Kayode Ekundayo
24 December 2008
Year 2008 was not funny to investors in the Nigerian capital market as in many other parts of the world. The Nigerian equities market which in the beginning of the year posed much more rewarding year suddenly went on a continuous jet-landing position with occasional unsuccessful recovery attempts since end of March 2007. Before we could say jack, the market has lost N6 trillion investors money and still yet to recover
In fact the month of March brought to a plateau the market bubble which has been sustained by the banking industry's excessive margin trading credits particularly for the purchase of its own shares. Like a dream, investors have lost 32 per cent in price movements only between March 5 and first week of October. In absolute terms, the market lost N3 trillion, from N12.5 trillion to N9 trillion.
Before the recession, investors made huge profit between January and March as the market remained bubbling with a lot of promise. Unfortunately, as a result of the huge returns in the market, companies seeking to raise funds through private placements market found it convenient to promise investors of their equities listing on the market.
The crises were traceable to two primary causes. One is primary and derives from domestic monetary and financial policies such as the untimely reversal of the margin trading policy which halted the fuelling of the bull market as well as the consequent increased pressure on the banks a few months from the halt of the policy to start recalling their funds, the increase in Monetary Policy Rate (MPR) from 9.50 per cent to 10.5 per cent and increased in Cash Reserves Ratio (CRR) from 2 per cent to 4 per cent all in a bid to curb the seeming excess liquidity which was also part of the underlying reason for halting the margin trading, the rumours of a CBN policy on the harmonization of banks' year end which triggered a desperation in the industry for fund mobilization which equally build up interest rates and made the money market even more attractive
According to Martin Oluba, President of Value Fronteria Limited there was series of domestic financial policy faux passes which caused a reversal of inflow of rise in share price. The first was the Central Bank of Nigeria's decision to stop the then massive credit expansions which took place through bank lending for equities. The implication of this, he said was endless upward price movement of Nigerian stocks, particularly the equities of the banks which were driven by the bank-credit-backed demand pressure, halted
Banks, he said had sustained the equities market boom by using a combination of tactics-direct interventions through lending to stock-broking firms primarily to buy their shares to sustain demand pressure on their stocks such that its prices continued to rise without corresponding appreciation on the underlying values.
The camel's back was however broken when JP Morgan on its 12th May 2008 report pointed out that more than 56 per cent of the banks are overvalued while pointing out clearly that bank share prices have run well ahead of fundamentals and do not incorporate the numerous risks facing the sector from both the operational and macro-perspective.
This, Oluba said triggered an increased drop in the holding of bank shares particularly by the foreign investors who have reckoned that the Nigerian market was indeed headed to experience exactly what other global market were facing.
Even though the CBN Governor Charles Soludo denied issuing any order halting margin trading, shares price kept depreciating
Worried about the rapidity at which shares are depreciating, the federal government in August set up a 16- member committee to stabilize the Nigerian capital market.
The committee, after series consultation, announced various measures which included establishment of capital market stabilization fund, that CBN should review the liquidity situation in the economy and take appropriate measure, that NSE should review its trading rules and regulations, banks to partner with the market markers to inject funds into the stock market among others.
A month later, however, the Minister of Finance and Chairman, Presidential Advisory Committee on Capital market, Shamsudeen Usman said in Lagos that the stabilization fund as recommended by the committee in August would no longer relevant, saying that the various measures taken by CBN, Nigerian Stock Exchange (NSE) and Securities and Exchange Commission (SEC) were enough to bring the market back to prosperity.
Indeed, a significant appreciation was recorded following the announcement despite turmoil in the sector as a turnover of 3.1 billion shares valued at N39.3 billion was recorded in 49,497 deals.
Usman said all the fundamentals of the market and all the companies listed on the exchange are still strong.
He said so far SEC has approved guideline for share buyback, the commission and the NSE have reduced their respective fees on all transactions by 50 per cent with various market operators offered to reduce fees in order to make the market more attractive to investors. The NSE total market capitalization gained N280 billion to close at N9.089 trillion from N8.809 trillion on August 26, 2008.
"SEC has also released rules for the licensing of the market makers who essentially dealers with strength and liquidity to buy and sell securities on regular and continuous basis coupled with CBN new monetary policy. To me, the securitsation fund will no longer be necessary as all these measures are adequate to bring the market back
He said SEC would soon released the name of market markers adding that the fundamentals of all the companies that are listed on the exchange are strong.
However, CBN, as a corrective measures announced a cut of 0.5 per cent on Monetary Policy Rate(MPR) or interest rate from 10.25 per cent to 9.75 per cent, Cash Reserves Ratio (CRR) from 4 per cent to 2 per cent and Liquidity Ratio from 40 per cent to 30 per cent, as well as abolished common-year-end policy, all as intervention measures aimed towards stabilizing the Nigerian capital market.
NSE, on its part, cut down its transaction fees on primary market by 50 per cent, from 0.6 per cent to 0.3 per cent and secondary market from 1 per cent to 0.3 per cent. NSE also returned the 1 per cent downward limit on daily price movement to 5 per cent while the current 5 per cent limit on upward movement is retained. The downward limit was reversed to 1 per cent from initial 5 per cent by the stakeholders of the Nigerian Stock Exchange after a meeting with federal government in August this year as part of efforts toward stabilizing the Nigerian capital market.
Okereke-Onyeuke said due to inability of some major stock brokers to muscle 100,000 units of share daily in order to raise the stock price upward or downward, the unit of shares to trade with have been reviewed to 50,000 units of shares
"There are some companies that have limited number of shares, they can never be market makers, because they don't have up to 100,000 units of share as stipulated in the guideline. So we are bringing down the number of making market to 50,000 from 100,000", she said
Meanwhile, SEC also announced a guideline for maker marker. Originally, a market maker is any specialist permitted to act as a dealer, any dealer acting in the position of a block positioner, who with respect to a security, holds himself out as being ready to buy and sell such securities for his own account on a regular and continuous basis.
To be eligible, they are to be duly registered with the Corporate Affairs Commission (CAC) and shall have a minimum paid-up capital of N2 billion, and shall at all times maintain sufficient liquid asset to cover its current indebtedness.
In November, however, SEC announced three names of successful market makers. They are Chapel Hill Advisory Limited, Greenwich Trust Limited and Diamond Capital and Financial Market Limited and by middle of December added another name to make up four. Even with these, shares failed to appreciate and by the end of November, market capitalization had fallen to N6.6 trillion
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