Margin facility overhang still a threat, says Renaissance


There is a significant uncertainty about the magnitude of the margin facility overhang, which, if not addressed, will anchor market upside down, according to a Renaissance Capital report published last week. 

This conclusion underscores suggestions in many quarters that huge chunk of the margin facility was lost in the market in the wake of the downturn. It is estimated that the market itself lost about N3 trillion, fueled by the sudden reversal of the margin trading policy which consequently halted the stoking of the bull market. 
The report also finds the road map to a free Nigerian market uncertain and says the equity market will continue drifting until the current artificial market dynamics are addressed.
“While market intervention has shielded the equity market’s performance from the significant volatility of global events, it has also sapped investor confidence, and trading volumes have fallen to levels we last saw 24 months ago.”
This remark also is a clear knock on the incessant and disparate intervention of the past few months by regulators trying to weigh in on the crashing market. 
Since 27 August 2008, no less 12 measures aimed at stabilising the Nigerian Stock Exchange (NSE) have been announced and all of those measures failed to stem the slide. 
It suggested three key potential catalysts for re-igniting market confidence over the next quarter. These are the relaxation of price intervention, increased liquidity and falling interest rates.

“The relaxation of price intervention back to previous levels could propel the market to new lows, but more importantly, we believe it will begin to restore market confidence and reverse the significant contraction in market liquidity” 

The report finds that since 27 August’s market intervention, average daily turnover on the NSE has fallen to about $40 million and as low as $16 million in the last week of September.
“This is more than 50 percent lower than its previous 12-month average of $97 million, and a far cry from the $250million plus daily highs we saw in 1Q08.”

While the report acknowledges the negative impact of over intervention, it says it is convinced the market will begin to rebound in 4Q08 but that will depend on the targeted injection of liquidity which it says will restore the attractiveness of the equity market to players that in recent times found solace in the Nigerian Commercial Papers (CP) market.

Meanwhile, the report said the Nigerian Stock Exchange (NSE) has the potential to grow its All-Share Index by 30 percent from current levels if market conditions are free or if temporary market intervention is removed.

It said earnings growth is exceeding expectations, inflation has been arrested and interest rates look to have peaked, but Nigeria’s equity market is not free.
It is expected that with inflation rate almost stable, and interest rates at its low, stock market indicators would look upward. Some of these restrictions, it said include the fact that the maximum downward limit on daily price movement was temporarily reduced to one percent, while the current five percent limit on upward movement was retained.
This restriction on share price drop below 1 percent was lifted Tuesday following suggestions and criticisms that it was an anti-market fixed floor for equity prices which have the propensity to further dampen confidence. Analysts say it is a clear sign that market regulators have not allowed market forces to cat freely by dictating where they want prices to head to.
The report is also not satisfied with the fact that the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE) took administrative actions to stem the rate of new listings until the market is stabilised.
The action, it is believed may have caused the withdrawal of Union Bank of Nigeria public offer of over N300 billion by the bank’s management. - Businessday
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