The capital markets have done remarkably well this year, supported by economic growth and international investment, and underpinned by recent reforms that have increased stability and security.
The Nigerian Stock Exchange (NSE) achieved 25.5% value growth in the first three quarters of 2012. The bourse’s success has been attributed to rising interest from both individual and institutional investors, and reports suggest that strong growth this year indicates the NSE is putting the damaging crash of 2008 behind it, benefitting from reforms brought in since then to strengthen regulatory infrastructure.
On September 30, Aliko Dangote, the president of the NSE, noted that foreign investors continue to dominate the exchange and account for 70% of ownership. Dangote said that the high level of foreign participation indicates confidence in the Nigerian market, but added that the increase in the proportion of stocks owned by Nigerians from 20% to 30% was also a positive sign, as domestic investors are now willing to return to the market.
Certainly, there are good reasons to be confident about Nigeria’s future. Economic growth has averaged 7% over the past decade, and the IMF expects a rate of 7.1% this year. Africa’s most-populous country is a huge market, and it has achieved greater economic and political stability in recent years, though serious challenges and the threat of violence in some regions remain.
Olu Abayomi Sanya, the managing director and CEO of Goldbanc Management Associates, a major market player, said that “market makers” also played an important role in keeping the exchange on a steady course. In April, the Securities & Exchange Commission (SEC), the government agency that regulates and promotes Nigerian capital markets, mandated 10 investment bodies as primary market makers (PMM), which gives investors greater freedom to trade with the aim of maintaining liquidity and volumes. PMMs can manage portfolio and trade risks by mapping open positions, borrowing and lending stocks, and through collateralised obligations. They are also the only investors permitted to engage in naked short-selling.
From other traders’ point of view, PMMs are useful as they maintain an inventory of shares that they can immediately sell to buyers, while buying shares from sellers to add to their own portfolio. In some cases, PMMs can just match up a seller with a buyer. This maintains liquidity and permits large blocks of shares to be traded. The system tends to increase investor confidence, as there is a likelihood of an immediate buyer being found should the holder of shares wish to exit quickly.
Lack of liquidity was a contributing factor to the 2008 crash, which started as a correction after several years of rapid growth – the All Share Index (ASI) rose 225% in the four years prior to 2008 – but was exacerbated by the effects of “margin lending”. This phenomenon saw banks lend to brokers who then purchased shares in the same banks, which were doubly hit by the sell-off as brokerages defaulted on their loans. The ASI lost two-thirds of its value as a result. The years since have not been easy, with investor aversion to Nigerian risk increased by the global financial crisis and economic slowdown, though the 2010 listing of Dangote Cement, which then accounted for one-quarter of market capitalisation, provided a lift.
While the 2008-11 period was indeed difficult, it brought real gains in capital market regulation, with the SEC, NSE and the central bank all spurred to action by the crisis. A raft of measures brought in to increase market stability helped restore a degree of confidence in the security and stability of the NSE.
On the buyers’ side, in September, the SEC launched the Investor Protection Fund (IPF), which will help compensate investors in the event of losses incurred from bankruptcy, insolvency, negligence or wrongdoing by listed firms. The SEC has made it clear that the N625m ($3.89m) fund is not there to bail out rogue investors, or those who have made bad decisions, but to provide some financial recompense if the firms in which they have invested encounter difficulties.
The NSE has grown impressively in 2012, based on sound economic fundamentals and recent reforms although the ASI is still below its pre-crisis peak. Now that the foundations have been laid, the authorities are looking to other medium- to long-term objectives, including increased liquidity and participation of domestic individual investors; encouraging more small and medium-sized enterprises to list; and developing a derivatives market. Developing these areas will take time, but progress made in reforming the exchange, and rising foreign and domestic interest, bode well.
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