well discouraged by foreign remittance restrictions. It takes just a policy thought in the corridors of regulators for portfolio money to flood in or to flee.

Abimbola Babalola, Head of Surveillance, the Nigerian Stock Exchange (NSE), said that there was the possibility of a majority shareholder dropping the share price in order to acquire more units of shares in a company with strong liquidity.

He noted that the Securities and Exchange Commission (SEC) rules stipulate that “if any director should acquire additional units, he must notify both the SEC and NSE, failure of which we would penalize such individuals and the firm that helped in carrying out the act.

Those rules are being implemented to ensure normal market operations with international best standard practices”.

While responding to a question relating to whether or not the stock market is well regulated, especially in check-mating operators’ perceived excesses in their various brokerage companies, Abimbola noted that existing regulations on market operations were enough to deter any trader from abusing the system.

The analyst explained: “The NSE and SEC have invested heavily in updating their regulations because we are dealing with a dynamic stock market. Those who will like to do manipulations are watching us and that is why we have invested much to ensure that the stock market is well kept, well regulated.

“As an institution, that is why we always amend our rules, especially when we perceive possible manipulations in the market operations. So, some of the rules are detectives and preventive of future occurrence of any manipulation,” he stressed.

Investors’ appetite
The jack-down of the naira-dollar exchange rates and other measures taken by the monetary and fiscal authorities to stabilise the foreign exchange market rekindled the interest of foreign portfolio traders in the equities market in the first quarter. The main anchor for those measures is the recovery in crude oil price, which has helped in beefing up Nigeria’s external reserves and, therefore, the ability of the Central Bank of Nigeria (CBN) to defend the Naira.

Also, the stability brought about some Importer and Exporter (I&E) window for forex stability for foreign portfolio investors such that they are comfortable to move with the stock market trend in the first quarter.

Mike Uzor, Equity Analyst with FinData, noted that exchange rate risks had declined in the environment of a reasonably-stable naira, and foreign portfolio traders are presently on a return to the capital flow pendulum, adding that the market is gaining inflow in a sustaining reversal of the capital flight that hurt the market in 2015 and 2016.

Uzor pointed out that this had been the story of the market since 2017, which gave the equities market an upbeat that saw the All-Share Index growing by 11,368.20 as at the end of last year.

According to him, the foregoing indicates a major change in the role the equity market plays in the economy in a reflection of different value systems of the foreign portfolio traders that now drive it.

He explained: “The focus has shifted from the ability of companies to consistently create wealth for investors to short-term price movements that create profits. Traders enter selected equities on the basis of technical outlook and liquidity, and they are clearly not the type of people companies need to explore new ideas and drive medium-term corporate goals.

“Preference for liquidity as against earnings quality is to guarantee a quick dumping anytime the foreign exchange market catches a cold. This tends to create some sort of share price distortion in the market where liquidity and tradable volume take the place of earnings quality in building share values.

“That explains why the banking stocks, which are highly liquid and have depth for high volume transactions, are leading the market rally, notwithstanding the poor quality earnings of many banks,” Uzor added.

As the market braces for the operational demands of the second quarter of 2018, many analysts project that, with many of the fundamentals likely to remain constant in the months ahead, investors may be set for another era of fairly reasonable returns on their investments.