Capital market: Groans, growls and gains of 2015

For the second consecutive year, Nigerian equities closed within the global worst-performing stock markets in 2015. Against the background of a loss of N1.75 trillion in 2014, additional loss of N1.63 trillion in 2015 rocked the Nigerian stock market to its bottom. Notwithstanding the negative overall market position, the year witnessed several landmark initiatives that promise to further enhance the market structure and efficiency of the Nigerian market. Capital Market Editor, Taofik Salako, highlights the market performance within the context of the macro-economic environment and regulatory and corporate performances

For investors, quoted companies, operators, regulators and other stakeholders in the Nigerian capital market, the year 2015 appeared longer than 12 months. An election year that brought political change, the initial dilly-dallying of political transition and global crude oil price crash combined with subsisting macroeconomic deficiencies, especially inadequate infrastructure, to constrict the performance of Nigerian capital market. Against all projections, the Nigerian stock market closed 2015 with a negative full-year average return of -17.36 per cent, nearly a notch above -16.14 per cent recorded in 2014. Approximately, this implied a loss of N1.63 trillion in 2015, a somewhat hard-to-bear addition on a loss of N1.75 trillion recorded in 2014. Altogether, Nigerian equities had lost N3.38 trillion in the past two years, nearly a quarter of their market value of N13.226 trillion recorded at the beginning of the period.

The Nigerian stock market tumbled to its worst performance in three years in 2015. In spite of a massive two-day rally that added N648 billion to market values of quoted equities, the benchmark index at the Nigerian Stock Exchange (NSE) indicated that investors lost almost one-fifth of the values of their portfolios during the year. Aggregate market value of all quoted equities on the NSE closed 2015 at N9.851 trillion as against its opening value of N11.478 trillion for the year, representing a loss of N1.627 trillion. The All Share Index (ASI)- the benchmark index that tracks prices of all quoted equities, indicated a negative full-year average return of -17.36 per cent. The ASI, a value-based common index that tracks prices of all quoted companies on the NSE, doubles as Nigeria’s sovereign equity index; the barometer to measure the performance of the Nigerian investment market within a given period. The movement of the ASI, up or down, implies losses or gains in monetary value. As such, the ASI and aggregate market value of all quoted companies on the stock market move proportionately in the same direction. While new listing, delisting and supplementary listing could temporarily distort full directional view of the market capitalisation, the market over a period corrects such distortion to align capitalisation with the benchmark index.

The ASI closed 2015 at 28,642.25 points as against its opening index of 34,657.15 points. The losses in 2015 worsened the downtrend that had in 2014 marked out Nigerian equities among the worst-performing stocks globally with average full-year decline of 16.14 per cent. Aggregate market value of all quoted equities had closed 2014 at N11.478 trillion as against its opening value of N13.226 trillion for the year, indicating a loss of N1.75 trillion during the year. Within the context of historic trend, the ASI had peaked above 57,000 points in 2007 and recently in 2013 closed above 41,000 points.

With inflation rate at 9.4 per cent and interest-rate benchmark’s Monetary Policy Rate at 11 per cent, average inflation-adjusted return for the stock market was -26.76 per cent and effective cost-of-fund adjusted real return could be in excess of -38 per cent in 2015. This was further compounded by the steep currency depreciation of 39.3 per cent in the parallel market and 9.9 per cent depreciation in the official interbank market. The Naira/Dollar exchange rate, which opened at N181.50/$1 and N191/$1 at the interbank and parallel markets respectively, closed 2015 at N199.50/$1 and N266/$1 respectively.

There appeared to be few safe places for investors in the Nigerian capital market in 2015. Across the sectors and categories of stocks- financial to consumer goods, high-cap to mid and low caps, the downers left gaping holes in the pockets of investors. The NSE 30 Index, which tracks Nigeria’s 30 most capitalised companies, recorded a full-year return of -17.63 per cent, underlining the obvious influence of high-cap stocks on the ASI. The NSE Premium Index, which tracks the trio of Dangote Cement, FBN Holdings and Zenith Bank International, returned -13.89 per cent. The broader NSE Main Board Index, which tracks all the equities on the main board of the Exchange, with the exception of the trio under the NSE Premium Index, indicated average decline of 17.60 percent. Banking stocks, which continued to wriggle under the spiral effects of the crude oil price crash, were the worst-hit with average return of -23.59 per cent. For the insurance sector, were most stocks were already down at nominal value of 50 kobo; average return of -4.70 per cent loomed larger than other sectors. The NSE Consumer Goods Index declined by 17.41 per cent, highlighting the suppressed performance of several fast moving consumer goods companies. The NSE Oil and Gas Index showed average decline of 6.20 per cent as the downstream oil sector fluctuated between product supply and scarcity amidst stunted industry reforms. The NSE Lotus Islamic Index, which tracks ethical stocks that comply with Islamic investment rules, dropped by 10.92 per cent. The NSE Pension Index, which tracks 40 companies specially screened as model portfolio for pension funds’ investments, recorded average return of -18.96 per cent. The only exception was the NSE Industrial Goods Index, where gains by large-cap cement companies left average modest full-year gain of 1.27 per cent. Indices present the average, balancing and counter-balancing gains with losses. For several investors, losses were in doubles and triples of the average losses. Investors in flour-milling companies were particularly hard hit with average loss of some 54 per cent. Former Dangote Flour Mills, now Tiger Branded Consumer Goods, capped the industry loss with a 12-month decline of 75.16 per cent. Breweries’ were in the double of average benchmark, which also applied to most banking stocks. But for many investors too, it was a year to cherish. Evans Medical’s loss of 78.07 per cent, the highest price depreciation during the period, was counterbalanced by Beta Glass’s 92.40 per cent gain. Many contrarian stocks such as Forte Oil, with a gain of 44.80 per cent; Presco, 34.69 per cent; Vitafoam, 34.24 per cent; University Press, 42.2 per cent and Unilever, which rose by about 21 per cent, helped many investors to cushion losses in other stocks.


Global slowdown

The Nigerian market was not alone. Across America, Europe, Asia, Middle East and Africa, there were less safe havens for investors in 2015. Nigeria trailed Egypt on the downside. Egypt 30 Index indicated average return of -21.52 per cent, the worst performance among tracked African markets. Ghana’s Ghana Stock Exchange Composite Index showed a return of -11.77 per cent. In Kenya, the Nairobi Stock Exchange All Share Index dropped by 10.55 per cent. South Africa played the contrarian market with the JSE ASI indicating a modest gain of 1.85 per cent.

Other advanced and emerging markets also showed a tinge of the downtrend. In the United States, the Dow Jones Industrial Average (DJIA) Index returned -2.23 per cent while the S & P 500 Index dropped by 0.73 per cent. The New York Stock Exchange Composite Index declined by 6.42 per cent. However, the NASADAQ Composite Index rose by 5.73 per cent, according to figures tracked by Bloomberg. In the United Kingdom, the FTSE 100 Index UK indicated average return of -4.93 per cent. The other European markets showed considerable resilience. France’s CAC 40 Index indicated a full-year return of 8.53 per cent. The regional Europe Stoxx 50 Index showed average gain of 3.85 per cent.


Drumbeats of recession

Executive vice-chairman, Capital Assets Limited, Mr. Ariyo Olusekun, said foreign exchange crisis was a major factor in the dynamics that shaped the market in 2015. He pointed out that the steep depreciation suffered by the Naira and the uncertainty around the foreign exchange management have continued to undermine attractive valuations of the Nigerian equities. In a market dominated by foreign portfolio investors, a forex crisis is a bitter pill that sours the mouth. Foreign portfolio outflows had risen and Nigeria’s foreign portfolio investment (FPI) has been running deficits since 2014. The 12-month foreign portfolio investment report for 2014 had shown that foreign portfolio outflow was N846.53 billion as against inflow of N692.39 billion in 2014, representing a net deficit of N154.14 billion. In 2013, total foreign inflow stood at N531.26 trillion compared with outflow of N510.78 trillion, leaving a positive balance of N20.48 billion. By October 2015, the latest available figure, Nigeria’s FPI deficit was N57.28 billion, according to figures supplied by the NSE.

The fall in crude oil price, Nigeria’s major foreign exchange earning resource, from a $100 per barrel to a $49 sell rate in January, triggered a foreign exchange crisis, which has continued to haunt the country. The price slump meant decrease in the national foreign reserve, which forced devaluation of Naira. With additional pressure on the Nigerian economy, many foreign investors became frightened with the possibility of additional currency risk. The Central Bank of Nigeria (CBN) responded to the forex scare with direct and indirect controls, constricting the forex market and heightening fears about worse devaluation. These fears were underscored by the removal of Nigeria from JP Morgan Government Bond Index-Emerging Markets Indices (JP Morgan GBI-EM Index). The fright-exit of foreign investors, decreased national productivity and uncertain fiscal and monetary outlook combined to create a sustained sell down at the stock market. Instructively, foreign investors account for the largest transactions and trades on the Nigerian stock market. Foreign transactions account for nearly two-thirds of turnover on the Nigerian stock market.

Besides, there were anxieties about the elections in April as many investors were worried and were unsure of the aftermath of the presidential election. To the relief of most, the elections were peaceful and a new wave of change was ushered in the election of President Muhammadu Buhari. The market quickly reacted to this with an 8.30 per cent rise in the ASI from 34,380.14 to 31,744.82 basis points in the immediate days after the presidential election in what has been termed the Buhari Bounce. But as the new government struggled with and delayed composition of its executive cabinet, the excitement started to wane. With continuing global crude oil price decline, a highly emaciated foreign reserves, and North East insurgency, the new government is yet to get the macro momentum to quicken investors’ appetite.

Group head, financial advisory, GTI Capital, Mr. Hassan Kehinde, said the stock market, which had been bogged down by political and policy risks during the political transition period, was affected by post-transition uncertainties and foreign exchange crisis, which led to the exit of influential foreign investors.

Acting President, Chartered Institute of Stockbrokers (CIS), Mr. Oluwaseyi Abe, said political risk and uncertain macroeconomic direction contributed to the downtrend at the stock market. According to him, it’s a normal pattern for the stock market to slow down during a political transition as investors wait for the policy direction of the market. Head, research and investment, Capital Bancorp Plc, Mr Oluleye Ademola, said the downtrend market might also not be unconnected with the high interest rate in the fixed-income market, weak earnings by some companies and panic selling from anxious investors.

Analysts at Afrinvest Securities- a Lagos-based investment firm, said uncertainties around fiscal and monetary policies, especially foreign exchange, have been major driving forces for the market downtrend. “Specifically, the economic and political risk of the country is currently too high for multinational and foreign investors. Factors influencing this includes dwindling price of Brent Crude Oil, uncertainly of the post-election period, decreasing value of Naira and unfavourable foreign exchange. Local investors are further affected by the increased volatility of the market,” managing director, Finawell Capital Limited, Mr. Tunde Oyekunle said.


Counter-productive cycle

The grueling downtrend at the secondary market has further worsened the apathy in the primary new issues market, starving companies of much-needed funds. Several companies have been unable to raise funds and many that braced the odds to launch new capital raising ended with under-subscription. The much-awaited listing of the third real estate investment trust on the Nigerian stock market was aborted by low subscription to the initial public offering (IPO) of the Haldane McCall Real Estate Investment Trust (HMK Reit). The N13 billion IPO by the HMK Reit recorded less than a third subscription by the close of extended offer period. Securities and Exchange Commission (SEC) requires that a public offer must record at least 50 per cent subscription to be deemed successful. With initial filings below the cut-off, SEC had granted a two-week extension of the offer period.

Many well-established companies that braced the odds to float new issues in recent period largely fell below their offer targets. All the companies subsequently fell below their offer price, putting subscribers to the issues in losses and increasing apathy for future participation.  Access Bank, which had offered about 7.63 billion ordinary shares of 50 kobo each at N6.90 to existing shareholders, recorded 79.4 per cent success rate. The bank raised N42 billion as against its offer target of N53 billion.  “The reason why companies are shying away from public offers is that the new issues may not necessarily get patronage or commitment from new investors due to the current state of the market,” said Sewa Wusu, economist and head of research and investment advisory at SCM Capital Limited, formerly Sterling Capital Markets Limited.

With the market showing little signs of recovery, most companies that had recently launched bids to raise new capital have been hesitant to further the issuance process as share prices continued to fall below intrinsic fundamental values. For instance, Flour Mills of Nigeria Plc, which had submitted application for regulatory approval to raise N30.25 billion through a proposed rights issue of 1.09 billion ordinary shares of 50 kobo each at N27.50 per share, closed the year at  N20.80, around its 52-week low of N18.99. Another company, May and Baker Nigeria Plc, which had announced plan to float a rights issue, closed at N1.10, a price the promoters of the issue considered to be below the intrinsic value of the company. Skye Bank and Sterling Bank, which had indicated plans to raise new funds, closed at N1.58 and N1.83 respectively, representing 40.6 per cent and 28 per cent declines in their share values during the year.

With high financial leverage, huge interest financing and the slumbering effect of financial mismatch, corporate earnings have been adversely affected by the inability of companies to secure amenable long-term funding from the primary market. May & Baker Nigeria, which had been forced to complete its new multi-billion Naira manufacturing complex with bank loans, is feeling the pinch, like other companies, of the interest expense.  The unaudited financial results of the 9 months of 2015 show that May &Baker  made  9 per cent growth in turnover and 165 per cent growth in profit when compared with the same period in 2014. Against gross profit of N1.8 billion and operating profit of N470 million by the third quarter ended September 30, 2015, interest expense was N425 million. It ended the period with net profit of N60.63 million. Managing director, May & Baker Nigeria, Mr. Nnamdi Okafor, said injection of new equity funds was a priority in the mix of the corporate plan of the company but he was afraid the current share price at the stock market might discourage existing shareholders from taking up their rights. Many other venture capital and institutional investors, both local and foreign, were interested in buying into the healthcare company, but Okafor feared the market value- which will form the basis of corporate valuation, would not lead to fair valuation for the company. Yet, the secondary market needs strong corporate earnings to tickle investors, but the primary market is undermining the earnings capacity of companies.


Towards a better, more efficient market

The steep decline was not a whirlwind that brings no good after all. The apathy and continuing decline had goaded market regulators to implement several forward-thinking initiatives that promise to enhance market’s infrastructure, investors’ confidence and future price discovery. In August 2015, the NSE, South Africa’s Johannesburg Stock and Kenya’s Nairobi Stock Exchange announced a collaboration to improve liquidity on Africa’s exchanges through cross listings of Exchange Traded Funds (ETF’s). Executive Director, Business Development, NSE, Haruna Jalo-Waziri , said the collaboration underscores the commitment to provide investors with a wide range of investment products to help them realize their financial goals. “ETFs are becoming attractive to many investors offering them portfolio diversification and reduce cost of investing,” Haruna Jalo-Waziri said. Both the NSE and Securities and Exchange Commission (SEC) started disbursement of funds to investors under their investors’ protection fund (IPF). The NSE has begun implementation of its Minimum Operating Standards (MOS), which seek to ensure stockbroking firms have adequate technology, human resources and structures to safeguard investors’ interests. The NSE also recently coordinated central launch of online mobile stock-trading portals that promise to bring the tech-savvy generation into the market. The ongoing weeding out of inactive and poorly capitalised operators by both SEC and NSE is addressing a weak point in the market link. SEC has driven the implementation of the 10-year Capital Market Master Plan, with several initiatives such as dematerialisation, e-dividends, direct cash settlement, reduction of transaction costs, unified licensing model across money and capital markets, obtaining liquidity status for non-interest capital market products and strengthening market institutions by completing the recapitalisation exercise on the front burner. “The market is well regulated and operators are following a strong regulation regime and we are putting in strong processes to make sure the operators are fit, strong and proper. Markets go up and down, what is more important is the fundamentals of the market,” Gwarzo said on the outlook of the Nigerian market. The electronic dividend (e-dividend) portal, which basically automatically transfers dividends to a shareholder’s bank account, whatever the status or type of the account, has been launched. Direct cash payment is scheduled to take off today January 4, 2016. As against the current general practice whereby the payments for investors’ transactions go into the accounts of the brokers for onward disbursement to their clients, the general practice under the ‘direct cash settlement’ will be to send the net proceeds directly from the clearing and settlement system straight to the investors’ accounts. SEC had in September concluded the recapitalisation exercise for market operators and it is currently undertaking post-recapitalisation audit preparatory to the release of the final list of compliant market operators. The final list of operators is scheduled to be released this week. SEC had also led the launching of the Capital Market Master Plan Implementation Committee- a highly influential advocacy group for the market; Corporate Governance Scorecard-a review mechanism for best practices and the National Investor Protection Fund (NIPF)-a fund dedicated to compensating investors for non-market risks. SEC provided the NIPF with take-off grant of N5 billion. SEC had also reduced the transaction fee on secondary market transactions involving government bonds, corporate debentures, money market instruments and other derivatives by 5,000 per cent.


Pains of yesterday, gains of today

With regulatory initiatives kicking in on market structures and processes, most analysts believed the sustained depreciation in the past two years has created opportunities for medium to long term investors. Head, research and investment advisory, Meristem, Mr. Basheer Bashir, noted that the current market situation provides attractive buy opportunities for discerning investors. “Valuations look attractive for quite a number of stocks across all sectors of the market irrespective of the economic headwinds. We are of the opinion that current economic factors and realities have been overpriced into the market,” Bashir said.

Chief Executive Officer, Nigerian Stock Exchange (NSE), Mr. Oscar Onyema, said opportunities still exist for investors in stocks, in spite of the current downturn in the capital market.

“So, it is important for investors to dig deeper and understand the dynamics of the market. Investors also need to understand that there have been significant sell-offs between last year and this year and it could present opportunity,” Onyema said.

But there is need for government to align its fiscal and monetary policies with the yearnings of the capital market. Several years after privatisation, privatised companies have balked from listing their shares, other nationally strategic companies see no incentives to list, listed companies receive little or no special status from national economic policies and the capital market is relegated to the background in government economic management. These have compounded the shallow domestic participation in the Nigerian capital market. Less than three per cent of Nigerians are participating in the Nigerian stock market, less than 0.2 per cent of Nigerians have ever invested in collective investment schemes otherwise known as mutual funds and foreign investors account for some 60 per cent of retail transactions at the market.

Chairman, Association of Stockbroking Houses of Nigeria (ASHON), Mr Emeka Madubuike said incentives should be given to listed companies and prospective listings so as to have some advantage over unlisted companies.

“We propose some tax incentives for listed companies and those that are in the process of getting listed. Governments at the highest level must continue to make positive statements and assurances that will engender investors’ confidence,” Madubuike said.

Chairman, Association of Issuing Houses of Nigeria (AIHN), Mr Victor Ogiemwonyi urged the CBN to strive towards reduction of the Monetary Policy Rate (MPR) to stimulate activities in the bond market.

According to him, government borrowing rate in the capital market should drop to avoid crowding out of funds and to make the market attractive for private sector to raise funds.

He said the government should revisit privatisation in order to allow for listing of government enterprises that are operating sub-optimally.

“All the government needs to do is to set up a capital market committee to work with the Bureau of Government Enterprises (BPE) to drive the process,” Ogiemwonyi said.

“With the expectation for massive capital spending and expansive budget in 2016, we anticipate a better performance for Nigerian equities in 2016. However key risk in the horizon remains exchange rate uncertainties and a bearish oil price outlook,” Afrinvest Securities stated in its closing note for 2015. There is much hope for recovery in 2016, but much still depend on government’s handling of the macroeconomic dynamics drumming the downbeats for the stocks.


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