NSE Post Takeover: Back of the Envelope

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Thursday, September 24, 2020  05:30 AM / by Proshare Research/ Header Image Credit:  EcoGraphics


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Ten years after the NSE underwent a stir in 2010 the market still appears a long way from earlier expectations. The Onyema US$1bn capitalization target seems to have hit a rough patch.  A combination of the poor global economy (-4.9% in 2020 by IMF projections), weak domestic production output (GDP growth was +1.87% in Q1 2020 and -6.10% in Q2 2020) and more recently an international viral pandemic has pulled the market face down. 

 

Some market analysts believe that after a decade of activities the local stock market has several paces before it shows noticeable improvement. In discussions with former staff of the NSE, the former Exchange managers insist that the market has not shown much of an upturn if any. The issues raised included but were not limited to the following:

  • The stock market and economy do not seem to be walking together. According to the erstwhile staff of the Exchange, one of the benefits of the change of guards at the Exchange should have been a stronger hitching of the economy to the market. This would mean that if the economy experienced strong growth so should the equities market. From the charts presented earlier, the stock market represents a negative relationship between GDP growth and the equity market Index (ASI). The problem, however, is not that of the market regulators but the fact that the market lacks adequate breadth to reflect the different economic sectors. Also, the Nigerian economy is driven mainly by 41.5m small and medium-sized enterprises not listed on the NSE, meaning that NSE companies do not represent a good sample size for broad economic activities and GDP. The NSE market capitalization as a proportion of GDP has steadily declined over the last ten years (see chart 7).


Chart 7:  NSE Market Capitalization/GDP numbers-The Gentleman's Slippery Slope

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Source: NSE, NBS, Proshare Research


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  • Regulatory enforcement appears weak. The claim of weak regulatory enforcement is conjectural. Oversight has been patchy for the last two decades but one thing that does seem clear is that indictment and punishment have not been equitable. For example, at the time Ndi Okereke-Onyiuke, the erstwhile DG of the NSE, had her problems at the market between 2008 and 2009, some Issuing Houses, Stockbrokers, Accountants, Auditors, Institutional Investors, and Financial Advisers were part of the process, but none of them were summoned and required to explain the issues that occurred at the period. The singling out of Okereke-Onyiuke and her management team could be interpreted within a certain context as inequitable. 

 

  • No clear lessons learned from the 2008-2009 market cleansing. The former managers of the NSE, insist that no clear lessons have emerged from the 2008-2009 exercise which supposedly dredged the drainage of management debris. The Exchange, according to these observers, has not moved significantly either in respect of new issues or as regards to the evolution of new products and services. This claim is debatable, and perspectives depend on which side of the fence you sit on. However, the available data suggest that in the last decade new issues by way of initial public offerings have tailed off, but big-ticket listings by way of market introduction have risen as stocks such as Dangote Cement, BUA Cement, Notore, and MTN got listed (see table 13).  

 

Table 13:  LBIs; The Joys of Introduction

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Nevertheless, some initial public offerings (IPO) also took place, they included Airtel Africa, Sky Aviation, Transcorp Hotel, Seplat, and Honeywell Flour Mills (see table 14).

 

Table 14:  The New IPO Kids on The Block

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  • Market composition by investor type has involved less foreign investor participation year on year (Y-o-Y). The argument that foreign portfolio investors (FPIs) have increasingly given the Nigerian equity market a cold shoulder may be accurate. Between 2014 January and 2020 January, the foreign investment flow into the NSE fell from N89.67bn in 2014 to N70.31bn in 2020, representing a -21.59% plunge. Between July 2014 and July 2020, the foreign investment inflow tumbled from N56.42bn in 2014 to N34.59bn in 2020, indicating another drop of -38.69%. Indeed between 2014 and 2020, foreign investment inflow has been on a downward slalom (see table 15).

 

Table 15: When Foreign Investors Freeze

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Domestic Equity Sushi

Local investors for a while lapped up the shares sold by foreign investors who had decided to go short on Nigerian equities. Between January 2014 and January 2020 domestic investment on the local bourse soared +78.92% from N92.3bn in 2014 to N165.14bn in 2020. Between March 2014 and March 2020, the hike in local investor interest in the market rose from N36.29bn in 2014 to N132.69bn in 2020, a rise of +265.64%. Since May, however, local investors have gone sore on the Nigerian market with local investor interest dipping between July 2014 and July 2020 with the local capital inflow into the market sliding from N167.77bn in 2014 to N68.62bn in 2020, or what amounts to a slide of -59.10%. Nigeria's equities Sushi no longer tastes so good.

 

  • Another problem former NSE staffers point to is the low free equity float available for trading on the NSE. They observed that most of the prime equities on the market are closely held by a very narrow band of investors and, therefore, the market price of equities does not reflect corporate fundamentals but mirror the restricted supply of traded stocks. The observation appears mildly valid and may be of concern to market regulators (The NSE and the SEC). Market efficiency relies on the laws of demand and supply working effectively but if the supply of an asset is rigged to be largely unavailable for open trading then the pricing of a company listed on a trading floor cannot be considered to be 'fair' and 'equitable' or reflective of corporate fundamentals or the company's free cash flow discounted by its weighted cost of capital. The problem of 'free float' is a thorn that has been stuck in the markets toe for a while. Equity analysts of three high-end brokerage firms interviewed for this report thought that if the local equity market is to attract increased foreign investor interest (which has implications for Nigeria's capital importation and foreign exchange market) then the issue of share availability for trading must be frontally addressed, otherwise, the efficient market theory (EMT) of textbooks would be meaningless, at least as it concerns Nigeria's actively traded equities (23 listed companies currently have free float deficiencies as of August 11, 2020). 

 

It must be noted that the NSE rules allow companies listed on the Premium Board to have free floats of less than the standard 20% threshold as long as the value of the free float shares on the Exchange equal or exceed N40bn. For the Main Board, the free floats of the companies can also be less than 20% of issued and fully paid-up shares as long as the value of the free float shares are equal or exceed N20bn. 

 

  • Bombshell bandits. Where is NSE's, Whistle-Blowers? Former NSE managers equally query how well the whistleblower laws of the Exchange have helped the market improve its transparency, efficiency, and equity. One of the managers interviewed but who requested for anonymity noted that "the whistleblower mechanism of the Exchange ought to create a trading platform scrupulous in transparency, rigorous in compliance and honest in governance. We are not witnessing that vigor, rigor, and commitment at the moment. What we see is a Baba Suwe (local comedian) kind of shadow boxing, where the footwork is pretty, but the punch never happens" he said.

 

Whistleblowers shelling evidence-based bombs on market bandits have not appeared, for now, leaving the market mildly vulnerable to abuse and manipulation say, analysts. "The bombs are yet to land but they should be in the corporate cupboards somewhere," said one observer (see table 16).

 

Table 16: Handling the Free Float

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Ten years after the stock market experienced a personnel shakeup in 2010 a few legacy problems have persisted; narrow assets tradeable on the floor remain a problem for nifty investors seeking portfolio diversification, low free float in prime quality stocks distort market pricing, and opaqueness of corporate governance of listed companies challenges the integrity and reliability of the market's equity information. However, the Exchange's management has not slept at the ship stern. Unexpected macroeconomic challenges caused by external global financial factors have hobbled the pace of market growth and inhibited market liquidity. 

 

The Exchange's external challenges have combined with unorthodox domestic monetary policies to dig studs into the progress of the local equities market especially in the last five years. But the Exchange has trudged on carefully with a few modest innovations and a clear sight at circumnavigating the potholes that line its journey to global best practices.

 

As Ben Graham once noted, "In the short run, the market is a voting machine. But in the long run, it is a weighing machine". With a rebound in economic fortunes likely in 2021, the Nigerian stock market will see a surge in equity voters and by 2025 it will see a major upward adjustment in equity values. But all this depends on how well the economy copes with 2020's economic headwinds. Markets like human beings suffer mortality.  

 

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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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