The fortunes of Nigeria’s stock market continue to decline due to lack of liquidity occasioned by the slump in the international crude oil market
By Dike Onwuamaeze
This is a season of woes for investors in the Nigerian Stock Exchange (NSE) as they have suffered a loss of N2.32 trillion between March 31, 2015, and February 22, 2016, when the capitalisation of quoted equities dropped from N10.71 trillion to N8.39 trillion. This represents 21.66 percent loss within a period of 11 months. The All Share Index (ASI) of the exchange also declined from 31,744.82 to 24,423.37 during the period under review.
Sadly, the declining fortunes of the Nigerian stock market may not be over soon as foreign investors have continued to quit the troubled capital market on a daily basis.
Financial analysts attribute declining fortunes of the NSE to lack of liquidity occasioned by the slump in the price of crude oil at the international market which has put Nigeria’s foreign reserve under severe pressure. They also blame the normalisation of monetary policy by the United States’ Federal Reserve Bank which raised interest rate for the first time in almost a decade. According to Dr Okwu Joseph Nnanna, deputy governor, Financial System Stability, Central Bank of Nigeria (CBN), the normalization of monetary policy rates by the United States and its resultant hike in interest rates provided the window for portfolio investors to ignite a bearish trend in the Nigerian stock market.
The CBN corroborates Nnanna’s view in a communiqué it issued recently, stating: “the All-Share Index (ASI) decreased by 13.15 per cent from 27,435.56 on November 30, 2015 to 23,826.50 on January 22, 2016.
“Similarly, Market Capitalization (MC) fell by 13.06 per cent from N9.42 trillion to N8.19 trillion during the same period. However, relative to end December 2014, the indices declined by 31.25 per cent and 28.66 per cent, respectively. This development reflected capital flow reversals accentuated by soft commodity prices and monetary policy normalization in the United States.”
The impact is much due to the dominance of foreign portfolio investments, which accounts for more than 50 percent of the exchange’s capitalisation. Currently, the monies are on a flight for safety and better investment havens. This development has further depressed the Nigerian capital market. Analysts believe that the stock market will continue to experience this cyclical crisis as long as Nigeria continues to welcome portfolio investors.
Recent publications by commercial and investment banks in the country show that funding the disinvestment of foreign portfolio investors from Nigerian capital market accounted for high utilisation of the foreign exchange they sourced from the CBN. Stanbic IBTC and Citi Banks were among the leading banks that used their forex to enable investors migrate out of Nigeria. Publications from Stanbic IBTC show that divestment by foreign portfolio investors from the equities and bond markets accounted for a largest chunk of forex, in terms of value it bought from the CBN, cementing its place as the largest stockbroking firm in the country. Some of its clients including BNP Paribas, Brown Brothers Harriman/Stanbic Nominees, HSBC Funds Services London, JPM London, JPM Securities, Northern Trust London, State Street/Stanbic Nominees, and the Bank of New York, were the investment banks that it sold forex to following their divestment from Nigeria’s stock market, treasury bills, as well as FGN Bonds. Others that benefited from the bank include the BP2S Milan, CACEIS Bank of Luxembourg, Brown Brothers Harriman, HSBC Funds Services London and Credit Suisse International. On the other hand, Citibank’s utilisation of forex showed divestments by foreign portfolio investors through NIB Nominees/RBC: Longbow Securities Limited.
Oscar Onyema, chief executive officer of the NSE, says the negative performance of the exchange is a reflection of the domestic economy and to some extent global economic performance. He implores investors not to panic, saying once there is economic recovery; the stock market will equally bounce back. “It would have been more worrisome if the economy is going down and the stock market is going up. But what is currently happening is a reflection of the health of the nation’s economy,” he says.
Looking ahead, Onyema says while he anticipates 2016 to be a challenging year for the market and the domestic economy, “we intend to continue our collaborative efforts with the new administration and other private sector players to create a framework for financing the nation’s infrastructure and capital requirements. Additionally, we plan to work with the FGN to ensure that the appropriate messaging is conveyed to the investor community.” The NSE boss said the exchange will this year focus on executing its strategy to continue to provide a credible platform for financing the economy.
Mounir Gwarzo, director-general of Securities and Exchange Commission (SEC), is currently championing collaborative effort among key financial and monetary institutions in the country to revive the fortunes of the capital market. These institutions include the CBN and the Debt Management Office. “We crave one-on-one collaboration with various institutions as we believe it is very important in finding solution to our economic problems as a nation. We need to collaborate on major areas beyond the platform provided by the Financial Services Regulation Coordinating Committee,” Gwarzo says.