GOVERNMENT POLICIES AND STOCK MARKET VOLATILITY
The stock market is a victim of uncertainty in the operating environment, argues
One of the five best performing stock exchanges globally, The Nigerian Stock Exchange has undergone volatility in the last two weeks. It’s measure of corporate gains, All-Shares Index and value of listed securities, market capitalisation fell by 6.38 per cent in one week to close at 36,818.29 and N13.336 trillion respectively on Friday, June 1, 2018. Volatility is unavoidable but it can be managed with an enabling operating environment and appropriate policies that enhance investor confidence.
During volatility, innocent shareholders watch helplessly as their investment is plundered by the bear market. Such a trend can make the chief executive officer of a stock market to sweat under corporate jacket while stockbroking firms lose jumbo commissions from fat cat clients. On our own bourse, the bear run is usually taken over by bull in a short while since nothing is intrinsically wrong with the quoted companies on the exchange as their shares are generally undervalued.
The Chartered Institute of Stockbrokers (CIS), an umbrella body that certifies stockbrokers and Association of Stockbroking Houses of Nigeria (ASHON) are always under pressure to calm nervous domestic investors that bear trading provides an opportunity for investors to beef up portfolio as market fundamentals on the exchange remain strong. The market has not fully commenced trading in derivatives. This would have provided hedging opportunities for the shareholders. After all, an investor cannot lose simultaneously in both the spot and derivative market. They would have been enjoying zero-sum game by now. We should commend the CIS for making training in managing equity derivatives compulsory for all stockbrokers as part of the institute’s compulsory continuous professional development programme. There shall be opportunities to implement the training in Nigeria one day.
The exchange has recorded trajectory of superior performance by global standard after the market meltdown of 2008. The battle for investor confidence is no longer a major issue as aggressive foreign portfolio investors have since discovered huge opportunities for superior return on investment (ROI) in the acclaimed frontier market. They know that investment is a game of trade off between risk and return. The exchange is a leading market by any parameter. The market is respected in the World Federation of Exchanges (WFE) and African Stock Exchanges Association (ASEA), where Onyema is the current president.
Shall we tell President Mohammad Buhari that the fingered enemy of the exchange is the government of Nigeria through its political and economic activities that unleash anguish on many investments? Every stock market mirrors and responds to the happenings in its political, economic and social space. Any market that operates at variance is voodoo. News headlines is daily replete with news on suicide bombings and kidnapping by Boko Haram, callous killings by Fulani herdsmen, emerging political assassination, high tension armed robbery, uncertainty of the government’s fiscal and monetary policies that have polarised our economic experts into two camps on the hazards of continuous retention of the nominal anchor, the monetary policy rate (MPR) at 14 per cent by the Central Bank of Nigeria (CBN) and perceived fear of economic and political crisis as we gradually approach 2019 general election. These are called systematic or market risks. They are external and beyond the control of the exchange.
As uncertainty of policies thickens, captains of our manufacturing firms are losing weight as they continue to contend with forex challenges despite all the publicity about the special window created for the manufacturers. Nigeria’s manufacturers performance index (MPI) which tracks relationship between productivity and profitability has slightly dropped from 56.7 per cent in April to 56.5 per cent in May. External reserve has also fallen slightly by 99 million to 47.5 billion dollar in the review period. Price of crude oil is already fluctuating in the international market. Nigerians are awaiting the impact of the federal government’s Economic Recovery and Growth Plan (ERGP) which recognises the deep weaknesses of Nigeria’s economy and the need to fully revive it by 2020. It is really not yet uhuru.
Some analysts can swear that the current monetary policy is pro-foreign portfolio investors and anti-domestic ones. Foreign portfolio investors are more active on our bourse than their domestic counterparts. By the analysis of the exchange, “Foreign Investors outperformed domestic investors by 15.48% in April 2018. Total domestic transactions reduced by 36.05% from N140.27 billion in March to N89.70 billion in April 2018. Foreign transactions also reduced by 7.32% from N132.21 billion to N122.53 billion within the same period”.
Foreign investors deploy mutual funds as investment vehicle. Mutual funds are baskets of investments that enable an investor to use the same amount of money to own shares and fixed income securities in many companies. There are mutual funds in Nigeria. It broadly comes under collective investment Scheme because of the varieties of asset classes under the scheme. It is managed by professional fund managers. Most mutual funds seek capital gains as investment philosophy. Some invest over 80 per cent of their net assets on equity securities market in the emerging markets like Nigeria. They frequently take positions on large and medium-capitalised firms. They dive into volatile markets without qualms. This investment model is credited with transparency through regulation, diversification and economies of scale in terms of bulk purchase. But mutual fund’s challenges range from cash drag as they must keep huge amount for unforeseen redemption, huge tax, high maintenance costs and relative illiquidity compared with stocks on redemption procedures.
There are fillers that the recent massive sale of shares by foreign investors is oiled by some mutual funds that are paying returns of five per cent and above in the United States and Europe and portfolio investors are under pressure to convert their shares to cash for better investment opportunities. But nobody can rule out the fear of impending general election as well because media reports are loaded with signals of what may happen in 2019. It could be a flight for safety for the foreigners. Unfortunately, herd instinct usually propels many domestic investors to take queue by selling off whenever the foreign investors blow whistle.
Foreign investors are adept at risk analysis. They accord importance to country risk before they invest trillions of hard currencies outside their countries. The naked truth is that uncertainty characterises our operating environment in Nigeria. Why should MTN give priority to Ghana Stock Exchange for its Initial Public Offering (IPO)? There is just no solid explanation other than MTN’s perceived unfriendly operating environment in Nigeria. By market capitalisation, The Nigerian Stock Exchange is about three times that of Ghana Stock Exchange. Theoretically, the exchange can acquire or swallow Ghana’s stock market.
Apart from insecurity issues and management of interest rate, the apex regulator of the capital market, the Securities and Exchange Commission (SEC) which represents the government on the market is unstable. The senior prefect of the capital market has been operating without a board for a long time and nobody seems to care. In six months, three staff of the commission occupied the hot seat of Director General, two in acting capacities. Mallam Mounir Gwarzo who took over from Ms Arunma Otteh was suspended by the Finance Minister, Mrs Kemi Adeosun for breaching public service rules. He was replaced in acting capacity with the SEC’s head of External Relations, Dr Abdul Zubair whose appointment was dramatically short lived. Zubair surrendered the baton to Ms Mary Uduk, one of the longest serving staff of the commission, expectedly in acting capacity. Adeosun also appointed in acting capacity, Reginald Karawusa as Executive Commissioner, Legal and Enforcement; Isiyaku Tilde, Executive Commissioner, Operations and Henry Rolland Adekunle, Executive Commissioner, Corporate Services.
Oni, Communications Consultant and Chartered Stockbroker is CEO, Sofunix Investment and Communications