Nigeria's capital markets poised for expansion

Following two years of rapid, double-digit gains in its equity market and strong foreign investor appetite in fixed income, Nigeria’s capital markets entered 2014 with the wind at their back, thanks in part to the announcement of a favourable reweighting of the MSCI Frontier Index in 2013.

The exchange was buffeted by both global and local factors in 2014, however, including the tapering of the US Federal Reserve’s quantitative easing programme, the sharp decline in oil prices in the second half of the year and concerns related to the presidential elections in early 2015.

As the portfolio of investable instruments continues to grow with the launch of new platforms, Nigerian authorities are seeking to further deepen Africa’s third-largest financial markets. Indeed, new products, along with more liquidity, will be needed if the Nigerian Stock Exchange (NSE) is to reach its goal of a $1trn capitalisation by 2016 – roughly equal to the Johannesburg Stock Exchange in 2013 and 12 times larger than the Nigerian bourse in June 2014.

The enactment of new securities lending and borrowing legislation in 2015 could boost turnover, as the pace of new equity offerings rebounds from a post-2009 slowdown. While sovereign fixed-income issuance is slowing, as the federal government gradually rebalances borrowing towards offshore sources, demand remains strong and should respond positively to the numerous state-level bond issues enacted in 2014. Despite some cyclical and short-term macroeconomic risks, Nigeria offers good opportunities for investors with an appetite for risk, and the market is expected to continue to benefit from a post-election rally that began in early April 2015 following the victory of Muhammadu Buhari.

Volatile Market Activity

Following blockbuster growth in recent years, the forecasts for Nigerian equities in 2014 were lower than forecast due to expected profit-taking by foreign investors, yet the extent of volatility was broadly underestimated.

The first quarter of 2014 brought several shocks that compounded the external impact of quantitative easing tapering in the US, including a protracted dismissal of Lamido Sanusi, former Central Bank of Nigeria (CBN) governor, in February 2014. Foreign outflows of roughly $5bn from the equities and fixed-income markets followed over the three subsequent months. By May 2014 the NSE’s benchmark All-Share Index (ASI) had fallen 6.9% year-to-date. Additionally, new banking regulations that raised cash reserve requirements, and therefore reduced the outlook for profitability, have weighed on banking stocks.

“The market was hit in the first quarter of 2014 by the trio of tapering of easy monetary policy in the US, the surprise suspension of the CBN governor and an increase in cash reserve requirements of commercial banks,” Sulaiman Adedokun, managing director of wealth management at Meristem, told OBG.

Lead Up

The continent’s third-largest equity market, after Johannesburg and Cairo, with a capitalisation of N12.14trn ($74.05bn) as of early April 2015, the NSE stood out as Africa’s second-best performer in both 2012 (after Uganda) and 2013 (after Ghana), with year-on-year (y-o-y) capitalisation gains of 35.5% and 47.2%, respectively. This marks a sharp rebound from the post-2008 downturn, with NSE capitalisation surpassing its 2008 peak of N12.62trn ($76.98bn) for the first time in late 2013.

Following a four-year surge that saw 74.7% y-o-y growth at its peak in 2007, the market fell by 45.7% in 2008, due to a combination of exogenous pressures and a domestic banking crisis, followed by another 33.7% drop in 2009. While outflows of foreign portfolio investment proved to be the short-term trigger for the downturn in equities, a homegrown crisis caused by excessive margin lending to brokers snowballed into a domestic sell-off and banking crisis linked to non-performing margin loans. Although the market rallied by 18.9% y-o-y in 2010 following stabilisation of the banking sector, this growth proved short-lived, with the NSE achieving negative returns of 16.3% in 2011 as the banks completed writedowns on their soured debt.

“The year 2013 was the first year where confidence fully recovered to pre-2008 levels, when people realised the bad years were over for the banks,” Layi Olaleru, head of equity trading at Cordros Capital, told OBG. “It was also the first year that the International-Financial-Reporting-Standards-compliant reports of listed companies where released into the market, following the 2012 implementation deadline.”

This trend reversed in 2014, however, with capitalisation of the equities market falling by 13.15% over the year, from N13.23trn ($80.70bn) at the end of 2013 to N11.48trn ($70.03bn) at the end of 2014.

Market Weight

There is still ample room for growth in the long term: the market’s weight within the broader economy remains low by frontier market standards. The NSE’s capitalisation declined from 24.1% of GDP in 2008 to 19.8% in 2009, before recovering to 25.9% in 2010. The year 2011 saw capitalisation fall back to 16.7% and then rebound to 22.12% in 2012 and 31.2% in 2013, according to the exchange’s figures. Following the rebasing of Nigeria’s GDP, which triggered a 89% rise in its value to $509.9bn, the NSE’s weight fell back to 16.49% of (rebased) GDP, lower than South Africa’s 159.3%, Morocco’s 54.8%, Kenya’s 36.3% or Egypt’s 22.1% in 2013, according to the World Bank.

Share Structure

The NSE boasted 197 listed companies as of the end of 2014. The market is only loosely representative of the structure of the broader economy, with trading and capitalisation still highly concentrated amongst roughly 35-40 stocks.

The top five stocks by value account for over half of the exchange’s capitalisation, according to a Wells Fargo report from April 2014, with Dangote Cement alone comprising approximately 28% of the total market in January 2014, despite its effective free float of around 5%, according to advisory firm Financial Derivatives Company, while the 10 bank members of the Banking Index account for another 15% combined.

In an economy where oil and gas accounts for 14.4% of (rebased) GDP and around 95% of exports, the sector makes up only 5.9% of the equity market following the April 2014 listing of upstream operator Seplat, which more than doubled the industry’s weight from the previous 2.6%. However, some new issues since the 2008 downturn have somewhat rebalanced the market’s structure – in particular, Dangote Cement’s listing in 2010.

“Although the market is still not representative of the Nigerian economy’s breadth, it is far more diversified than in the run-up to 2008, when only banks were dominant,” Kyari Bukar, managing director of the Central Securities Clearing System (CSCS), told OBG.

Nonetheless, the pipeline of initial public offerings (IPOs) has tightened considerably since the downturn, although 2015 could mark a turning point (see analysis). While the ASI tracks all listed stocks, a better gage of market performance is the NSE30, a capitalisation-weighted index tracking the 30 largest stocks. The market also hosts five sectoral indices (Banking, Consumer Goods, Insurance, Oil and Gas, and the recently launched Industrial), as well as the NSE50 and the NSE Lotus Islamic Index (NSE-LII), a sharia-compliant index that tracks 15 equities and was launched in August 2012.

Market Performance

 Returns in 2014 were down almost across the board, with only the oil and gas and services sectors seeing growth, of 68.08% and 20.98%, respectively, over the course of the year, according to data from the NSE.

The agriculture sector was the hardest hit, losing 35.51% in 2014, followed by conglomerates (-34.89%), construction and real estate (-24.50%), health care (-22.15%), financial services (-19.34%), consumer goods (-17.18%), industrial goods (-10.22%), natural resources (-6.73%) and ICT (-0.91%).

In terms of market capitalisation, mid-cap shares (those with a capitalisation of $150m-1bn) did the worst in 2014, losing 25.58%, followed by large caps (those over $1bn) with a loss of 11.42%. Small-cap stocks (those under $150m) turned in a stronger performance, gaining 8.23% over the year.

Despite the more difficult market conditions, both total traded value and total traded volume rose in 2014, by 24.37% to $1.7bn and 7.99% to 28.92bn shares as of the third quarter of the year. Value traded remains well below the heights of the pre-2008 bull run, with total turnover in shares traded peaking at N2.38trn ($14.51bn) in value in 2008. Average daily trading was up by 23.92% to $29.19m as of the third quarter of 2014, while average daily volume increased by 9.35% to 472.59m shares.

Foreign Investors

Although domestic demand has recovered somewhat of late, following years of weaker sentiment on the part of local retail investors, foreign investors remain the driving force behind the NSE’s turnover. Indeed, Nigeria has received the largest amount of portfolio inflows amongst sub-Saharan African countries since 2012, according to figures from Deutsche Bank. Foreign portfolio investors accounted for 66.8% of transactions by value in 2011 and 61.4% in 2012, though their share of turnover dropped to 50.9% in 2013 before rising again to 58.5% in January-November 2014, according to the NSE. The gradual return of domestic demand has been driven in part by the growing exposure of pension funds to the Nigerian equity markets and recovering retail appetite (see analysis).

Foreign investors, particularly large emerging market investment managers like the Ashmore Group and T. Rowe Price, however, have clustered in the 30-35 largest stocks, focusing on firms leveraging domestic consumption, including breweries, fast-moving consumer goods (FMCG) and other industrial firms.

The launch of the Van Eck Market Vector Nigeria exchange-traded fund (ETF) in 2011 and the Global X Nigeria Index ETF in 2013 brought Nigeria-focused index trackers to offshore investors, while 12 Africa-focused ETFs offer some exposure (usually minor, below 10%) to Nigeria. The reweighting of the MSCI Frontier Markets Index in May 2014, which saw Qatar and the UAE reclassified from frontier markets to emerging markets, increased Nigeria’s weight from 13.8% to its current 17.45%, second only to Kuwait.

Local investment bankers see the portfolio investment figures to be exaggerating actual inflows, given the use of foreign brokerage accounts by some domestic investors, as well as inadequate accounting by banks. “We believe that if the destination of portfolio investments into Nigeria is properly captured, you will find that these flows in the last three years have been directed more towards the fixed-income market rather than equities,” Akinsowon Dawodu, chief operating officer and public sector head of Citibank Nigeria, told OBG.

Although the exchange counts some 5m investment accounts, dual ownership means the actual number of investors is closer to 2.5m, according to brokerages like Meristem. “Given widespread ownership of multiple trading accounts, retail investors are getting more active as they now fairly compete with institutional investors, who accounted for around 49.18% of domestic investment in the first quarter of 2014,” Adedokun told OBG.

Despite the rebound in retail risk appetite, high benchmark interest rates have preserved the appeal of fixed-income securities over higher-risk equities. “The high interest rates at present do not attract many domestic investors into the equity market,” Bukar told OBG. “If interest rates start to drop, fixed income becomes less attractive and we should see growth in liquidity on the stock market.”

Infrastructure Upgrade

The exchange has sought to attract more liquidity through investments in its infrastructure and harmonisation of its standards to best practice norms. A central plank of the new management’s strategy since taking office in 2011, the upgrade from NASDAQ OMX’s Horizon platform to the faster X-Stream, able to handle 1m messages per second at sub-80-microsecond speeds, was completed in September 2013.

“We estimate the migration to the X-Stream platform has made trading around three times faster,” Cordros’ Olaleru told OBG. “After a lag we saw volumes roughly double at the turn of 2014.”

Cordros estimates the upgrade required cumulative investments of around N50m ($305,000) per brokerage house, with the top 20 all meeting these requirements. Those unable to upgrade must physically trade at the exchange.

While the new trading platform provides higher bandwidth and capacity, the option of offering collocation services to high-frequency traders is only planned for the medium term. In addition, the exchange moved to relax price swing restrictions in 2013, from suspending stocks witnessing price changes of 5% within one trading day to 10%, to allow for larger movements in key stocks.

Over the medium term, authorities plan for even more significant reforms. While awaiting a regulatory framework from the Securities & Exchange Commission (SEC), in early 2014 the NSE issued a tender for advisors on demutualisation, with the aim of eventually publicly listing over 51% of its shares. This is expected to improve efficiency in the exchange’s management, although sticky details (like determining each of the 350 members’ relative shares) will need to be resolved beforehand – the exchange counts 255 active dealing members of the 350 individual and institutional ones. As the market rebounded in recent years, the NSE has swung from an operating deficit of $42,000 in 2010 to a surplus of $3m in 2012, according to annual reports.

Reforms are also planned in the settlement process, with the CSCS expected to move from T+3 to T+2 to improve liquidity, in parallel to the ongoing shift to dematerialised shares (all new share issues are dematerialised), which allow for fractional share trading. This follows in the footsteps of the CBN move to a T+2 cheque truncation and securities settlement system, which was implemented through the Nigeria Inter-Bank Settlement System in 2014.

Fixed Income

While such upgrades are needed to support greater liquidity in the equity market, Nigeria’s star in the global frontier markets investment community has risen even faster in fixed income, where it ranks as sub-Saharan Africa’s second-most-liquid debt market, after South Africa, according to Bloomberg. This is a result of both of the government’s efforts to develop the local-currency yield curve, since 2007 in particular, and the inclusion of Federal Government of Nigeria (FGN) bonds in major emerging market indices since 2012.

The local-currency bond market’s capitalisation rose sharply from N2.3trn ($14.03bn) in 2009 to N5.82trn ($35.5bn) in 2012 and N5.85trn ($35.69bn) in 2013 before falling 12.06% to N5.38trn ($32.82bn) in 2014, according to the NSE. The market remains dominated by FGN bonds, with a combined capitalisation of N4.70trn ($28.67bn) in 2014, while state and corporate bonds accounted for another N669.63bn ($4.08bn). These figures exclude the N2.5trn ($15.25bn) in Treasury bills and N4.35trn ($26.54bn) in Asset Management Corporation of Nigeria bonds, which are not traded and are primarily held by banks that sold off bad debt in 2010-12.

The number of listed bonds fell from 55 in 2013 to 52 in 2014 as the federal government retired local-currency bonds in an effort to gradually rebalance borrowing towards offshore sources (see Economychapter). The value of new issuance rose from N951.6bn ($5.8bn) in 2013 to N1.09trn ($6.65bn) in 2014. Of the 2014 total, FGN issues accounted for 30 bonds worth a combined N897.11bn ($5.47bn), according to figures from the SEC.

Solid growth in fixed-income issuance was partly generated by falling yields, from 2012 in particular, as foreign investors expanded their market share. In 2011 the CBN lifted the one-year minimum holding period for foreign investors in FGN bonds, which had been imposed in a bid to stabilise the market in the wake of the 2008 global downturn. Although this was a necessary precondition, foreign appetite was particularly stimulated by the inclusion of three FGN bonds in JPM organ Chase’s Emerging Markets Government Bond Index in October 2012 – the second sub-Saharan market included after South Africa – as well as the inclusion of 13 bonds in Barclays’ Emerging Markets Local Currency Index in March 2013.

Sovereign credit rating upgrades to “BB-” by Fitch and Standard & Poor’s in 2011, and Moody’s maiden rating of “Ba3” in November 2012, also bolstered investor appetite. By December 2012 yields on benchmark 10-year government bonds dropped some 4.5 percentage points to around the 11.9% mark. In broader terms, average yields fell from 14.45% in 2012 to 12.17% in 2013, according to Meristem. While the announcement of the US Federal Reserve’s tapering of quantitative easing in May 2013 caused yields to rebound to the 12.5-13% range by late 2013, this remained well below historical averages and ensured high returns for investors.

In the 18 months to April 2014 the Nigerian bond index delivered 17% returns in dollar terms, compared to an 18% fall in South Africa’s, according to research by Wells Fargo from April 2014. While the naira recorded modest depreciation in 2013, the FGN bond market delivered returns of 8% in naira terms and 5.5% in dollar terms; yet, interest has tended to focus on the shorter end of the market. “Significant participation in the fixed-income market is at the short end of the curve, i.e., under three-year tenors,” Eno Atoyebi, portfolio manager at SIM Capital Alliance, told OBG. “Fund managers do not want to be locked in too long given expectations of rising interest rates.”

Despite greater appetite from both local and foreign investors for FGN bonds, the government is gradually decreasing its issuance, with N265bn ($1.62bn) issued in first-quarter 2014, compared to N355bn ($2.17bn) in bonds coming to maturity in the same period and issuance of N380.5bn ($2.32bn) one year earlier, according to the Debt Management Office (DMO). Indeed, the 2014 budget increased bond-servicing allocations by 20.27% y-o-y to N712bn ($4.34bn), far greater than the 4.62% annual increases from 2011 to 2013, and driven by the retirement of more maturing bonds, according to Meristem.

Non-Sovereigns

While far smaller in value, the market has witnessed a growing number of issues by state governments and supranationals, even if the corporate market remains constrained by the need for two credit ratings. The first supranational bond issue came in February 2013, when the International Finance Corporation (IFC) issued a N12bn ($73.2m), five-year Naija bond at 10.2%. Given the 2.5 times oversubscription of the maiden issue, the IFC announced a $1bn medium-term local-currency note programme. Meanwhile the African Development Bank announced its own $1.5bn issuance pipeline.

The corporate issuance segment remains limited to blue-chip corporates that hold the double rating and banks raising Tier-2 capital, with outstanding corporate bond capitalisation of N144.96bn ($884.26m) as of the end of 2014. “Commercial banks will only ever issue Tier-2 subordinated debt, since they can raise much cheaper deposits than the cost of senior debt,” Egie Akpata, head of capital markets at UBA Capital, told OBG. Merchant banks like FSDH, statutorily barred from collecting deposits, came to market in 2013 for unsubordinated debt.

State Issuance

The state government market has proven increasingly dynamic since the first such bond issue in 2009, with N15bn ($91.5m) issued in 2014, down from N126bn ($768.6m) in 2013. Some 20 bond issues by 15 states have raised a combined N547.4bn ($3.34bn) in the five years to 2015, with Lagos the most frequent issuer.

Guaranteed by the federal government but requiring approval from the DMO, state bonds are mostly bought by local pension funds and banks. “State bond issues have been the flavour of the local-currency market over the past year, with up to 10 new issues planned for 2014,” Samuel Sule, associate director of capital markets Africa at Standard Chartered Securities (Nigeria), told OBG.

Despite the plans, in 2014 the market added a single state bond, a N15bn ($91.5m) issue from Bauchi State. This followed on an active 2013, in which the market welcomed N5bn ($30.5m) issues from Ekiti and Nasarawa States, N12bn ($73.2m) from Bauchi State, fully underwritten by a single issuing house for the first time, and a landmark N87.5bn ($533.75m) from Lagos State in November 2013 – the largest subnational bond on record. Coupon rates have varied from 13.5% for Lagos to 15.5% for Bauchi. Osun State broke new ground in October 2013 with the country’s first sharia-compliant bond ( sukuk) issue, with an ijara leasing structure, which raised N10bn ($61m) at the same 14.5% coupon offered on a previous conventional N30bn ($183m) bond.

While the SEC enacted new rules allowing for sukuk issues in 2013, revisions by the Pension Commission are still pending, meaning that pension funds are unable to buy such issues for the time being. States including Oyo, Ogun, Kano and Kaduna had plans to raise new bonds in the second half of 2014, although these ultimately failed to materialise.

Eurobonds

 Nigerian demand for offshore sources of funding has also accelerated. Sovereign eurobond issues in 2011 and 2013 established a track record for Nigerian issuers, but banks have increasingly come to market to meet demand for dollar liquidity in the power and hydrocarbons sectors. “Banks need dollars and they have three main ways to get them in size: first from development finance institutions, then by syndicated loans and finally from the eurobond market,” Sule told OBG. “We are seeing banks extend their debt tenor from one to three years for syndicated loans to around five years for eurobonds.”

Following the example of Guarantee Trust Bank’s $500m issue in 2011, Access Bank, Fidelity Bank and First Bank issued $350m, $300m and $300m, respectively, in five-year bonds in 2013 (four-year for Fidelity), while Zenith Bank saw its April 2014 issue of $500m in five-year debt achieve two-fold oversub-scription. “The strong response from the UK and US for Zenith Bank’s eurobond issue, which accounted for 45% and 40% of the issue, respectively, shows there is still significant appetite from Nigeria’s traditional investor base,” Sule told OBG.

Other banks subsequently followed suit, including Diamond Bank in May 2014 ($200m), Access Bank in June ($400m) and FirstBank in July ($450m). Coupon rates have varied from a narrow 6.25% for Zenith Bank to 8.25% for First Bank. Nigeria’s government also gained approval to raise up to $300m in a eurobond issue targeting its diaspora (see Economy chapter). The sharp devaluation of the naira in late 2014, however, is likely to put a damper on any further eurobond offerings in the near term.

Money Market

The market for Treasury bills ( Tbills) – issued in three-, six- and 12-month tranches at bi-monthly auctions – and other money market instruments has remained active. In 2012, N3.61trn ($22.02bn) worth of T-bills were issued, with this rising 1.1% to N3.65trn ($22.27bn) for 2013. In the first half of 2014 alone, the most recent period for which such statistics were available, N2.23trn ($13.6bn) of T-bills were issued. Of those, 17.9% consisted of three-month T-bills, 25.5% were for six months and the remaining 56.6% had maturities of 12 months.

The market in Nigeria for commercial paper (CP), or bankers’ acceptance notes, has remained virtually inactive since the CBN issued new rules in 2009 requiring CPs to be registered at the CSCS and held on banks’ balance sheets, while issuers must be rated. The curbs were enacted following widespread abuse by banks seeking to disguise deposits and minimise payments to the Deposit Insurance Corporation. The only issuer to return to market is Stanbic IBTC, which has issued N80bn ($488m) in 10 CP issues since November 2012, far lower than the 2008 peak of N300bn ($1.83bn). The CBN has expressed hope that the new over-the-counter, fixed-income and money market platform will revive the CP market.

Oversight & Reform

Both the NSE, as the frontline regulator, and the SEC are implementing reforms to enhance corporate governance of listed firms and boost liquidity on the exchange. The SEC has been starved of budget funding in recent years and has tightened regulatory oversight as a result. It also benefits from a 0.03% levy on all NSE trades, down from 0.06% in 2009. “The SEC has stepped up its controls and penalties over market participants because, starved of federal budget funds since 2013, it must generate revenue in other ways,” Olaleru told OBG.

Notwithstanding funding challenges, the NSE management is developing a corporate governance ranking of listed companies, which it piloted for 10 stocks in October 2013 and planned to roll out for all firms in the second half of 2014. While some 88% of listed firms were in compliance with year-end reporting requirements in 2013, according to the NSE, the exchange will require all firms to be rated according to the speed and efficiency of their disclosures. Eventually, the NSE hopes to create a premium board of firms with a market capitalisation of over $1bn, with highly liquid shares and a rating of over 70% on the new governance ranking. The exchange also introduced a new whistle-blower service in March 2014.

In parallel, the exchange has launched a comprehensive review of transaction costs, which – at 1.855% on average on the buy side and 2.1855% on the sell side, according to F&C Securities – remain much higher than on foreign platforms. “Nigeria has the world’s highest transaction costs,” Olaleru explained. “The average broker fees of 0.35% for institutionals and 1% for retail are not really the problem, but the SEC levy, the stamp duties and value-added tax are.” The CSCS switched from a 0.6% fee on transactions to a flat N4 ($0.02) fee per trade ticket in 2012.

Although the Ministry of Finance announced the suspension of the 0.075% stamp duty in 2012, it had not been implemented as of March 2015. “We are undertaking a transaction costs analysis covering both explicit costs and implicit ones, such as spreads, benchmarking our market against 11 others,” Oscar N Onyema, CEO of the NSE, told OBG.

Several other initiatives are expected to boost turnover on the exchange. Nigeria is an active member of the West Africa capital markets integration initiative, accounting for more than 60% of West African markets’ capitalisation. Having implemented sponsored access for qualified brokers to trade across the Nigerian, Sierra Leonean, Ghanaian and French West African exchanges in 2014, they are moving towards electronic interconnection. Given their sizeable market capitalisations, the Ghanaian and French West African bourses are of particular interest.

The NSE also expects to launch securities lending and borrowing, and therefore short-selling, in the near future. The SEC has already licensed 10 market makers each for bonds and equities (and 10 supplemental market makers) in 2012, as well as four securities lenders – UBA Capital, Stanbic IBTC, First Bank and Capital BanCorp.

“Securities lenders are still handling legal issues and negotiating the interest to be paid to securities owners,” Olaleru told OBG. Participants in the market will only be able to engage in covered shorting, meaning that they will need to maintain a collateral cover of 35% of a shorted stock’s value. Despite high requirements, this launch should allow brokers to provide two-way quotes for bid and ask.

Broker Review

The SEC is significantly raising capital requirements for brokers and other market participants in a bid to enhance the market’s efficiency and prompt consolidation. With 242 registered brokers, the market is very fragmented, though trading is dominated by the top tier of brokers: in 2013 the top-10 brokers accounted for 43.42% of volume and 60.26% of trading value, which increased to 67.2% and 74.74%, respectively, by April 2014, according to NSE figures. “While the top-three brokers have remained roughly the same for the last five years, there has been significant movement amongst the next seven,” Olaleru told OBG. Stanbic IBTC, Renaissance Capital and CSL remain the top three, while Cordros and BGL have also maintained their rankings.

The market has attracted growing foreign interest, with pan-African broker Securities Africa acquiring Skye Stockbrokers in 2013, and London-based Exotix opening an office in Lagos in June 2014. “It makes sense for foreign brokers to want to establish a local presence in Nigeria, since this cuts out the local middle man,” Olaleru said.

A handful of existing brokers including Meristem and Lead Securities have also launched online trading services, although no purely online broker has yet formed. With average broker fees of 0.35% for institutionals and 1% for retail investors; however, most brokers cannot break even from stock trading alone.

After over five years of anticipation, in December 2013 the SEC announced sharply higher capital requirements effective from January 2015. The requirements will be raised from N75m ($457,500) to N300m ($1.83m) for broker-dealers, while those for pure brokers will rise from N40m ($244,000) to N200m ($1.22m) and those for dealers from N30m ($183,000) to N100m ($610,000), though they will need to trade through broker-dealers. The regulator is also enacting higher requirements for issuing houses, from N150m ($915,000) to N200m ($1.22m); for underwriters, from N100m ($610,000) to N200m ($1.22m); as well as for registrars (N150m [$915,000]), trustees (N300m [$1.85m]), rating agencies (N150m [$915,000]) and fund managers (N150m [$915,000]).

In parallel the NSE set new standards for brokers’ equipment, governance, technology, processes and global competitiveness. “With the higher capital requirements from the SEC and higher technical standards from the NSE, we do expect a shake-out in the broker market in the coming years,” Onyema told OBG. “The market is overdue for consolidation.”

Diversification

The authorities’ focus is not merely on strengthening oversight but also on developing the market in order to reach their goal of a $1trn capitalisation by 2016. Efforts to attract new listings appeared to be yielding fruit in 2014 with six equity listings taking place (see analysis). The move to diversify product offerings, however, has been slow.

The 52 collective investment schemes registered by the second quarter of 2014, mostly open-ended unit trusts, had less than $1bn in assets under management, excluding the UACN Property Development Company (UPDC) real estate investment trust (REIT) launched in 2013, valued at N26bn ($158.6m). While the launch of more REITs beyond the Skye Shelter Fund and UPDC’s has been hindered by disagreement with the Federal Inland Revenue Service, which does notconsider them pass-through vehicles for tax purposes, the market has witnessed several passive index-tracking ETFs targeting retail investors since 2011. The first, Barclay’s Absa NewGold ETF, conducted a secondary listing on the NSE in December 2011, adding to its listing in South Africa and Botswana. However, given the subsequent downturn in global gold prices, its performance has been poor, with an 8.65% drop in value by April 2014.

A second ETF tracking the NSE30 index at 1% of prices – the open-ended Vetiva Griffin 30 Exchange Fund – listed in March 2014 and was 159% oversubscribed. Although it has only been thinly traded since, two more ETFs have subsequently been introduced, a sharia-compliant ETF by Lotus Capital tracking the NSE-LII index launched in August 2014 and an ETF from Stanbic IBTC tracking the NSE30 index.

As part of its five-year strategy from 2011, the NSE aims to introduce five new product types, including ETFs, REITs and derivatives. Originally planned for 2014, the launch of simple derivatives starting with futures and then options has been delayed pending the completion of a feasibility study.

One important first step will be for the NSE and the CSCS to establish a central counterparty clearing-house in 2015. While commercial banks offer hedging products booked offshore, an appropriate regulatory framework will need to be established in Nigeria to handle such instruments.

“While Nigerian companies with foreign currency exposure can, and sometimes do, enter into derivatives contracts offshore, the prospects of structuring such contracts onshore are hindered to some degree by the lack of a legal framework for such contracts in Nigeria,” Dawodu told OBG.

Outlook

The Nigeria stock market is poised for stronger growth throughout 2015. The peaceful conclusion to the March 2015 elections should help rebuild investor confidence, both within the stock market and in the wider economy, although the weak price of oil continues to be a reason for caution. Ongoing structural reforms are set to foster bettercapitalised players who will drive expanding local penetration and further attract global frontier market funds. Meanwhile, changes at the NSE, such as infrastructure upgrades and the introduction of new trading instruments, promise to provide new options for traders. While investors with a short-term investment horizon could see benefit from higher uncertainty based on cyclical risks, long-term real money managers will look towards strong economic growth to drive corporate earnings in the coming years.