Market repositioning still in progress


Monday, August 03, 2015 6:29 PM / ARM Research

This evening, ARM concludes the review of the domestic environment in their core strategy document – Nigeria Strategy Report, with a review of some capital market initiatives.  

WACMIC continues march for improved region-wide market liquidity …
West African stock exchanges took another stride in their resolve to promote greater market liquidity with the ongoing roll out of the second face of West African Capital Markets Integration Council (WACMIC) propositions. Dubbed “passport stage”, the second phase is structured to enable qualified brokers in West Africa access jurisdictions within the region they wish to trade in directly. According to WACMIC, capital market operators will be provided with common passports that would be mutually recognized by WACMIC member security exchanges, securities commissions and depositories (CSDs).

Ultimately, this phase is expected to permit issuers of securities in any member country to take advantage of other West African markets with greater liquidity. Interestingly, the attendance of representatives of regional economic bloc – ECOWAS – at WACMIC’s 5th ordinary meeting in March 2015, wherein they reinforced support for the initiative, bolstered hopes of successful actualization of the programme. In particular, they noted that the regional power is poised to assist WACMIC in resolving issues requiring high level political approvals.

Whilst Nigeria’s relative market size and liquidity makes it a logical hub, in the interim, lack of standardization of regulations on mandatory reporting by companies, with Burkina Faso, Togo,

Senegal, and Côte d'Ivoire of the BRVM yet to adopt IFRS, will likely remain a constraint as investors find it difficult to judge the financial health of companies in neighboring markets. This will likely restrict the improvement in market liquidity and free flow of funds across the constituent exchanges in the near term.

Figure 1: Classification of West African stock markets by market capitalisation


… as SEC’s par value review stokes mixed expectations
On other fronts, sequel to the recommendation of the Rules and Adjudication Committee of the NSE on 21 October 2014, SEC recently reviewed par value for securities trading on the Nigerian exchange to 1kobo (from 50 kobo). Whilst an effective date is yet to be announced, eventual implementation would see 1kobo become new price floor, as well as allow forces of demand and supply determine share prices. .

Ultimately, we believe the new rule has the potential to kick-start trading in ~48 hitherto inactive stocks which constitute 1.3% of equity market capitalization. Drilling down to specific names, we note that apart from stocks such as FTN Cocoa Processors plc and UTC Nigeria plc that have been dormant at 50kobo for a while, insurance stocks look set to be more affected by the proposed adjustment with the sector accounting for more than half of the affected names.

In view of their long dragging illiquidity and investors’ pessimism on the stocks, holders have reportedly had to offload these stocks at significant discounts to par value in the past and the new rule should facilitate price discovery and enhance liquidity.

Furthermore, to the extent that this rule could ultimately lead to significant collapse of market capitalisation of affected companies and perhaps encourages takeovers (hostile or otherwise) and significant restructurings of the companies. In any case, that should be a positive though the likelihood that any price hits would more greatly impact retail investors and dampen their gradual re-interest in the equity market remains of some concern. 


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