Since the global economic meltdown in 2008 and the banking crisis that followed, the Nigerian equities market has been in a tailspin. To reverse the trend, the Securities and Exchange Commission recently set up a committee to come up with strategies to restore investor confidence in the new year, writes Malachy Agbo
Sometime in 2007, a retired civil servant, Mr. Lanre Okewoye invested his savings from his gratuity on some recommended stocks based on the tacit advice by his cousin, a stockbroker. He was assured of a bumper harvest in the near future. True to form, it was not long before he took positions in some stocks that made appreciable gains. At the time, Mr. Okewoye was always busy with his calculator calculating his margins after trading each day, and each time he did, he was thankful to God and his cousin for investing in the stock market.
But all this millions turned into mere paper when the bubble bust in 2008. Under his very eyes, his fortune dwindled, and in a matter of months, his millions turned into a few thousands. But his cousin did not give up. He approached Mr. Okewoye who was reeling from the loss to encourage him to buy more stocks, positing that this was the right time to invest when share prices were low.
The poor pensioner heeded his cousin’s advice again and ploughed his pension into the market, with the hope and assurance that the market would make a recovery in the no distant future. Today, the value of his hard earned savings is best imagined.
Mr. Okewoye’s story is not different from a lot of other retail and institutional investors who got their fingers burnt in the market in 2008 and thereafter. Based on this, confidence in the market has continued to wane as the days go by.
What is more worrisome is that other economies that suffered the same fate have started to recover from the free-fall of shares. But back home, the equities market has continued its downward spiral, with market capitalisation, which stood at N12.395 trillion as at March 2008, falling to an eight-year low on December 8, 2011. The fact that the resolution of the banking crisis took two years to conclude, also took its toll on equities in the capital market.
In the bid to reposition the Nigerian capital market and make it more attractive to investors, the Securities and Exchange Commission recently inaugurated seven sub-committees of the Capital Market Committee (CMC) that would map out strategies for the revival of the market for better performance. The CMC is a body comprising officials of the SEC, Nigeria Stock Exchange, operators and other stakeholders in the nation’s capital market.
The seven sub-committees include investors’ confidence restoration, investment management market information/technology, commodities exchange/capital trade points, fixed income securities, products and business development, and rules and compliance.
Committees’ Task
The major task assigned to the committee is to fashion out a roadmap that would assist in the determination of the market’s direction in 2012 and beyond. According to the director general of SEC, Ms. Arunmah Oteh who spoke at the CMC maiden retreat in Uyo, Akwa Ibom State recently, the investor confidence restoration sub-committee, for instance, is expected to come up with strategies and home grown policies that would ensure that investors refocus attention on the market and ensure that their needs are adequately taken care of.
On the investment management sub-committee, she said it would evolve strategies that would ensure greater participation in portfolio investment by investors whether in stocks, equities or commodities.
“Members of the committee would come out with ways on how portfolio and fund managers can pull retail investors together and give them professional and qualitative advice and services. Many investors have lost significant money in the past and they can only return to the market if they are sure of getting better services,” she said
Can CMC Deliver?
There are divergent views on the need for such committee and its timing. Some market analysts who spoke on the issue were of the view that setting up the sub-committees was the right decision since the market needs urgent resuscitation, while others said that it was a familiar route that would not produced the desire results.
According to the chairman of Association of Stockbroking Houses, Mr. Rasheed Yusuf, the decision to set up the committee was a welcome development. “The Nigeria Stock Exchange is a going concern. Though the stakeholders had in the past come up with ideas on how to move the market forward, I believe the essence of the committee is to look at the extent of implementation of those ideas and what new ideas they can bring on board,†he said.
Rasheed further stated that setting up the committee shows that SEC is worried about the trend in the market and it is part of its work to reposition the market in the new year. “The new year will always throw up new challenges and I am sure SEC does not want to leave any stone unturned in restoring confidence in the market. It means they are pro-active. It is a good idea to have a committee that will look at the events that might shape 2012 and prepare the exchange against uncertainties,†he said.
On the contrary, other analysts were of the opinion that the regulatory body should concentrate on implementing all the ideas and strategies proffered by previous committees and the ones suggested by the stakeholders rather than setting up a new one. “The swings in the market are normal market trends and cannot be changed by setting up committees. This is not the first or the second, and at the end of the day, virtually all the issues raised and those solutions agreed upon will not be implemented.
Spectre of Margin Loans
“Historically, brokers took margin loans from banks to buy stocks and at the end of the day, the loans went bad in 2008. In margin loans, the borrowers’ liability is limited to the collateral for the loan and I am sure, most banks did not understand the transactions as some of them even turned speculators in the market. And they are not accusing any broker of diversion of loans approved for trading into other uses. The truth remains that margin loans got bad when the market collapsed and since then, no one wants to touch margin loans,†said one analyst.
According to him, the real issue affecting the capital market is not lack of ideas but mainly the attitude of banks in the country on anything concerning the market. “The main issue is that banks are not lending to the capital market, so there is no liquidity.
“The retail aspect of the capital market is gone. Investors now turn to real estate and other investment opportunities where they have stronger confidence in return on investments. This is what SEC should saddle itself with on how to tackle and not setting up committees upon committees and at the end of the day, it becomes an academic exercise,†he said.
Market Challenges
Market analysts have proffered reasons for why the equities market has failed to recover in the last few years. Many attribute the exit of foreign portfolio investors from the market to cover their positions in mostly Europe that has suffered a prolonged economic downturn owing to the debt crisis in the Eurozone region.
Besides, there is the issue of margin lending in Nigeria, whereby investors borrowed money from banks to invest in stocks with the hope of making returns but lost all in one swoop. With banks and investors getting their fingers burnt between 2006 and 2008, banks have closed their doors to margin lending and foreclosed a key source of liquidity for the capital market.
Another is investor apathy which the Institute of Capital Market Registrars recently blamed on the poor performance of regulators. According to the institute, investor education has not been given its rightful place, coupled with lack of adequate transparency in the market. Registrar/Chief Executive of the institute, Dr David Ogogo, explained that as a result of poor investor education, numerous investors on a sustained basis have been moving funds from the equities market to other ventures.
Other factors, according to financial experts, that have contributed to the general decline in investor confidence are ineffective market regulation and supervision, weak institutions and corporate governance, lack of regulatory pro-activity and cohesion, concerns about transparency, uncompetitive cost structures, and inefficient and cumbersome processes.
According to experts, depressed equities markets are usually preceded by macroeconomic instability emanating from declining output and foreign reserves, high inflation and unemployment rates. These macroeconomic challenges propel loss of investor confidence due to concerns that the poor economic conditions will persist in the foreseeable future.
Previous Measures
After the meltdown in 2008, the SEC and NSE had set up a 16-man committee to come up with strategies that would reverse the losses in the market. Proposed measures included share buyback, a review of stock exchange rules and regulations, a reduction in capital market fees, and the proposed establishment of a stabilisation fund.
Under the share buyback, companies will be allowed to buy back up to 20 percent of their issued shares while exemptions are to be issued by the Attorney General on relevant provisions under the Companies and Allied Matters Act. At the same time, the stock exchange directed that share prices could only move one percent downward and five percent upward. In addition, the exchange reduced its fees by 50 percent.
Unfortunately, all the measures introduced by the government were unable to turnaround the market and achieve the desired results. The restriction of share movement was also counter-productive and had to be reversed after a few weeks while the stabilisation fund was never set up.
In all of this, a crisis of confidence was brewing among the leadership of the NSE and its council members, leading to the eventual removal of the past director general, Dr. Ndi Okereke-Onyiuke, and the dissolution of the council by SEC. It took SEC six months to replace the past director general with a new CEO in the person of Oscar Onyema after an extensive recruitment search.
The way Forward
As the committee settles down to work, some financial experts have suggested measures that can turn around the fortunes of the market. They include government investment in infrastructure, particularly in electricity and transportation, as a way of reducing high production costs in the country. According to them this has negatively affected several companies that are listed on the exchange.
“The cost of doing business is high in Nigeria. Basic infrastructure like good roads and power supply is lacking, leading to the high cost of doing business and government should look into this critically,†said one expert.
There is also the issue of inconsistency in the policies issued by regulators of the capital market, especially on the issue of market makers. “At some point in 2009, the SEC licensed five market makers, but the stock exchange is yet to also license them due to avoidable administrative bottlenecks. Thus, there are no functional market makers that can provide liquidity to the market,†he added.
On the issue of margin lending, according to another financial analyst who did not want to be named, a way out is for the Central Bank of Nigeria to give a guarantee to the banks on margin loans. “Like they did in other sectors of the economy such as agriculture, aviation, power, they should create a fund for the capital market and guarantee it. That is the only way any bank can approve margin loans for stock brokers. When this happens, it will inject fresh funds into the market and that will lift market activities and the interest that has waned will be rekindled,†he said.
He said that everyone knows that the fundamentals of the market are very strong but no one wants to go to jail for lending money to brokers. “What the market needs is fresh injection of funds and these funds will come locally. Let us not deceive ourselves; no one should expect any money from abroad now. Across Europe and Asia, there is a grave financial crisis and they will first of all resolve their own immediate problems before looking at any other person’s headache.
“Another thing is that it is only when local investors have shown confidence in the market that would attract foreign investors. But in a situation where local investors are divesting into other areas, who will not convince the foreigner?†asked the analyst.
He said if the market continues on the current trajectory, it will take a long time before it recovers. “It will take a long time before retail investors start returning to the market because almost all of them got burnt. At this time, any initiative taken must be robust, sustainable and it has to be institutional. “The regulators are doing well in the area of ensuring there is corporate governance and transparency in the market but more has to be done in the area of injecting funds into it,†he said.
He said when AMCON bought the margin loans from the affected banks, it only brought temporary relief to the affected banks but not directly to the exchange. According to him, buying over the loans from banks was a good step in the right direction but it remains the implementation of the second leg, to which he said is the issue of forbearance.
“Before AMCON was set up, the CBN had a series of meetings with stockbrokers and it was agreed that there should be forbearance on the issue of margin loans. As we speak, the boards of both CBN and AMCON have approved it. What is left before it comes into effect is for the Minister of Finance to approve the forbearance. I think SEC or any of the regulators should pursue this vigorously and ensure that it is achieved,†he said.
Another analyst suggested that all the stakeholders should support the recent clamor in the National Assembly for the listing of blue chip companies in Nigeria, especially those operating in the telecommunications and oil and gas sectors. “Government should also mandate all companies doing well in Nigeria to be listed by granting them some level of tax breaks and anyone that refuses to list should face punitive measures. If there are many companies quoted, there will be more activity and inflow of money. It should be a stick and carrot approach,†said a top executive in one of the commercial banks.
She further suggested that the committee should also look into a number of private companies that did private placements in 2008 but are yet to be listed. “In addition, regulators should ensure that all quoted companies release their results as at when due. The best thing to do is to mandate all quoted companies to send in their financial calendar for the year so that investors can easily track them and sanction appropriately any company that fails to hand in its result when it is due,†she added.
According to her, SEC should encourage share buyback schemes and stop share reconstruction. “When you do a share buyback, you spend a lot of money unlike share reconstruction that is mere paper work. Share reconstruction is not only cumbersome but makes investors to lose value on their investment. I think it should be more appropriate for the regulators to have a look at this and come up with more concrete steps that will increase liquidity in the market and share buyback is one area that can achieve this,†she said.
Source: ThisDay