Panic Over The Bourse

The plunge would have been worse if the Council of the Nigerian Stock Exchange, NSE, had not intervened to freeze prices a fortnight ago. NSE’s action stemmed the slide as no price decline was recorded that week. Rather, the unusual disappearance of the bears saw 31 stocks gaining in price on Monday 9 June. The following day, 43 price gainers were recorded.

The NSE management explained that the absence of the bears was a direct function of a policy it was implementing. The policy seeks to ensure that a stock must trade a minimum of 100,000 units before its price could move up or down. Before the new policy, a stock usually had 5,000 units traded before its price could move. This was later increased to 15,000 units.

The new NSE policy announced three weeks ago is expected to guard against frivolous pricing of shares and promote market liquidity. Mr. Sola Oni, the Exchange’s Principal Manager in charge of Corporate Affairs, believed the policy has already proved effective in controlling price slide. But the measure was unable to arrest the slide witnessed again last week.

Mr. Bismark Rewane, a renowned financial analyst, and chief executive officer of Financial Derivatives Company Limited, said it was wrong for the NSE to attempt to rig the market. Rewane described the move as panicky, “a disorderly intervention in a chaotic market.” Though it was true that the market could be heading towards under-valuation, the decision to freeze prices, according to him, could trigger panic from investors who might want to exit the market once the freeze was lifted. Rewane argued that the NSE and other regulators should have put in place a package to bail out some stocks which were clearly undervalued to support prices and restore long-term confidence in the market.

Rewane revealed that freezing the market could also drive investors into further panic. He also attributed the phenomenon to the tendency of investors to gamble on the market. Rewane noted it would be tantamount to calling the stock market “a casino, which it is not” if an investor borrows money at 22 per cent and invests in a market where dividend yield is two per cent in the hope that prices will appreciate.

Of course, the effect of the halt on margin trading is the price of using borrowed funds to invest in securities generally. As a risky practice, it amplifies both gains and losses. This probably explains why most stockbroking firms in Nigeria have high gearing ratios, which means an unfavourable ratio of their funds to borrowed funds.

Musa Al-Faki, Director-General of the Securities and Exchange Commission, SEC, the apex capital market regulator in Nigeria, disclosed most of the stockbroking firms as having gearing ratios that range from 113 per cent to 6,698 per cent, an indication of a high level of indebtedness, relative to their net assets value. Most of the debts are owed banks, and because of the panic over a possible crash of the stock market, there have been calls for effective measures to prevent a systemic crisis in the banking industry. The size of leverage in the stock market is estimated to be N2.5 trillion, a factor that has contributed significantly to share price appreciation. Another critical factor is the entry of pension funds into the system. Pension fund administrators invest a huge percentage of their money in the capital market. The fund is already close to N1trillion.

Bank lending to finance share trading has impacted extensively on the market. Banks which floated very successful public offers were believed to have loaned some money to investors to subscribe to these offers. As an issuing house to the last First Bank of Nigeria hybrid offers, IBTC Chartered Bank, now Stanbic IBTC Bank, was involved in this practice. Though this practice does not contravene any law, it affects high subscription level of offers at the primary market, while it pushes share prices at the secondary market.

In a panicky move, the NSE initially banned marginal trading but later lifted the ban to enable a committe comprising the regulators in both the money and capital markets examine the practice. The Central Bank of Nigeria refuted a report it had directed banks to suspend lending to stockbrokers and speculators for the purpose of margin trading. Professor Chukwuma Soludo, the CBN Governor, said banks’ lending to customers to acquire shares had not reached the level that would warrant intervention by the CBN.

Professor Ndi Okereke-Onyiuke, Director General/Chief Executive Officer of the NSE initially attributed the crash in the stock indices to a technical hitch on the trading engine. She said for the fact that the market has been moving up for several years does not suggest the market is down now. She also argued that stockbrokers took advantage of the technical hitch in selling stocks. The NSE boss warned that any stockbroker caught while trying to cause either upward or downward movement in shares pricing would be suspended from trading for at least two weeks. The Professor, however, advised investors to diversify their investment in order not to lose much money in case of downward trend in the market.

That stockbrokers could take advantage of technical hitches on the trading engine is a clear indication that share prices could be manipulated. In February this year, SEC accused the NSE of alleged price manipulation of six quoted companies – African Petroleum plc, Big Treat plc, First Aluminum plc, IPWA plc, Afroil plc and Capital Oil plc. This led to the probe of the six firms. SEC observed that Afroil plc and Capital Oil plc do not possess the fundamentals that could take the share prices to the level they were trading at the time. Moreso, the firms were not meeting their post-listing obligations of sending quarterly reports to the NSE and SEC. But Onyiuke said the allegation of share price manipulation levelled against the six companies was speculative and sensational. While denying the price fixing allegation, Mr. Kene Okafor, General Manager and Head, Research and Information Technology Department at the NSE, told stockbrokers that the Exchange was not aware of any report. He said the issue being a sensitive one, SEC ought to have consulted the NSE first before going public.

Chief Lugard Aimiuwu, former president of the Nigerian Institute of Management, and Director, Research International, warned that the turbulence going on across the global stock market could be avoided if good corporate governance structures were in place to make all market operators conform to ethical and best practices. As an emerging market, the NSE is not yet mature to be fully judged on the scale of perfection, Aimiuwu submitted. He wanted regulators to be careful in making decisions that could affect investors and their investment.

Mr. Sunny Nwosu, National Coordinator of the Independent Shareholders Association of Nigeria, supported the price freeze, saying investors needed to be protected. He, however, called on regulators to review the policy on margin lending. Nwosu opined that the market would continue to swing but ruled out a burst. As an emerging market, he said, the Nigerian exchange is bound to be full of a lot of uncertainties and opportunities. He advised that this is the best time to buy.

Analysts remarked that investors should expect mild recovery. They argued that if the government depends so much on the NSE as its key driver, the economy may be heading for a crash. They hinged their argument on the fact that the banking sector is not servicing the manufacturing sector, the real sector that would have sustained the economy. In addition are the problems of government’s neglect of the agricultural sector and rising inflation.

But stockbrokers remain optimistic. Reverend Olu Odejimi, doyen of stockbrokers and Managing Director/Chief Executive Officer of Clearview Investments Company Limited posited that every market has its ups and downs. He said the stoppage of margin trading has its effects on the capital market. With the lifting of ban on margin trading, the market will certainly bounce back, he declared.

Samuel Olayemi, Managing Director of Mainland Trust Limited, a stock broking firm, spoke in the same vein. He told TheNEWS that the ban on margin trading was responsible for the liquidity problem in the market. The stockbroker, however, faulted the banks for being too specific. He said when banks lend to stockbroking firms under margin trading, the lenders provide them with a list of stocks to invest the money in. This he considered not too good for the growth of the market. He wanted the banks to give stockbrokers and speculators a free hand to operate. A shareholder, Boniface Okezie, National Chairman of Progressive Shareholders Association of Nigeria told this magazine that declining share prices is normal in any stock market. According to him, some stocks are overpriced, hence the market is undergoing correction. He argued that even in the face of declining prices, some stocks keep recording share price appreciation.

To him, companies which are churning out impressive results but without any reflection on their share prices are those stocks whose shares have been polluted. His advice is that such firms should undergo share restructuring. Another critical factor for price loss is delayed issuance of share certificates by many banks which floated public offers. This, he said, is capable of eroding investors’ confidence.

At the inauguration of the new board of the Securities and Exchange Commission, Al-Faki noted that the nation’s capital market is witnessing rapid growth which also comes with a lot of challenges. Dr. Shamsudeen Usman, Minister of Finance who was also at the occasion, advised SEC to do more in the areas of entrenching market transparency, efficiency and discipline. He said SEC should ensure the international competitiveness of the market and its relevance to the nation’s domestic needs. The minister’s advice is not unfounded as market infractions by operators is on the rise. SEC has dragged 13 stockbroking firms to the Economic and Financial Crimes Commission, EFCC, and sanctioned 42 others for various malpractices this year alone.

Quoted companies are not helping matters either. In a bid to appear attractive to investors, they connive with auditing firms to doctor their accounts. The case of Nampak Nigeria plc is still fresh in the capital market circle. Leading companies such as Cadbury Nigeria plc and Afribank Nigeria plc have also been involved in the negative act. Of course strange trading in dead stocks remains a practice at the NSE.

Hitherto, frequent access of the capital market by banks was the order of the day. The development drew the ire of the Senate Committee on Capital Market, led by Senator Ganiyu Solomon. This intervention has seen many banks withdrawing their planned offers. Banks like Wema, Sterling, Unity and Ecobank Nigeria had earlier signified interest in floating public offers.

Solutions to the problems of free price falls and other infractions could just be under way. One is the lifting of the ban on margin trading. To this end, SEC has set up a committee that comprises of representatives from CBN, Nigeria Deposit Insurance Corporation, NDIC, NSE and SEC itself to review the modalities of margin trading with a view to sustaining the growth of the capital market. SEC is again set to reduce transaction cost in the market to boost investors’ confidence. The Commission had earlier slashed transaction cost by 40 per cent.

Defending the rationale for the on-going recapitalisation exercise of the capital market operators, Al-Faki noted that most of the stockbroking firms in operation have less than N500 million in equity capital, thus constituting high risk participants in the market. Al-Faki reckoned that the firms are ill-equipped to cope with the rapid growth in the capital market.

He remarked that adequate capitalisation is a critical requirement for the market operators to support and sustain the rapid growth. Hence, the new capital base of N1 billion specified for stockbroking firms would put the companies on a sound footing to cope with the challenge in a rapidly growing market. Already, SEC and NSE are predicting the existence of only about 10 stockbroking firms by 2020.

Al-Faki also disclosed that SEC, as a matter of urgency, is pursuing the implementation of policies and programmes that will enhance market efficiency, transparency as well as the capacity of operators and regulators, both as entities and individuals.

Interestingly, despite all the shortcomings at the Nigeria stock market, many quoted firms have been turning in impressive operating results, and good cash and stock (scrip) dividends to the admiration of investors. Guinness Nigeria plc even went ahead to announce a special dividend of N6.80 per share. Julius Beger Nigeria plc also paid special dividend of N3.75 per share having declared a cash dividend of 125 kobo per share. Chemical and Allied Products Company plc paid cash dividend of N3.75 per share.

In the Petroleum Marketing sector, while Total Nigeria plc paid a dividend of N9.50 per share, Chevron Oil paid N7.50 per share in cash dividend, Oando Nigeria plc, N6.00 per share and a bonus of I for every 5 held and Mobil, N4.70 per share plus a bonus of 1 for every four shares previously held. Even Eterna Oil and Gas was able to pay a dividend of 24 kobo per share. All dividend payments were for the financial year ended December 2007. Same year, a study by Datatrust Stock Trading Guide indicated that Ecobank Transnational Incorporated was the leader in earnings per share (EPS) which stood at N10.63; Nestle, N10.29; Total Nigeria, N9.42; Mobil Oil, N7.90; Chevron Oil, N7.87; Oando, N7.51 and Guinness, N7.26. Others are African Petroleum, N5.10; Flour Mills, N4.82; Julius Berger, N4.66; Lafarge-WAPCO, N3.69 and CAP plc, 3.56. The report concluded that these companies are attractive investment opportunities this year.

In the bank sector, First Bank of Nigeria, UBA plc, Zenith Bank, Intercontinental, Union Bank, GTBank and Oceanic Bank are touted as good buys. Other companies which made the list are UAC of Nigeria plc, Dangote Sugar, Guinness Nigeria, Nigerian Breweries and Nigerian Bottling Company.

What actually move stock prices, according to analysts, are financial performance, forces of demand and supply, sensitive information, ownership and management, brand strength, earnings history and competitive advantage. However, integrity and due diligence are central in any transaction. Investors are advised to play the game with caution.