NSE Post Takeover: Market as a Metaphor

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Sunday, September 20, 2020  06:40 AM / by Proshare Research/ Header Image Credit:  EcoGraphics


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Stock market trading in the last decade has been unpredictable, rascally and brutal, like the wider economy, the market has shown investors little if any mercy. Between 2008 and 2019 the stock market saw only four (4) years of positive Index growth, while the remaining eight (8) years saw a negative slide in average equity values as the NSE ASI dipped at different intervals suggesting that the equities market over the last decade had been a poor protector of investor value (see table 8).

 

Table 8:  ASI Y-o-Y Growth (2008-2019), A Solemn Season of Returns

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The troubles of the stock market appear to have reflected the harsh state of the domestic economy as external shocks coming from the international oil market accompanied by contagion from financial markets abroad continued to hurt domestic Nigerian asset values. A pullback in foreign portfolio investment (FPI) pushed down equity prices while a rise in PFIs raised prices. Between 2014 and 2020 foreign investors appear to have voted with their feet as seen in lower equity market participation rates over the last half-decade (see table 9).

 

Table 9:  Foreign Investment in the NSE: Spooked by Harshness

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However, local investors have been less pessimistic between 2014 and 2020, except in Q2 2020 when the coronavirus pandemic appears to have taken a toll on domestic investors who moved in lockstep with their foreign counterparts. From May 2014 to May 2020, local investors seemed to have clawed back money invested in the market from N109.75bn in May 2014 to N83.91bn in May 2020 (-23.54%). By June 2020 apathy had worsened as the volumes invested by locals fell from N107.51bn in June 2014 to N72.54bn in June 2020 (-32.53%). By July this year domestic investors could no longer hold back their rising fears as the sums invested on the NSE dropped from N167.77bn in July 2014 to N68.62bn in July 2020 (-59.10%) (see table 10)

 

Table 10: Domestic Investment in the NSE: Coming to Terms with Reality

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The US$1bn Walk Too Long 

The Oscar NSE team came in with admirable enthusiasm, the goals were clear, the energy overpowering, and the desire unshakeable. In April 2011 Onyema was the new kid on the bloc, a blue-eyed market specialist with a yen for reconfiguring a legacy. Onyema had set a thundering goal of growing market capitalization to a staggering US$1bn. The target was supposed to be achieved by 2016. To reach this goal the market capitalization needed to rise by 1,205% from its US$76.64bn on October 30, 2013, at the official exchange rate of the time of N155.8/US$ (or at a bureau d' change (BDC) rate of N160/US$ resulting in a market cap of N74.63bn).

 

Between Onyema's resumption in April 2011 and the end of October 2013, the market recorded a rise in the NSE ASI by +51.51% and a growth in market capitalization of +79.86%. The growth rates were both significant, but they were nowhere near the rates required to achieve a market capitalization of US$1bn. For the market capitalization to have settled at roughly US$1bn by 2016 the market cap would have had to grow by +67.15% annually for straight five years.

 

Between 2013 and 2015 the market cap fell from US$76.64bn in October 2013 to US$50bn in December 2015. Indeed, by the end of 2016, the market cap had dipped further to US$30.32bn before recovering to US$44.48bn at the end of 2017, mirroring a global turnup from a short recession. However, the market took another brief dive by the end of December 2018 falling to US$38.18bn before climbing back up to settle at US$43.99bn at the end of 2019. So far, the market appears to have plunged mildly again with capitalization sliding to US$34.74bn as of August 27, 2020 (see chart 3). 

 

Chart 3:  NSE dollar capitalization 2015 -2020, bearing mixed tidings

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Source: CBN, Proshare Research 

 

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The Dog That Didn't Bark 

As far as local equity analysts are concerned, an increasingly important question for managers of the local bourse is, "is the NSE All Shares Index (ASI) a leading indicator of the Nigerian economy?" Unfortunately, for most market analysts the answer seems to be a resounding "no". Contrary to expectations, a sustained fall in the Nigerian stock market would neither suggest a fall in GDP nor would a rise in the market index imply growth in national economic output. Historical data of ASI and GDP growth rates in recent years suggests that each run along separate paths in the opposite direction. The statistical correlation between both sets of data is -16.59 %An explanation for this, according to a few analysts, is that the Nigerian Stock Exchange's breadth does not reflect national domestic economic output (see chart 4).

 

Chart 4:  ASI Vs GDP; In Search of Correlation

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Source: NSE, Proshare Research

 

A large number of the companies that contribute to Nigeria's GDP are micro, small, and medium-sized enterprises (MSMEs) that are not listed on the NSE or any other domestic equity Exchange for that matter (not even the NASD Plc adds a blip on the GDP radar). The implication is that Nigeria's capital market flows do not reflect absolute national GDP or its growth rate. Another problem appears to be that bellwether stocks on the NSE and NASD move more with market sentiments than broad economic outlook, this results in the NSE's ASI and NASD's NSI stepping out of gear with the overall direction of the economy. Similar to the NSE ASI the NSD NSI is negatively and weakly correlated with GDP growth with a correlation ratio of -22.40% (see chart 5). 

 

Chart 5:  NSI Vs GDP, When Economic Growth Barely Matters

 

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Source: NSE, NBS, Proshare Research 

 

The volatility of the market has been relatively mild over the last decade and uncertainty has been soft as investors have typically been able to determine market direction, especially foreign portfolio investors (FPIs) and subsequently foreign direct investors (FDIs). The complexity of the market has not been a challenge, but some investors have complained about the ambiguity. Complaints about ambiguity may ride on the back of the increasing market volatility between Q1 2018 and Q2 2020 (see chart 6). 

 

Chart 6:  NSE; Foreign Forays into the Deep (FPIs/GDP and FDIs/GDP

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Source: NBS, NSE, Proshare Research

 

The VUCA analysis nudges the edge of the realities of the market movements between 2013 and 2020, with foreign and local investors caught in different mind-games that have ultimately led to a decline in the NSE ASI and market capitalization in recent months (see VUCA in illustration 3).

 

Illustration 3: Getting A Hold of VUCA Problems

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Regardless of a VUCA perspective in the last half-decade, both the NSE and NASD refused to bark warnings to analysts and traders of an imminent recession or expansion. At the tail-end of his second term in office, the NSE's CEO, may not be in a position to lead the charge towards significantly increasing the number of equities listed on the NSE, but he could at least start the process of supporting the growth of new listings by adding pep to the Exchange's Growth Board which, if properly handled, could attract a pile of fresh issues and reenergize stocks currently listed on the AseM. 


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Making Business Growth Count 

However, to achieve the goal of broadening the market's size and asset composition, early Growth Board missteps need to be speedily reversed or simply avoided. For instance, value-added service providers and other partners responsible for improving investor education and enlightenment should not be required to pay exorbitant prices for data and information necessary to engage, as this could defeat the purpose of collaboration and access to information necessary to ensure a better understanding of the market and investor participation. Without a model that guarantees that service providers can generate sustainable incomes, the effort at plugging these supposed partners for money is, to put it lightly, inappropriate and unhelpful

 

The best approach to broadening the attractiveness of the Exchange to growth companies both on and off the Exchange is to create obvious value journeys that corporate managers can see and appreciate which in turn could lead to listings on the NSE. The value-added proposition would include, but would not be limited to the following:

  • Regular media coverage of the businesses of Growth Board members
  • Regular engagement of analysts with the management of Growth Board members to gain a sense of context for developments within the companies and their sectors
  • Periodic impact assessment reports of fiscal and monetary policy on the businesses of Growth Board members
  • Regular review of market conditions of Growth Board members
  • Forward guidance on the impact of global and local economic trends on the corporate activities of Growth Board members
  • A Growth Board Index and the monitoring of members market price movement against Index movement
  • Quarterly Growth Board member financial statement of affairs market memo

 

At the early stage of the Growth Board market development, the NSE needs to build a raft of relationships that lifts all critical stakeholders. The value-added service providers should be given a period to incubate the growth and development of the data and investor relations management around emerging corporate entities. NSE's initial emphasis should be market development and not revenue capture.

 

While demutualization has presented a strong case for the Exchange to increase its revenue streams, this must be viewed within the context of a carefully framed business model that nurtures various market segments. The business case would be a superior approach to sustainable market development rather than a response to revenue expediency. 

 

The metaphor of the NSE as a living company implies the drawing up of a set of long-term corporate objectives and the adoption of a far-sighted business playbook; companies that rush into revenue streams based on bloated short-term income projections usually end up shipwrecked as cash flows fail to meet expectations.

 

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Downloadable Versions of NSE Ten Years After Takeover Report (PDF)

1.  Executive Summary: NSE Ten Years After a Takeover: The Good, The Bad and Undecided Sep 16, 2020

2.     Full ReportNSE Ten Years After a Takeover: The Good, The Bad and Undecided Sep 16, 2020


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