October 04, 2010 4267 VIEWS
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The Monthly NCM Report for September 2010
ISSN 1597 - 8842 Vol. 1 No. 50
 
Executive Summary
 
“The close of market on a positive note in September would have otherwise raised expectations of a turnaround. This may not be the case as the market looks set to book price gains in the days ahead, leading to the possibility of profit taking by some speculative investors – signifying the volatility that characterises the market at this time and expected to continue for the rest of the year.”
 
The quarter ended in a negative position as the month of September 2010 continued the bearish and low confidence state inherited from the month of July through August. Market activities in the month recorded an avalanche of red to close the Q3 2010 in the red – trading at its eight-month low at 23,050.59.
 
Q3 it must be said was heavily characterized by a deluge of fundamental market and business regulatory pronouncements – ranging from directives, licence and status policy changes; as well as regulatory compliance circulars. The combined effect of these changes http://www.proshareng.com/reports/2905not only depressed or depleted the value of the NCM and left unresolved the twin issue of illiquidity and low confidence in the market.
 
It would appear that investors have resigned to the belief that the rescue, recovery and developmental needs of the market have been downplayed over the regulatory needs of the market.
 
Market confidence, a sensitive and integral part of the capital market which requires diligent management has suffered a sustained neglect in the process of decision making. Yet, it must be said that the driver of this feeling in the market space is the cycle of negativity that has been sustained from the regulatory side – with conflicting signals sent out about actions planned, taken or under review.
 
The equity market prior to, and since the SEC intervention of August 5th 2010, has really not had a significant up trend for about 6 months now. Although we reversed the original downtrend after the passage of AMCON bill in July, the delay in concluding its take off till the last but one trading day in September meant that market participants could not see where the improvements to the are liquidity issues confronting the NSE was coming from; therefore, the initial euphoria evaporated.
 
A review of the market trend, pre-intervention, 14 trading days before - i.e. July 16th to August 4th 2010, revealed that the market maintained an average upward movement of 0.27%, while from August 5th to August 24th 2010, 14days after intervention – the market recorded an average downward movement of -0.34% with -4.71% aggregately, translating to N396.35billion loss against investors’ stake.
 
The key decisions from the trend analysis referred to earlier could be traced to pronouncements from the Central Bank of Nigeria (CBN) which impacted the market negatively and sent it into a sell mood.
 
Firstly, the inherited spill over effect of the September 1st deadline on margin loan thresholds by banks resulted in constant heavy sell floats in the market – initiating the bearish trend in the early weeks of the month of September. The first six trading sessions in the month, September 1st to September 8 2010 precisely, recorded consistent downward movement on average of -0.32% with one day upbeat break of 0.16% to close with -1.92% aggregately. The market traded sideways between September 13th to 17th September 2010 before embarking on another uninterrupted six (6) days downward movement till 27th September 2010 as market records N342.01 billion loss between September 8th and 27th 2010.
 
Secondly, as a reaction to the outcome of the MPC meeting on 22nd September 2010, http://www.proshareng.com/reports/view.php?id=2900 the market recorded salient downward trend due to the upward adjustment of CBN’s benchmark rates which lured investors towards low risk based investment. The upward adjustment was represented by the CBN as a proactive measure against anticipated inflation outlook.
 
 
Thirdly, the CBN upended the 2005 Soludo-era banking reforms by abolishing current ‘universal bank licenses,’ and replacing this with the creation of new ‘regional, national and international bank licenses. It imposed IFRS standards on the entire industry; established new minimum capital requirements and barred commercial banks from proprietary trading, asset management, equity underwriting and general investment banking activities - www.proshareng.com/news/12004. It is expected that on a positive note, these new banking regulations will spur the creation of new smaller regional banks, force internal restructurings at many of the major banks and unleash new competition for scarce consumer deposits. On a negative note, this ‘dispersal of economies within a sovereign approach’ could deliver unintended consequences for growth. As far as the market is concerned, the stock exchange will continue to witness increased volatility during the next 90 days as the market gets to grips with the new landscape that will emerge.
 
Through all of these, Q3 2010 saw the YTD performance drop to 10.61% from the high of 34.51% recorded on 19th April, 2010.
 
 
There were some expectations that informed the positive outlook predicted in the H1 2010 market review http://www.proshareng.com/reports/2753which unfortunately did not materialise; and some of these include:
 
 
Developments in the Coming Month:
 
1.    Quarter of deals, mergers and acquisitions, and one for the beginning of integration.
2.    Take off of the AMCON. Hopefully, the constant mutation seen of the AMCON – moving from being a resolution vehicle to a recapitalisation vehicle with AMCON officials on the boards of firms the invest in – will be clarified.
3.    Banks expected to cut the cost of running their businesses by 30 per cent over the next three years. http://www.proshareng.com/reports/view.php?id=2906
4.    CBN to issue treasury bills regularly as part of its monetary control measures to curb inflationary growth and help banks manage their liquidity. http://www.proshareng.com/news/12145
5.    Adoption of International Financial Reporting Standards (IFRS), implementation of risk-based banking supervision, improving collateral and land registries, and strengthening and enforcing creditor rights.
6.    The Federal Government plans to raise $500m from foreign investors between September and October to finance infrastructure in the country.
7.    Injection of N15 billion jointly capitalized by the government-owned Middle Eastern group and the Japanese financial services conglomerate, would invest in Nigeria, Ghana, Egypt, Tunisia and Morocco.
8.    Deployment of N400 billion from Pension Funds in the power projects.
9.    Listing of the DCP/BCC merger on Nov 5, 2010; altering the weight/risk profile of the NSE. The share price of BCC seems to be maintaining steady upward movement after a sharp drop from N70 on Sept 15th to N64.13 on Sept 20th, now trading at N68.
 
The Market Outlook
 
The issues raised above are to the point. They represent the market perceptions that have held investors back from allowing the market rhythm principle to catch on.
 
Against all sentiments, we truly do not see the market recovering to the levels we saw in 2006/2007.
 
The market has not witnessed any sustainable recovery since September 2008 when the government began with the idea of a presidential team on capital market recovery for several reasons, some of which include:
 
1.    The large float, which resulted from several IPO, secondary offerings, and bonus offerings by banks - the lack of liquidity to absorb the large float;
 
2.    The new 10% rule is along the same line like the limit downward price movement to 1% and upwards constant at 5% instituted by the NSE in 2008. We do not understand why the CBN is implementing such a rule. The market needs liquidity infusion and the banks remain the primarily the source of the liquidity. This rule will stall the market recovery in the absence of an alternative source of liquidity.
 
3.    Brokerage firms are cash-flow challenged and near insolvent, issuing houses are struggling, registrars fare no better (no new issues/offers to generate income and simply have to contend with just the rudiments - AGM’s, dividend warrants, etc)
 
4.    Investors (local and foreign) know where the real market problems exist: process and practice of stock investing in Nigeria - manipulations of IPO’s, listings, deliberate delays in release of share certificates for verifications, collusion of brokers/issuing houses/advisors with banks in shares allotment, usage of bank depositors' funds to buy shares of same banks, approval of dubious share offerings by SEC between 2005 and 2007, dubious and non-performing mutual funds floated by banks and others between 2005 and 2008 left unaddressed, and many more.
 
Conclusion
 
The rash of announcements of suspensions and prosecution market operators for various alleged infractions is perceived as no more than grandstanding and has largely left the investor confidence no better off than it was before – as everything seems to have grinded to a transparency unfriendly routine – no names, no timeline of action and no follow up encouraged.
 
Sadly, it appears that till the fundamentals are corrected, this market isn't heading anywhere upwards; anytime soon. However, the fundamentally strong stocks (i.e., NB, Guinness, WACO, Mobil, Nestle, etc) on the exchange will continue to do well.
 
Thank you for reading and do take time to share with us your thoughts on the market, analyst at analyst@proshareng.com.
 
 
 
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