View Full Version : Nigerian Stock Market Soon to Crash???

Jul 12, 2007, 02:45 AM
This article and the ensuing comments following it was both alarming and funny but gave me cause to pause, reflect and reconsider my stock portfolio, investment and options. lol

Thisday online (http://www.thisdayonline.com/nview.php?id=83178)

It’s Irrational Exuberance, Stupid!
Behind The Figures By Ijeoma Nwogwugwu
email: ijeomanwogwugwu@thisdayonline.com, 07.09.2007

With due respect to James Carville, but ever since he coined the winning campaign slogan, ‘It’s the Economy, Stupid’ when he was the campaign manager in charge of Bill Clinton’s 1992 US presidential bid, several commentators have rephrased it to emphasize different themes and view points. Borrowing a leaf from Mr. Carville it has become necessary to re-coin his catch phrase with some assist from Alan Greenspan, the former US Federal Reserve Chairman, as a basis for assessing the true state of the Nigerian capital market.
Last month, the Stock Exchange’s Director-General, Ndi Okereke-Onyuike, tried to shore up investor confidence in the capital market when she told international investors at a forum in London that return on investment in the Nigerian market was one of the highest in the world. According to her, returns were as high as 400 per cent making it an attractive investment destination for hedge funds and institutional investors. The Director General was absolutely right.
The Nigerian capital market has consistently posted impressive results in the last couple of years, and has continuously bucked market trends particularly during bear runs and market corrections in other parts of the world. For instance, year to date indices for the first half of 2007 show that the All Share Index (ASI) rose by almost 54 per cent to 53,336.46, while market capitalization hit N7.8 trillion by the end of June, representing a gain of almost 80 per cent from the beginning of the year.

Investor confidence in the market has been buoyed by strong demand for stocks in mostly the banking sector, which by the end of last month accounted for 45 per cent of market turnover. This is in spite of the fact that dividend yields in the banking sector were far below the market average. The building and construction sector has also enjoyed a good rally on the back of macro-economic variables and an anticipated huge infrastructure spend of N1.5 trillion by the Federal Government between 2007 and 2008 which should give cement manufacturers extraordinary potential for increased revenues.
Also, isolated stock price gains made by Dangote Sugar Plc after an initial public offer, UBA after its hybrid offer and an anticipated First Bank rally once the technical suspension is lifted on its share price following the collation of returns on its N100 billion offer, will push the market to new record highs before the end of the third quarter. The resultant effect is that the massive capital gains posted in the market has attracted a deluge of investors who want to cash in on an unbelievable rally before it bottoms out. Hang on a second. Did I just predict gloom?

Yes I did, because in spite of Okereke-Onyuike’s rosy outlook, the Nigerian stock market is bound to bottom out in the months ahead because the fundamentals just do not add up. First and foremost, a capital market cannot be isolated from the environment in which it operates. The market, according to Financial Derivatives Company, an investment and economic and financial advisory firm based in Lagos, was by June ending trading at 43.67 times earnings, which when factored against real or nominal GDP forecasts for the year of some 6 per cent, does not justify the stock market rally. Second, dividend yields on actively traded sectors like banking are on average falling because their earnings relative to share capital are weak. In fact, with dividends yields in the market falling to an estimated 3 per cent (as against bond yields of 14 per cent), this should make a stock market plunge inevitable as investors will begin to look for more attractive avenues in which they can invest their funds.

Of greater worry is the fact that most stocks have become overvalued due to market manipulation by operators, excess money supply and irrational exuberance on the part of investors looking to make quick gains from the capital market. If truth be told, most of these investors are speculators, as opposed to long term investors, who are by nature fickle and just want to make huge capital gains before cashing in on their shares once there is any sign of instability. Investors in this category are mostly made up of international hedge fund managers who have been bringing in ‘hot money’ (it is estimated that hedge funds have invested some $4 billion in the Nigerian capital market since 2006).
However, hedge funds will normally be the first to make a run for the exit once there is any form of instability, a significant policy flip flop or in the event Nigeria suffers a sovereign-risk downgrade. For them, they would not lose sleep over Nigeria because their investments here account for an infinitesimal part of their portfolio. Yet these same funds constitute a significant chunk of the NSE’s market capitalization, and if withdrawn hurriedly to safer destinations, could portend a bad omen for the market.

In addition to hedge funds are Nigerian speculators who have been borrowing huge sums of money from banks to invest in stocks. Presently, it is estimated that speculative trading being funded by borrowed funds has risen to 85 percent. And although the banks that are lending the funds are holding onto the share certificates as collateral, the snag is that if there is a systemic default on the part of borrowers, banks will be compelled to sell the shares to recover their funds. If this were to happen, selling the shares will become a self fulfilling prophecy as prices are bound to crash.

Already, the Central Bank has read the writing on the wall by expressing concerns over the level of margin that is available to speculative investors and is preparing to sanction banks that have been financing margin trading in the stock market. The National Pension Commission (Pencom) also recently disclosed that it intends to scrutinize Pension Fund Administrators’ compliance with investment guidelines and portfolio composition to ensure there is no overweight in equities investment.

It is quite apparent that the Nigerian capital market may be heading for an imminent market correction of sorts. Whether the correction will take the form of bear run for a prolonged period or a fast and furious crash is still subject to debate among market analysts. What is not being debated is that share prices in the Nigerian market are generally overvalued and cannot be justified when subjected to any form of analytical rigour. Concerns also continue to abound that the overstatement of its financial accounts by Cadbury Nigeria Plc may not be an isolated case, and that there could be other major blue chip companies buried in concrete. Should information sip into the market that other companies have been trading on false information the market is bound to take a massive hit.

The consequences of a financial market melt down and its systemic consequences especially in the banking sector need not be repeated on this page. What we have today is a stock market bubble that has been kept afloat under the wrong assumptions. Regulators would need to step promptly with all sense of responsibility to ensure it does not happen. The market must be protected from ignorance, market manipulation and pervasive irrational exuberance which have taken hold of investors. The Nigerian market remains an exotic one and unfortunately does not have the circuit breakers that have been introduced in more mature markets to stem a free fall. As Mr. Rewane Bismark, CEO of Financial Derivatives Company, during a presentation on the state of the Nigerian Economy at the Lagos Business School three months ago warned: “Don’t be long and wrong.”

….Speaking of Stock Price Manipulation

Please could some one explain why it’s taken this long to lift the technical suspension placed on Transnational Corporation of Nigeria Plc’s (Transcorp) share price? Trading was first suspended on the company’s stock at N9.71 per share last December during its initial public offer. Three months later it was lifted, but was suspended for the second time without prior notice to traders after four days of trading saw its share price plummet to N8.34. Its stock price took a hit at the time because investors who had bought Transcorp’s share at N1.00 per share during the private placement ignored the holding period imposed on them and started to dump their shares.
For them the temptation was too great to ignore. Preparatory to the IPO their stocks had been split into two, thus doubling their holdings in the company. This along with a huge capital gain of N8.71 per share made many of them instant multimillionaires and billionaires, which they just had to translate into raw cash. In any case, suspension was once again lifted in April, but once more Transcorp’s stock price went into another free fall to below N8.00 per share. By this time the Nigerian Stock Exchange had had enough and placed another suspension on the company’s shares to stop it from falling below the offer price of N7.50 per share.

The Stock Exchange went a step further. It reversed all the trading that had taken place on the company’s shares by reverting to the pre-IPO price of N9.71 per share. The excuse given by the Exchange was that collation of results had not been concluded by the Issuing Houses to the offer and as such suspension should not have been lifted in the first instance. Worse still, the media at the time erroneously reported that Transcorp’s shares had made a huge percentage gain when its share price was moved back up to N9.71 per share.

It was a gain quite alright. However, it was not one that occurred due to market fundamentals. It took place because the stock price was forcefully and manually manipulated with the full knowledge and approval of the Director General of the NSE, Ndi Okereke-Onyuike. Incidentally, she is also a shareholder and chairman of Transcorp. Moreover, the reversal by the NSE contravened its own rules which do not permit more than a 5 percentage movement on any share price in a single day of trading.
Meanwhile, no word has been heard from the Stock Exchange as to if investors who had bought the shares when the suspension was lifted twice have got a refund of their money given that their investment in the stock was nullified ignominiously. Alternatively, neither have they been informed if they shall be entitled to their shares and certificates, if and when trading is ever lifted.

The technical suspension on Transcorp’s share is indeed mind boggling to say the least. Never in the history of the Nigerian capital market has a stock price been so brazenly manipulated. It is even uncertain if technical suspensions were kept this long on banking stocks two years ago during the period of banking consolidation when the Central Bank took its precious time verifying the authenticity of investors buying up the stocks. The toothless bulldog that is the Securities and Exchange Commission should awake from its slumber and look into this mysterious suspension imposed on Transcorp’s shares. It also needs to protect investor who invested in its stock when suspension was lifted twice this year. There is only so much Transcorp and NSE can do to keep a circumspect stock afloat.

Jul 12, 2007, 03:28 AM
I am not a business major, and its hard to predict these things. In addition, I do not have any money in the Naija stock market. Having said all that though, from my rudimentary understanding, does the stock price not reflect the underlying earning potentials of the company in question? No matter how well all those companies have done, Do you think they have even started scraping the surface? Let's take banking for instance - do you know the number of people who are still unbanked in Nigeria? Millions and millions. If u were talking about the American market, which is very mature, I would say ehen, yes, it is likely. The amazing run this summer, it makes me nervous, I dunno if it is sustainable. However, if government repairs roads, takes care of electricity, I tell you , u have not seen nothing in terms of returns on the stock market in Nigeria. Nothing at all.
Will it crash short term? Perhaps. But long term, if reforms continue, and more and more people are able to enter the middle class, I think the sky is the limit.

I may be wrong o. Just my thoughts.

Jul 12, 2007, 10:25 AM
Anon: This is what Easimoni has to say about the above post on another forum:

Here is my pet peeve again; people using stats in a misleading way. Stocks don't have a yield of 3%. stock yields are dividends + capital gains. As long as a bank (or any other stock) continues to grow it's earnings at 50+% p.a., it'll remain the most attractive investment vehicle in Naija. That a correction is coming is not news. You can see the market slowing down already. The rash of mega offers (each one larger than the last one) may precipitate a slight correction but I don't see anything else that could cause a crash.

Now considering the above post, what do you think about this? We all know that things are not exactly kosher in Nigeria, but as always money keeps exchanging hands.

I don't foresee a crash, only a price correction which should even out the over-priced stocks that current abound in the market.

Of Local Banks And Their Phoney World-Class Status

Daily Champion (Lagos)
8 July 2007
Posted to the web 9 July 2007

By Atyi Babs Opaluwah

Feeling heavily under an attack of exaggerated success and self-importance, Central Bank of Nigeria Governor, Chukwuma Soludo, declared recently that with over 3, 866 branches, a total asset base of N6.5 trillion, a definitive prospect of seven banks hitting shareholders' fund in excess of $1 billion, and over 10 of the banks attaining market capitalisation of over $2 billion by the end of the year, Nigeria's 25 mega banks have achieved world-class status in less than three years.

He went further to add that "the CBN is poised to sustain and strengthen the new banking system, as it remains a key driver in the nation's effort at becoming one of the 20 largest economies in the world by 2020". This assertion and many others in like manner have become esoteric swansongs on the lips of our modern day Reformers who would never miss any opportunity to regale us with how their advent on our shores has secured our deposits in the banks, multiplied our investments, increased our access to funds and loans, and have further solidified our collective symbol of purchasing power (naira).

Regrettably, the reality on ground in Nigeria does not exactly tally with the above sanctimonious pontifications. The real life experiences that exude from any interface with Nigeria's post consolidation banks is to say the least, less than laudatory and still way below the mark of acceptable global banking standards. It is appalling, indeed lamentably appalling that three years after the consolidation gong was sounded in the Nigerian banking sector and with a preponderance of branches, endless queues and needless suffocation in the banking halls are still common sights in Nigeria's major banks. A recent experience of a crowd that far exceeded the capacity of the hall of one of Nigeria's top banks and the attendant risk of losing consciousness in the milieu, confirmed to me in the very clearest terms, the possibility of an early return to the culture of bringing sleeping mats to the banking halls for transactions.

The usual facile mantras readily mouthed by bank officials are "our systems are down", "there is network failure", "the ATMs are faulty", or worst still, "our UPS is down as a result of prolonged power failure". In an age where technology-enhanced bank halls across the world have become synonymous with serenity and swiftness coupled with highly effective automated teller machines facilitating the creation of a cashless society, Nigeria's mega banks still wallow in the cesspit of inexplicable network failure which automatically leads to congested bank halls and decrepit and docile ATMs. In most banks where insignias of ATM 24/7 are boldly inscribed, the machines have become defective monuments, swallowing cards without vomiting cash while at the same time deducting the amount requested. One of Nigeria's big banks has an intimidating register of trapped cards written in three voluminous notebooks all in a single branch! A top-flight banker with one of Nigeria's big banks recently confided in me that Nigerian banks are yet to fully come to terms with the requisite sophistication for efficient ATM services and as a result, he personally avoids the use of ATM while in the country.

As far as Nigerian banks are concerned, world-class status is all about conjuring facts and figures, cooking audited reports, and covering non-performing loans to hoodwink investors and the gullible public all in a visceral bid to shore up their depositors' and shareholding profiles. These banks are blessed with smart and pushy CEOs who see nothing wrong in active but secret involvement in unethical and sharp practices that run contrary to the key provisions of BOFIA 1991 (Banks and other financial institutions Act). Acts such as concealment (for a fee) of certain deposits that are way beyond the approved limits, money laundering, money transfer scams, injection of bubble capital, and using proxy companies to mop-up shares on the floor of the exchange are seen as smart moves within Nigerian banking circles. The recent indictment and sanction imposed on one of Nigeria's three leading banks for money laundering offences in United Kingdom and the Spring Bank scandal are all cases in point.

It is now an open secret that for any bank to land choice public sector deposits or sweet forex deals, the bank must romance the ruling party through channeling of depositors' funds to finance electioneering activities at both presidential and gubernatorial levels. Closely related to this is the prevalence of poor corporate governance, a situation that has birthed the current reign of official sleaze, sharp practices, nepotism, willy-nilly connivance with Banking Supervision Officials of CBN, immoral marketing, victimization and overzealous contempt for hedge fund operators, family domination, hereditary leadership, and sponsorship of spurious award ceremonies to honour selves as bank of the year, banker of the year or bank CEO of the year.

A colleague of mine, an international broadcast journalist from France, had a 'world-class' banking experience that left a sour taste in the mouth last month. An amount as tidy as -20, 000 was sent to her domiciliary account and for her to withdraw the money in naira, Nigeria's Banker's of the year told her that the money would have to be converted to dollars first and later to naira with the actual amount depreciating in value at every conversion. When she opted to collect her money in its original currency, Euro, she was told plainly to go and come back some other time as the amount requested far exceeded what was available in the bank's branch at a highbrow area of Ikoyi, and also that Lagos wasn't safe enough to convey such an amount from another branch in broad daylight. World-class banking la Nigeria!

Equally laughable is the current foreign exchange regimen, put in place by our world-class banking conscious apex bank, the Central Bank of Nigeria, and faithfully implemented by our mega banks. This regimen achieves no practical, useful purpose other than swelling the clientele of roadside forex hawkers as prospective buyers of forex in Nigeria must present documentations such as international passports and return flight tickets to be eligible to buy either personal or business travel allowance. Methinks that our modern day Prophets of Bank reforms should know that it makes more sense, globally speaking, to have a list of ineligible transactions that will inadvertently open up people's minds to possibilities rather than having a list of eligible transactions as contained in the foreign exchange manual being brandished about with careless flourish.

It is saddening to note that a sizeable part of the banking system in Nigeria has become so rotten that morally upright individuals now express serious reservations about allowing their wards to pick up careers in banking. Recruitment and advancement within the Nigerian banking system are now determined and predicated on one's capacity to attract and if possible lure to bed, high net-worth clients that can enable the bank to beat the competition and become the bank with the most intimidating depositors' profile. In the name of post consolidation dynamics, banking halls have become red light offices where politicians, senators and ministers go to, not for financial transactions, but to pick from the bevy of skimpily-dressed female bankers and satisfy their daylight concupiscence in exchange for fat deposits. Female Transactions Officers and Branch Heads have been promoted over and above their senior male colleagues as a result of their uncanny ability to fully maximise their 'natural endowments' to the benefit of their banks, leaving their male colleagues with no better option than to scamper into towns, posing as Executive Gigolos in search of fat deposits!

It is prudential at this point to state that world-class bank status has nothing to do with rushing to South African PR firms in search of fantastic logos and adverts and paying DSTV for unofficial insertions of same on CNN. It has nothing to do with sponsoring ubiquitous competitions, acquiring state-of-the-art cars, attending every presidential dinner, and conceptualisation of a hodgepodge of obsolete promotions. It sure has more to do with an efficient and effective banking system, built on the solid rock of innovative technology, proactive client service orientation and disposition, people-centred Corporate Social Responsibilities, strict adherence to enabling laws, strong and untainted balance sheet, intimidating war chest of depositors' and shareholders' funds built by reaching out to millions of the "unbanked" public, and a strong passion for global excellence as well as good corporate governance. The ABSA bank of South Africa is a shining example of what an African bank with a world-class spirit can achieve after a carefully scripted and thoroughly supervised consolidation exercise where false declaration, cover-up, bribery, and abuse of process were not brought to table.

Central Bank of Nigeria, on its part should wake up from its self-imposed reverie of successful consolidation and commence a drastic overhaul of its Banking Supervision Department, which has been greatly compromised, and polluted by the Nigerian factor. This should be done with a view to strengthening the financial engineering instruments of the apex body as well as flushing out the agents of massive irregularities and sharp professional malpractices that currently abound in their numbers at CBN. The apex body should as a matter of urgency, shift from its current rule-based approach to a risk-based supervision, which will remove the restrictions often placed on accessibility to forex in the country. These and many others should be done accurately and urgently too, that our banking sector may be greater!

-Opaluwah wrote in from Broadcasting House, Ikoyi - Lagos.


Jul 29, 2007, 08:32 PM
It is common knowledge there are a lot of imperfections still in our financial system, when compared to advanced mature economies. However, for students of Nigeria financial markets, what we are seeing today is a little bit unprecedented. Not in recent history have we seen the kind of returns emerging from the Nigeria stockmarket. A lot of people are cashing in, and some are highly exposed having taken debt finance to shore up their stake in the market.

That this trend is sustainable is an assurance that no one can provide at this time. What is more likely is that a crash is not imminent in the short term - (one year and less).

If the new govt and the key actors continue with the present policies then there is greater chance of longer term sustainability. In the short term, enjoy the ride and have an exit plan when things turn awry.

Jul 30, 2007, 07:54 AM
Well...i was just wondering what exactly would you guys consider a crash in the context of the NSE.
In any stock market, markets will go up and down depending on so many factors. As i write, world markets have dropped significantly wiping all the gains made in London this year, big sellof in asia and usa too.
But is that a crash? in no way...this selloff is prompted by investors who are scared of bad credit.

Back to NSE, what will u consider a crash? is it if FBN falls to 10 naira. But that wont happen now with the kind of profits that the big boys are making. Even the thought of FBN at 10 naira screams BUY BUY BUY.

There will be periods of correction such as the insurance sector is experiencing presently but the strength of a company, investor sentiment, emerging market forces will eventually drive stock prices higher over time.

The periods of correction will create huge discounts and attractive buy prices. Look at Nascon at 17.5 (prompted by short term selling), mutual benefits at 3.7 to mention a few

A stock market crash will precede a severe economic depression and not vice versa