The Nigerian Stock Exchange takes an adaptive approach towards developing innovative products

Oscar-Onyema: President, African Securities Exchanges Association (ASEA) and Chief Executive Officer, Nigerian Stock Exchange
Oscar-Onyema: President, African Securities Exchanges Association (ASEA) and Chief Executive Officer, Nigerian Stock Exchange

Taking into consideration the ever evolving economic realities, especially the economic recession which took its toll on the Nigerian capital market in 2016, the Nigerian Stock Exchange (NSE) is expected to take an adaptive approach in 2017. In the immediate future, the NSE will focus on achieving its goal of becoming a more agile and demutualized exchange and will fast-track efforts towards developing innovative products such as exchange traded derivatives to provide investors with tools to weather economic realities in 2017.

The Exchange intends to strengthen its thought leadership efforts with policymakers to drive policies that will free up the system and promote the ease-of-doing business in Nigeria. Oscar Onyeama, chief executive officer of the NSE, believes that incentive schemes for sectors of the economy that can support a pivot to export-led economy will be beneficial. He noted that systematic removal of impediments to doing business and therefore reduction of leakages will attract private sector investments.

The NSE stated that it would enhance cross-border integration efforts  through African Securities Exchange Association’s (ASEA), African Exchange Linkage Project (AELP) model and the West African Capital Market Integration (WACMI) programme. It would also continue its engagement efforts with the government to promote the listing of privatized state-owned entities (SOEs), as well as engage with the private sector issuers for listings across all product categories.

“We anticipate that secondary market activity will be challenged initially as the impact of various policy measures work their way through the system.  However, we expect to see a revival of supplementary listings, return of the new issuance market, and potentially one IPO since the equity market is a forward indicator of the economy. We are cautiously optimistic, as consensus estimates suggest a moderate recovery for Nigeria in 2017, provided that policy makers implement the right combination of policy measures,” Onyema said.

The economic recession impacted negatively on the Nigerian capital market in 2016. A review of the capital market performance in 2016 by the NSE showed that investors lost N800 billion last year when the capital markets’ capitalization, which is made up of the equity and bond markets, declined from N17 trillion to N16.2 trillion between 2015 and 2016. The equity market capitalization moved downward from N9.9 trillion to N9.3 trillion while the bond market slopped downward from N7.1 trillion to N6.9 trillion respectively in 2015 and 2016.

Similarly, the All Share Index (ASI) declined from 28,642.25 in 2015 to 26,874.62 in 2016. This represents -6.17 percent decline. Only two sectoral indexes, the NSE Premium Index and the NSE Banking Index, appreciated during the year under review. They rose by 6.98 percent and 2.17 percent respectively in 2016. The Premium Index grew from 1,584.92 to 1,695.51 while the Banking Index rose from 268.49 to 274.32 between 2015 and 2016.

Other sectoral indexes recorded negative performance in 2016. NSE 30 Index: -7.18 percent; NSE Mainboard Index: -10.02 percent; NSE ASeM Index: -1.57 percent; NSE Pension Index: -0.63 percent. Also, the NSE Consumer Index and NSE Lotus Islamic Index lost -4.49 and -7.87 percent respectively while the NSE Insurance, oil and gas and the industrial sectoral indexes dropped by -11.44, -12.31 and -26.37 percent respectively.

Onyeama, explained that after the market peaked at 31,071.25 in June 2016, an increase of 8.48percent over the 2015 closing value, the NSE All Share Index began to retreat to negative territory as total foreign inflow dropped by 45 percent between June (N42.46billion) and July (N23.43billion).

He attributed the drop to loss of confidence in the implementation of an announced free floating foreign exchange regime as well as the weak corporate performance the second consecutive quarter of negative economic growth in the period resulting in the economy entering into a recession. “Accordingly, we witnessed the lowest levels of foreign portfolio and domestic trading activity since the global financial crisis, with a Y-O-Y decline of 69.79percent and 56.79percent, respectively. This trend is consistent with the inverse correlation observed between the value traded on the NSE’s equity market and the spread between the parallel and interbank FX market rates, suggesting that both domestic and foreign investors seek stability in monetary policy. In addition to sluggish performance in secondary markets, primary market activity was nonexistent as there were no IPOs for the year, although there was one new company listed by introduction in the period,” Onyema said.

The worst hit in 2016 was the NSE Industrial Index, which recorded the steepest drop of the year at -26.37 percent. This is a clear testimony of severe difficulties faced by companies in accessing capital for imported raw materials.

In the Exchange Traded Funds (ETFs) market, tracking to this methodology, the Vetiva Industrial ETF recorded the largest price decline in 2016 of 20.51 percent when compared to ETFs in other sectors. Further indication of the equity market’s link to the internal economic dynamics in the country in 2016 was reflected in the drop in NSE Oil/Gas Index which declined 12.31percent, mimicking the 22.01percent decline in real GDP growth of the oil sector by Q3’16 driven by output and distribution complications. Furthermore, the Real Estate Investment Trusts (REITs) declined by 49.48percent and 47.10percent in value and volume traded, respectively, reflecting the macro-economic impact of the real estate sector which declined by 7.37percent in terms of GDP.

Inflation had a converse-effect on activity in the fixed income market during the year under review. Inflation spiked above 18percent by Q4’16, driven by rising prices of imports and structural deficiencies in power, transportation, and production. “The high rate of inflation forced the CBN to raise interest rates to 14percent in July 2016. Consequently, the value of bonds in the market depreciated, increasing investors’ appetite for portfolio diversification via interest rate products selling at discounts. This resulted in a 137 percent increase in the value of bonds traded on the NSE in 2016, admittedly from a low base.  We also saw a 31.17percent improvement in bond issuance during the year,” Onyema said.

However, the Nigerian capital market did experience some resilience by year-end as the NSE Premium Board Index ended 2016 in positive territory, advancing 6.98percent, while the NSE Banking Index inched up by 2.17percent.  Furthermore, after declining by 21.60percent to a low of 22,456.32 in Q1’16, the NSE ASI rebounded by 19.68percent from its January low to close the year down by 6.17percent mirroring the 6.12percent decline in the equity market capitalization (approx. 40percent in USD terms).

By Dike Onwuamaeze

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