FROM THE ARCHIVES: Predictions for Nigeria's Stock Market [By Tope Fasua, January 2008]
Mobolaji ALUKO
This Day (Lagos)
OPINION
14 January 2008
Posted to the web 15 January 2008
By Tope Fasua
Lagos
It is official. This year 2007, the Nigerian stock market was the fourth best performing in the world; in terms of sheer growth. According to Bloomberg, arguably the world's most sophisticated financial information provider, Nigeria's All Share Index came in fourth behind China's Shanghai Index (97% growth), PFTS of Ukraine (a fairly new market), and the Slovenian Index.
With a growth of 73% in the year, the Nigerian stock market can no longer be ignored by any serious global investor. Those sharp minds have started to participate in the growth of the market, directly and otherwise. On the other end of the spectrum, the worst performing indices for 2007 include Venezuela, Nikkei (Japan), Republic of Ireland, Ecuador and surprisingly, the Johannesburg Stock Exchange in South Africa.
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The growth of the All Share Index of any country is a natural pointer to the growth of that economy as a whole. This is because the index contains shares listed for all the industries in a country. It therefore presupposes that most major companies in a country are publicly quoted. This supposition may be misleading though, as many big companies are still, and are increasingly privately held. Furthermore, the indexes say nothing about the constituent parts of the stock market. For example, in Nigeria, banking shares may have driven the process, but the index tells nothing of what has happened in the manufacturing sector. This is dangerous for analysis.
However the mere fact that Nigeria featured so prominently in the list of best performing capital markets last year, moving from the ninth position as at June 2007 to finish off at fourth, means that the global financial community has another financial instrument on which to invest. It also means that the capital market, and not necessarily the banking industry, will be the leading light for the Nigerian economy, as it is the locus for the attraction of Foreign Portfolio Investments. For more good money will go after good money, and as the major fund managers are reviewing the list of top performers for 2007, they are presently debating just how much they should invest in the Nigerian stock market in the coming years. It's all about the 'Benjamins', as the Americans would say.
Locally also, more people are going to join the gravy train of this ingenuous market called the stock market in the coming years. People who have seen their friends and family double their investments in the last two years, will go to great extents to also see just what they can benefit from the process. The ingenuity that surrounds share trading anywhere in the world is that it is the bidding process that drives up the price, and so if more money goes after a share, the price naturally goes up and vice versa. It matters less the reason why more money will go after a share. It could be for fundamental reasons (where a company is deemed to be doing well), or it could be sentimental, speculative or driven by market information (or misinformation). Overall, the combination of increased international and local participation in our stock market seems to guarantee a process of more bids and less offers.
But the stock market can also be so good, it can kill itself. In the same way as more people joining in generally leads to higher prices, sudden mass exit from the markets may lead to a crash, otherwise called market correction. Because of increased international participation in the market, investors and regulators have to be mindful of events on the global scene. Global markets sometimes react in irrational ways. Increased globalization of our financial markets as has been evident in the past few years may translate into volatility, and transmute into the dual problems of herding and contagion. By this, I mean that the global markets may wake up one day and pull funds out of our market out of a whim about what will happen in say, sub-Saharan Africa. If major stockholders like foreign hedge funds sell off from our markets, small shareholders may be unaware of this and will therefore be the losers.
Very cogently, investors and regulators should notice the considerable level of indirect participation in our stock market through the use of Global Depository Receipts. Every major bank in Nigeria is raising funds through this means, which is effectively a way by which the investing world states that they are scared of investing in a country directly. A proliferation of GDRs will mean that we are not attempting to change the mind of the global investing community, but are satisfied with the classification handed to our country as being a relatively unsafe investment destination. Secondly, the market should be mindful of speculative capital in this area, because major GDR holders abroad, especially institutional investors, have a way of playing the market, say from London, in a way that can affect prices here in Nigeria. We should also ask ourselves what happens in the event that GDR holders decide to exit the market by instructing their depository bank to dispose shares in Nigeria. This act alone will mark down the market.
Looking at the horizon though, it seems Nigeria may not see much political volatility in the years to come. It also seems that we are moving closer to being able to solve problems through the courts as is the hallmarks of the present administration. This is song to the ears of the global markets, as that kind of assurance enables them to increase their investment horizon i.e go longer term. We are also terribly blessed by God and do not have many environmental disasters unlike some parts of Asia and the United States. Remember that the Kobe and other earthquakes dealt severe blows on the Japanese economy, almost bring it to its knees in the early 90s. The first casualty after such disaster is always the stock market. This is not so say that Lagos, Nigeria's financial hub, is an environmentalist's paradise; far from it. A lot more needs to be done to make things better.
In the coming years the Nigeria stock market will continue to mature. Perhaps only one of the 250 odd shares listed on our stock exchange costs more than a Pound. From a global perspective, all our shares are still effectively 'small cap', meaning that they have a long way still to go. Pundits have it that no Nigerian banking industry share should be priced less than 20 Naira by the middle of 2008 (great opportunity if this happens). Many shares in that market will also gain value before a slow down occurs. A slow down will be necessary at some point though, so that the Bond market will become vibrant, and the relative volatility of the market should be slowed down.
The corporate finance activities of our repositioned banks should also ensure that more companies are taken to the stock market this year, thereby increasing market capitalization and growth, and further attracting the attention of the global markets. With crude oil prices surpassing $100 at the first two trades this year, a lot of confidence is imbued in Nigeria by global investors. With that kind of windfall, the country is expected to keep racking up, at least marginally, its foreign reserves, which is a key indicator of a country's financial stability. A few derivative instruments (GDR is one), should also creep into the financial space in the coming months.
By and large, another great year is predicted for investors. One is reminded though, that only people with surplus funds can benefit from the wonderful mechanics of the stock market. It may be instructive to remind those that 'make it' there, to remember to give something back to the larger society, so as to be able to enjoy that windfall. Government should also ensure that it discharges its social roles very astutely, so that the country becomes a more permanent abode for foreign portfolio investors. The best is yet to come; in fact the best is several years away.
-Fasua wrote from Lagos
Okwy Okeke
Prof. Aluko,
Thanks for your tireless service in providing ready information on Nigeria financial market.
Though informative, there are many not so informative details in this essay
Cheers,
Okwy
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