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Tuesday, 8 April 2014
Nigeria: In First Quarter, Investors Count Losses As Share Prices Depreciate
A number of factors 'conspired' to depress share prices on the Nigerian Stock Exchange in the first quarter of the year as investors count their losses while analysts warn that the trend may continue in the wake of poor corporate information from quoted firms, reports Festus Akanbi and Sandra Alumona
For the army of investors who had banked on the nation's capital market for bountiful gains at the end of the first quarter of the year, the statistics on market performance released to the public last week was a great disappointment. According to reports, the Nigerian equities market recorded the highest decline in Africa in the first quarter ended March 31, 2014. The Nigerian Stock Exchange (NSE) All-Share Index, which measures the aggregate growth of the market, ended Q1 of 2014 with a decline of 6.2 per cent as the ASI fell from 41,329.19 to close at 38,748.01. The market capitalisation of the exchange shed N780 billion, declining from N13.226 trillion to N12.446 trillion.
The Decline A random survey of price movements on the Nigerian Stock Exchange showed that virtually all the stocks were affected by decline in price movement. In the banking sector, a unit of Diamond Bank's share traded for N7 on December 2, N6.83 on December 9, N7.04 on December16 and N7.25 on December 23. Meanwhile, the bank's share price was sold at N6.46 on March 25. Skye Bank which was sold at N4.1 per unit of share on December 23 came down to N3.60 on March 25 this year. The survey showed that Ecobank Transnational was not spared in the downtrend that hit shares of quoted firms on the exchange. The movement of the bank's share showed for the trading of December 2, 9, 16 and 23, N15, N14.84, N14.7 and N15.01 were offered respectively. The share price went further down as it sold for N13.4 on March 25. Fidelity Bank indeed showed some resilience as no significant movement was noticed in its share price. The bank's share price sold at N3.18 on December 2. It increased to N3.21 on December 9, and fell slightly to N3.16 on December 16 and 23 while it fell to N2.2 on March 25. A unit price of Skye Bank was N4.1 on December 23 but the figure came to N3.64 on March 25. As investors continue to count their losses over the uninspiring performance of stocks in the first quarter of the year, capital market watchers said the stage for the decline performance was set by a chain of unfavorable developments in the nation's economy right from the last quarter of 2013.
Market Efficiency In an attempt to explain the prevailing scenario at the stock market, a research analyst with Proshare Nigeria Limited, Mr. Taiwo Ologbon-ori said two key things were involved, and needed to be addressed. The first, according to him is what he called market efficiency. This, according to him, has to do with how efficient the market is in terms of accessing and pricing all available information about a particular stock. As we know, market discounts all information available. "In the case of the NSE, information is either scanty/inaccurate or not available at all. We expect this to be corrected by the licensed market makers but the situation is yet to change, since there is no means of assessing accurate information about business performances of these listed firms. The financials and market announcement only cannot help the situation. "The companies are not communicating at all, though it might be expensive to maintain interactive relationship with the investing community but the information is very crucial to maintain fair valuation. The little and inaccurate information available within the investing community determine the valuation we are currently seeing on the bourse - Bargain hunters would not trade outside the available information. "Please note that information required here are more than market announcements or financials. It includes full and detail information about business and industry knowledge; this will aid investors' knowledge and understanding in pricing the share price of the firm fairly," he said.
Market Psychology The second factor he identified is what he called fair value. He said this had to do with "market psychology - a function of how information is interpreted, which we don't have control over. Though, it takes its feed from processed information (market efficiency) available to aid a valuation processes. In this regard, the key is how the information is interpreted. Some people hear news and choose to be aggressive and buy. Some hear the same news and choose to be conservative by either holding or selling. "In my opinion, the current undervaluation of quoted firms on the exchange will persist and bargain hunters cannot change the outlook. Robust information about the quoted company is very key for fair valuation. Nigerian quoted firms need to understand this. And is high time, NSE and SEC should compel and enforce investors relation principles on Nigerian bourse. It is very crucial and necessary."
Negative Sentiments In the opinion of the Managing Director, Proshare Nigeria Limited, there is so much negative sentiments affecting the market. According to him, all the companies are declaring reasonable profits yet there is little to show for it for two reasons. He said the first reason for the regime of decline share performance in the market was the election circle that normally affects the market, noting however that the effect is more severe this year because of the prevailing negative sentiment in the polity. He said, "Whether we like it or not, the impact of the so-called missing money led to the position of Standards and Poor's that Nigeria is generating oil revenue but yet they can't see it as it does not reflect in the nation's foreign reserves." The implication, according to the Proshare chief, means by borrowing more money, it means we are putting ourselves under pressure. "We argued we have not over-borrowed but they are worried that our ability to generate revenue is declining. So, any reasonable person will say why will I be encouraging you to borrow when your ability to pay is doubtful and these foreign investors make most of the market. They are the ones driving the market so they are a little bit cautious," he explained. A capital market analyst pointed out that no economic activity operates in a vacuum. According to him, markets react promptly and uncharacteristically to rumours of war, changes in regulatory environment; political climate seen as a negative factor by the business (investing) community; and interest rate variation to general performance of the economy. He added that it was a common trend for stock prices of some quoted companies to rise and fall or fall and rise twice or thrice within a year. The stock prices of quoted companies on the Nigerian Stock Exchange (NSE) are affected either positively or negatively by a number of factors occurring within and without the economic system. Investment in stock market is long-term in nature; any development that could affect the stability of the economy usually has serious impact on the stock prices. In recent times, the NSE has consistently lost points and the prices of stocks have experienced sharp decline. Commenting on the performance of the market, a stockbroker and managing director of Lambeth Trust and Investment Company Limited, Mr. David Adonri, was quoted as saying the equities market entered 2014 overheated. "Subsequent market correction cooled down in January. Series of events since February have added in taking the breath out of the entire financial market. Notable among which were tightened monetary policy and sudden suspension of the CBN governor. These were the factors that forced the market into decline," Adonri said.
The Pressure Speaking on the market performance for the first quarter under review, Diekola Onaolapo, Managing Director/CEO, Eczellon Capital Limited, a business and financial advisory firm, said that despite the favourable outlook for the market at the beginning of the year, there has been a considerable pressure on the market since the beginning of the year. According to him, the market witnessed a myriad of challenges both foreign and domestic in the last three months as current year to date,YTD, figure stands at -9.84 per cent. He stated that the combined effect of the United States government's gradual withdrawal of its stimulus package (US tapering on its Quantitative Easing Programme by US $10 billion) and the outcome of the monetary policy committee (MPC) meeting in January both sent shock waves through the market, adding that some foreign portfolio investors dumped their shares 'hot money' in the Nigerian market for more attractive and less risky positions in more stable markets. "This was in no way exclusive to Nigeria as it affected all the emerging market economies with the worst hit being Argentina," he added.
He emphasised that the outcome of the MPC meeting, which resolved to increase the Cash Reserve Ratio, CRR, on public sector funds to 75 per cent from 50 per cent had an effect on the Exchange rate as it dipped by 3.21 per cent in the following week and plunged to -0.34 per cent. He said that this added to the palpable uncertainty of Nigeria's economy. "The suspension of the Governor of the Central Bank also contributed to the dip in equities prices in the market. The All Share Index plunged by 1.47 per cent at the announcement of the suspension which led to a further fall of 4.46 per cent in the banking sector index, an event which further exacerbated the market dynamics highlighted above affecting the Bond Market. This also gave a push to a series of sell-offs by foreign investors," Onaolapo stated.