ANALYSIS 2 FOR MONDAY
2017 has been a good year for investors as the stock market recovered from a three-year decline to post a record 43% growth, writes Goddy Egene
For three consecutive years, the Nigerian equities recorded decline thereby sending negative signals to investors. The Nigerian Stock Exchange (NSE) All-Share Index (NSE ASI), which is the benchmark gauge to measure the performance of the equities market, recorded a cumulative fall of 39.61 per cent between 2014 and 2016. Specifically, the market fell 16.14 per cent in 2014, 17.3 per cent in 2015 and 6.17 per cent in 2016.
The decline for three consecutive years led to exit of many investors who divested to fixed income securities, which returns are relatively stable and less risky. However, investors who remained in the equities market in anticipation of the return of the bulls are now counting their gains in 2017.
With only three trading days left in 2017, the NSE ASI has recorded a growth of 43.34 per cent, rising from 26,874.62 to close at 38,522.14 last Friday. The market capitalisation of equities grew faster, rising by 48.1 per cent or N4.453 trillion from N9.256 trillion to N13.709 trillion.
Just as the decline in the market in 2016 was expected, the recovery was also expected in 2017. Speaking on the 2016 performance of the market , the Chief Executive Officer of NSE, Mr. Oscar Onyema said: “After peaking at 31,071.25 in June 2016, an increase of 8.48 per cent over the 2015 closing value, the NSE ASI began to retreat to negative territory as total foreign inflow dropped 45 per cent between June (N42.46 billion) and July (N23.43 billion) due to: loss of confidence in the implementation of an announced free floating foreign exchange (FX) regime; weak corporate performance; and second consecutive quarter of negative economic growth in the period resulting in the economy entering into a recession.”
An Imminent Recovery
Onyema and some stakeholders in the market were optimistic that the market will recover this year. According to the NSE boss, the capital market is a subsector of the Nigerian economy and the World Bank has projected that the economy will recover from its recession in 2017 with a modest growth of 0.6 per cent.
Onyema, therefore said based on the positive forecast and the initiatives being in place by the NSE, investors should be optimistic about recovery of the market in 2017.
He said the Nigerian capital market will do a better job at promoting its unique value proposition to both global and domestic investors.
We expect investors to continue to keep a close eye on the divergence between the interbank FX rate and other exchange rates in the country. Accordingly, a convergence of FX rates in the country and the performance of listed corporates will determine the level of market activity in the short term,” he said.
Onyema disclosed that the NSE will take an adaptive approach to strategy execution in 2017, noting that in the immediate future, the NSE will focus on achieving its goal of becoming a more agile and demutualised exchange and will fast track efforts towards developing innovative products such as exchange traded derivatives to provide investors with tools to better weather economic realities in 2017.
“We intend to strengthen our thought leadership efforts with policymakers to drive policies that will free up the system and promote the ease of doing business in Nigeria. We believe that incentive schemes for sectors of the economy that can support a pivot to export led economy will be beneficial and systematic removal of impediments to doing business and therefore reduction of leakages will attract private sector investments,” Onyema said.
It was not only Onyema who was optimistic about the recovery of the market this year, analysts at FSDH Research and Cordros Capital Limited were equally highly expectant that the market would close in the green in 2017.
They had said that at the strong growth in the unaudited results that quoted companies released for the period January – March 2017 and the improvement in the macroeconomic environment, we believe the equity market is ready for a recovery in 2017.
The analysts explained that the increase in the supply of foreign exchange to meet the input requirements of manufacturing companies should increase their production activities and revenue in the current financial year.
They said data from the National Pension Commission (PenCom) on the allocation of the Pension Fund Assets as at February 2017 showed that the weight of the pension fund assets on domestic equity dropped consistently from 2014 to 2017, noting, however, that there are indications that there is room for pension fund assets to allocate more funds to equities.
FSDH added that the value of equity transactions from foreign and domestic investors declined between 2014 and 2016, explaining that although the relative size of foreign investors’ participation in the equity market declined between 2014 and 2016, the share of foreign investors’ participation was higher than domestic investors’ participation between 2014 and 2015.
“The stability in the macroeconomic environment and the strong earnings of quoted companies should attract the needed liquidity into the market. Consequently, the equity market should record a strong recovery in the year 2017,” they stated.
In the same vein, analysts at Cordros Capital had said the better-than-expected Q1 results would bolster the market to sustain positive growth in April.
“We expect the current improvement – albeit modest – in the macroeconomic environment, especially the currency space, will further stoke investor appetite, particularly in the event of no negative surprise(s). Better-than-expected first quarter results (we expect a few top names to announce results before the end of the month) may act as catalyst,” they said.
A boost from Forex Window
However, the major factor that led to the rebound in the market was the introduction of Investors’ & Exporters’ (I&E) foreign exchange (FX) widow by the Central Bank of Nigeria (CBN) in April.
Commenting on the new policy, analysts at Cordros Capital Limited said they sensed improved investor appetite for risk assets on the Nigerian bourse, judging by market activity and the spike in the number of deals and the volume of shares traded shortly after the introduction of the policy.
They linked the performance to reduced apprehension in the macroeconomic environment, impressive full year 2016 and 2017 first quarter (Q1) results of highly capitalised companies, as well as increased confidence and liquidity in the forex market.
Speaking in the same vein, analysts at Afrinvest said foreign investors’ appetite for Nigerian assets had waned significantly on the back of the currency crisis, which in turn had fundamentally weakened macroeconomic environment, dragged corporate earnings, and impacted negatively on the equities market.
“However, in April, investor sentiment strengthened following the commencement of I&E FX window which signalled a possible return of flexibility in forex rate determination, though multiplicity of rates at the official window is still a concern.
One of the reasons the market suffered three years of a decline was refusal of investors to return after past losses they recorded. Despite the losses, some investors were still recording gains in the market, indicating that what was needed was more enlightenment on the part of the investors.
Realising this, regulators in the market intensified their investor education and financial literacy initiatives. Explaining the importance of financial literacy, Onyema said contemporary society requires everyone to understand the principles of money management and to develop personal financial management skills that will enable them manage their finances effectively to achieve financial freedom.
“We are playing our part in building a financially savvy generation, by implementing and supporting a number of programmes that contribute to raising the level of financial literacy in Nigeria. Notable among these programmes is the NSE Essay Competition which began in the year 2000. The competition is aimed at bridging the gap between classroom learning and practical knowledge required for long-term personal financial planning. It serves as an essential platform to get the perspectives of our young ones on key challenges relating to financial literacy and inclusion in Nigeria. The competition’s overall goal is to develop a culture of wealth creation amongst our youth towards “Building a Financially Savvy Generation.” Onyema said.
According to him, other financial literacy initiatives include school excursions to the Exchange, X-Tours, NSE Adopt-A-School initiative, school outreach programmes, financial literacy workshops and of course platforms such as the Global Money Week.
“We also donated a school, Maisandari Alamderi Model Nursery and Primary School, to the Borno State Government as part of our commitment to the global drive of inclusive and equitable quality education for all. The school which is designed to help Internally Displaced Persons (IDPs) in the state, is made up of two blocks of classrooms for 330 pupils and an administrative block consisting of a staff room, sickbay, security office and restrooms. Through these initiatives, we have been able to promote financial literacy among young Nigerians, by encouraging them to learn how good financial decisions can better their lives now and in the future and ultimately grow the economy,” he added.
On its part, the Securities and Exchange Commission (SEC) introduced and executed some initiatives that gave more investors to return to market in 2017. They include: dematerialization of share certificates; direct cash settlement; electronic dividend management system; national investor protection fund; complaint management framework; and corporate governance code and scorecard.
While the recovery of the market in 2017 would have ignited wild celebration among all stakeholders, allegations of breach of corporate governance issues against the management of Oando Plc and of financial impropriety against the Director-General of SEC, Mounir Gwarzo have proved to be a sore thumb. SEC in October, placed a technical suspension on the shares of Oando Plc and directed a forensic audit in the operations of the oil firm. According to SEC, the action was a result of outcome of a comprehensive review of petitions by Alhaji Dahiru Barau Mangal and Ansbury Incorporated alleging financial mismanagement of the company.
The duo had petitioned SEC, claiming majority shareholding in Oando Plc and that the company was being mismanaged by the Wale Tinubu-led management.
The commission explained that it carried out a comprehensive review of the petitions and found: breach of the provisions of the Investments & Securities Act 2007; breach of the SEC Code of Corporate Governance for Public Companies; suspected insider dealing; suspected related party transactions not conducted at arm’s length and discrepancies in the shareholding structure of Oando Plc among others.
SEC said after due consideration, the commission believes that it is necessary to conduct a forensic audit into the affairs of Oando Plc. But the management of Oando Plc faulted SEC, saying the forensic was not only unnecessary but was capable jeopardising the company’s operations.
While the market was waiting for the resolution of this matter, the news of financial impropriety against Gwarzo came in October. He was alleged to have requested and received the sum of N104 million as severance package when he became DG in 2015.
A petition, which has been sent to the House of Representatives over the alleged fraudulent activities, also accused Gwarzo of violating the rules guiding the SEC by awarding contracts to his companies and those of his family and friends.
The federal government in November suspended Gwarzo to allow for an unhindered investigation of several allegations of financial impropriety levelled against him. However, Gwarzo has said his suspension was due to his refusal to discontinue the forensic audit into the affairs of Oando Plc.
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