Tuesday, October 13, 2020/07:00PM /Bukunmi Adejobi, Proshare Research/Header
Image Credit: Training Zone & EcoGraphics
Investors' Confidence has been given an illicit shot in the arm and like a tube-station junkie has led to a roller coaster ride of emotions in the face of a global economic meltdown in 2020.
The twin shocks of the COVID-19 pandemic as well as a drop in crude oil prices has exposed Nigeria's weak economic underbelly. Crude oil represents over 80 percent of the country's export revenue and a downturn in the market for the oil always has a ripple effect on the economy, GDP of the domestic economy declined by -6.1% in Q2 2020 which was the first negative growth since the first quarter of 2017.
The local investment climate rode on the sloped back of a health pandemic leaning against a shrinking global economy. The domestic capital market has proven to be volatile and influenced largely by unsettled investor sentiments, which has seen a flight to safety and strongly defensive hedging plays during the H1 2020 lockdowns. This saw capital move in unaccustomed directions.
Capital Importation declined in Q2 2020 by -77.88%, a breakdown of the capital importation numbers shows that the equity segment of Foreign Portfolio Investment (FPI) declined by -91.68% Quarter-on-Quarter(Q-o-Q) to $53.25m from $639.72m recorded in Q1 2020. Foreign Direct Investment (FDI) also recorded a decline of -30.51% Q-o-Q to $148.59m from $213.84m recorded in Q1 2020. One of the principal drivers of the decline recorded in capital importation was the state of the health of the economy which was significantly impacted by the crash in oil price and the COVID-19 pandemic, investors' confidence was dampened against the Nigerian economy which reflected on the Nigerian Stock Exchange (NSE) and NASD OTC market.
The Nigerian equities market closed Q3 2020 positive as the market witnessed improved bargain hunting in September which was majorly driven by the reduction of the MPR by 100 basis points to 11.5% by the CBN. The reduction in interest rates led to a decline in money market rates, which meant cheaper funds and indicating liquidity in the system. With fixed income rates depressed, portfolio adjustments became imminent thus leading to a renewed rally in the equities market. This, no doubt indicates that the Nigerian economy has limited investment options for investors, this is seen in the bullishness of the equities market despite the slow economic recovery.
NSEASI Vs NASD OTC - Outlook of Year to Date performance
A review of the NSEASI performance in Q3 2020 revealed that the index inched up by +9.61% Year-to-Date while the NASD Securities Index (NSI) closed positive with +2.55% Year-to-Date.
The NSEASI recorded significant declines in February, March and June with -9.11%, -18.75% and -3.12% respectively which was during the heat of the economic downturn, the market rebounded in June being steadily bullish to close Q3 2020 positive with +5.94% in September.
With only 40 securities listed on the NASD OTC Securities Exchange and lower trading activities, the performance in Q3 was slightly different moving with less momentum compared to the NSE, it recorded declines in March, May and July with -1.10%, -1.32% and -2.05% respectively while the index recorded positive growth in August and September to close Q3 2020 on a positive note with +1.47% and +3.18% respectively (see chart 1)
Chart 1: NSEASI Vs NSI Index Yields Jan. 2020-Sep. 2020
Source: NSE/NASD OTC/Proshare Research
NSEASI, NASD OTC: Q3 Performance (WoW)
The Nigerian bourse started Q3 on a negative note which quickly reversed by the second week of July (+1.17%) as economic activities rebounded in the country in Q3 2020 amid improved macroeconomic conditions such as a rise in Crude Oil price from its low of $24.93pb in March to $45.32pb in July. The bourse ended the month of July on a positive note with +1.09%, the bullish trend continued through August and September to close the quarter with +2.92%. (see chart 2)
Chart 2: NSEASI Yields July - September 2020
In a game of catch up, the NASD OTC trails miles behind its larger and broader official market counterpart -the NSE started Q3 on a negative note despite the gradual economic recovery which suggests investors within the NASD OTC market are less likely to respond to external macroeconomic stimulus with immediate effect. Throughout July, the NASD Security Index recorded negative yields but experienced a reversal in the first week of August with +0.75% WoW. The index recorded a negative performance of -0.23%WoW in the second week in September but ended the quarter positive with +1.74%. (see chart 3)
Chart 3: NASD OTC Index Yields July - September 2020
Investors have a chance to participate in trading securities on the exchange as the three actively traded stocks on the NASD OTC exchange are:
Peering Into Two Markets
The Nigerian Stock Exchange services the largest economy in Africa and is championing the development of Africa's financial markets. The NSE, a registered company limited by guarantee, was founded in 1960 and it is licensed under the Investments and Securities Act (ISA) and is regulated by the Securities and Exchange Commission (SEC) of Nigeria.
NASD Plc is a Securities Exchange registered by the Securities and Exchange Commission ["SEC"] to operate a formal Over-The-Counter ["OTC"] market in Nigeria. The acronym NASD was derived from the company's origin -the "National Association of Securities Dealers. It provides trading platforms where all instruments not listed on a traditional exchange, registered by the Securities and Exchange Commission, can be traded through licensed stockbroking houses.
It also provides a regulated marketplace for OTC transactions; - an avenue for shareholders to trade shares of unlisted public companies which can also be termed as a centralized source of information and price discovery on unlisted public companies.
Listing Opportunities In Both Markets
The Hidden Opportunities and Challenges For The NASD OTC Exchange
The NASD was introduced as a formal Over-The-Counter market licensed by SEC to operate as a platform to raise capital for companies which are not listed on the exchange, the shares are tradable. Some companies that have been previously listed on the NSE have also been seen relisting its shares on the NASD, for example, Great Nigeria Insurance voluntarily delisted from the NSE and was admitted to the platform on August 27, 2019; this shed more light on the opportunities the NASD has to offer amidst its imperfections.
The NASD places companies into three categories (blue, pink and red), depending on the level of disclosure that a company is willing to provide to the market. Companies with high levels of corporate governance are placed in the blue category, while companies with low levels of corporate governance are placed in the pink category.
Categorizing companies by the level of compliance such as admitting securities that do not comply with disclosure requirements might be a defeatist approach to managing companies listed on the exchange as these securities are not under pressure to stay competitive. For example, securities listed under the Pink category such as Cappa & D Alberto (SDCAPDETO) have its last trading day recorded on November 20, 2019.
NASD OTC: Taking A Bet on The Future
Does the NASD stand a chance of catching up with the NSE as the equities exchange of choice? Time will tell. In the meantime, the NASD could devise strategies to improve activities on its Exchange through increased trading activity, providing up-to-date disclosures of activities on the Exchange, encourage new listings to improve competition amongst companies and involve key market players in building a more attractive market.
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