Saturday, September 19, 2020
06:00 AM / by Proshare Research/ Header Image Credit: EcoGraphics
In the 1970s and 1980s, Nigeria's stock market was still in its infancy. The open outcry system prevailed with most brokers running on passion or 'animal spirits' rather than logic. The mood of the market was shaped by the powerful aphrodisiac of rumor, speculation, clean and dirty corporate numbers with a dash of hubris.
The 1990s was a bridge between the old and the new with the federal government taking a more proactive approach towards private sector involvement in the economy, especially in respect of developing a mature local capital market capable of significant capital raise to support domestic enterprises. The 1990s decades saw a deepening, widening, and upgrading the capital market.
For example, in 1990 the NSE introduced the collective investment scheme called unit trusts. The unit trust product was designed to encourage small-time investors to take advantage of superior investment returns available to bigger players in the equities market who tend to trade stocks with large market capitalizations and relatively steep prices. The 1990s also saw an increase in market operators (CMOs) from 140 in 1992 to 226 in 1999 or an increase of +61.43%. To improve settlements and repository services the Exchange established the Central Securities and Clearing System (CSCS) in 1997. The creation of the CSCS reduced the transaction settlement period from transaction day plus 14 days (T+14) to transaction day plus 5 days (T+5). The reduction in the transaction cycle spurred an increase in market confidence and improved traded volumes (the transaction cycle has since been reduced to T+1 from T+3 in 2015). The volume of shares traded rose from N557m in 1997 to N2.097bn in 1998 and N3.954bn in 1999 (see table 4).
Table 4: NSE: Eight Years of a Transition (1992-1999)
Between 2010 and 2019 the market has seen improvement but, in its numbers, but the rise in market indices appears to have fallen by far short of expectations set by the Exchange's managers in 2011. But the last two decades, and particularly the last decade, have witnessed some triumphs with the bumps. (see table 5).
Table 5: A Contrast of Two Eras
At the turn of the millennium, the stock market saw a steady rise in traded equity volumes with a significant leap between 1995 and 1999 (from N397m in 1995 to N3.9bn in 1999) before it fell into a shallow ditch between 1996 and 1997, which was ahead of the global financial meltdown between 1997 and 1998. Surprisingly the global financial crisis of the late 1990s had a minimal impact on the local equities market.
The next decade from 2000 to 2010 created an additional twist to the market's evolution. The drama of high impact political engagement of the managers of the NSE and the internal squabbles between the Exchange's managers and Council members between 2000 and 2010 simmered between 2010 and 2015, except the incidences of the early difficulties within SEC and between SEC and the NSE and between SEC and the House of Assembly Committee on the Capital Market (see the Council members of the NSE between 2009 and 2014 )
Table 6: Aliko Dangote's Turn at The NSE Council Steering Wheel; A Time of Growth and Simmering Conflict
The period between 2010 and 2015 saw heightened market awareness and a tougher regulatory push towards global best practices, but the raw emotions of individuals, institutions and vested interests made for an impossible sequence of unwinnable skirmishes. Onyema in the last ten years has brought some saneness to the fistfights between stock market regulators and legislative oversight bodies while making effort to upscale market sophistication. However, despite Onyema's best efforts the equities market still shows considerable weakness concerning the number of traded instruments available and the volume of free float for prime market traded instruments.
On a pleasant note, in March 2018 the NSE, SEC and the former management of the Exchange led by the erstwhile DG, Dr. Okereke-Onyiuke, came to an amicable settlement with the Exchange, with the stock market regulator agreeing to pay the entitlements of the affected former staff and recognize the right of Dr. Okereke-Onyiuke to the land title to her house built in Ikoyi, Lagos. Also, it was agreed that the sack of Okereke-Onyiuke be recognized as retirement after 27 meritorious years at a market that she had helped to nurture. The settlement put a decent end to a sour chapter in the Exchange's recent history.
NSE: The Story of Here and Now
Over the last ten years, Oscar Onyema has pushed for a stronger, deeper and broader local stock market. The alumni of the New York Stock Exchange (NYSE) had no illusions about the challenges he would face in a market hamstrung by narrow asset classes and relatively low domestic liquidity, but he was optimistic that things could be made better. In 2011 Onyema led a team of young and not-so-young professionals in setting sail along a new course that was uncertain but promising (see Table 7)
Table 7: NSE's New Plough Hands
Onyema had to start the process of redirecting the Exchange towards bolder milestones with the support of an executive council peppered with a few prominent private sector executives. The NSE's new CEO would have found the early days unsettling as he would have had to navigate a minefield of tough personalities, polished egos, and hardboiled market experience (see illustration 1).
Illustration 1: NSE Old Boys (and Girls) of the Council
The first set of things on Onyem's agenda was to make the Exchange foreign-investor friendly by ensuring tighter market governance with stricter rules over trading practices and the submission of regular periodic reports by listed companies (although the likes of Warren Buffet have advocated that reports to Exchanges should be less frequent because they lead companies to pursue short-term profitability goals rather than long-term corporate stability and value creation, thereby leaning companies towards creative accounting and dodgy financial statements). The Onyema era has so far seen the following actions/events:
Onyema has driven a generally forward-looking agenda at the NSE but constraints of slow economic growth, cultural/personality traits that prevent Nigerians from offering up equity in successful businesses, and poor administrative market memory have inhibited faster service delivery and market breadth. The combination of these factors has subdued the desired performance metrics of the Exchange's CEO and his team.
The NSE has seen four (4) listings by way of initial public offerings (IPOs) and 13 offers by way of initial introduction (LBI) over the Onyema years from 2011-2020. The growth in the number of listings by way of introduction rather than public offerings underscore the observation that Nigerian corporations tend to favor a closely-knit shareholding structure with minimal share dilution than a broader share structure with additional shareholders diluting corporate influence and dividend payouts (see illustration 2).
Illustration 2: NSE: The Complex Alchemy of Raising Funds Locally and Abroad
Analysts have observed that new equity issues by way of IPOs have not been the preferred method of capital raise in the local market as most companies prefer to deal with their working capital and long-term funding needs by a combination of short-term bank borrowings and retained annual corporate earnings. So far, the local money market has served these purposes well, as cash-seeking chief financial officers (CFOs) have easily needled their bank credit officers for temporary overdrafts (TODs) or short-dated loans by way of overdrafts (ODs).
However, considering the onset of the coronavirus pandemic which has disrupted domestic supply chains and rattled corporate liquidity, it is doubtful if past funding preferences would be sufficient to support future growth expectations. However, the capital market option comes with difficulties. To sell a public offer in a recession is as easy as surfing on a shark's back, investors are increasingly shying away from parking money in risky assets, with or without polished nameplates. In other words, the omen for a successful primary market issue in 2020 or 2021 remains grim.
With the country's recent gross domestic product (GDP) showing a modest growth of +1.87% in Q1 2020 and crimson-colored -6.10% in Q2 2020, the economic outlook is sufficiently depressing to keep investors out of the local equity market for a few more months or perhaps years. This means that the poor IPO trend of the last decade will likely be sustained.
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