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Any foreseeable revival for the 'comatose' NSE?
December 1, 2009

The last nineteen (19) months since the NSE attained an all time high of 66,371 before beginning a sustained decline has been a nightmare for majority of investors in the market. Since March 6, 2008 when the market began its distribution, the NSE all share index has lost 43,833 or 66 per cent closing at 22,560.4 on October 15, 2009 as shown in the graph below.

Although the all share index has declined 66 per cent over the last nineteen months, the decline amongst several listed stocks far exceeds the loss of the all share index. For example Costain, Intercontinental Bank, and Bank PHB are down N82.18 or 95.1 per cent, N41.68 or 91.1 per cent and N30.98 or 91.5 per cent respectively from their 2008 all time high. Investors who purchased these stocks have been financially and emotionally decimated. The comatose state of the Nigerian Stock market has left many investors disillusioned and full of regrets for ever investing in stocks listed on the NSE. It appears that these investors will not get any succor anytime soon because of several circumstances surrounding majority of the listed banks stock. Skepticism looms in the market arena as investors are left to wonder about any possible recoveries of lost grounds for the NSE listed stocks.
Although the CBN has spent the most recent two months dissecting possible attempts to bring some transparency to the banking sector, I believe that more should be done to turn the Nigerian stock market around.

In 2006 and 2007, NSE was one of the best performing stock exchanges in the world. However, in 2009 while most of other exchanges exploded into bull markets (i.e., above their 200 day CSMA), the NSE continues to be stock in a maze with no clear direction.  It appears to be an exchange that takes one step forward and two steps backwards.  Most of the exchanges worldwide have recovered or are on the path to recover from their 2009 low.  For example the China index (Hang-Seng) is up 10,654.5 or 93.9 per cent from its 2008/2009 low of 11,344.58, the United States Dow industrial average has gained 3,515.9 or 53.7 per cent from its 2008/2009 low of 6,547.05 and the London index (FTSE 100) is up 1,710.90 or 48.7 per cent from its 2008/2009 low of 3,512.1 as highlighted in the graphs below.
Why then does the NSE continue to lag behind most of the world exchanges? The answer to this question varies from individual analyst to the other. In some of my previous articles I suggested measures that I believed will help to correct the current downtrend. One of my suggestions was to discontinue the current policy of one per cent daily allowable decline, while the five per cent allowable increase remained in place. That policy had an upward bias and will result in traders selling into the upward trend.  The NSE subsequently reinstated the former policy of the five per cent upward limit and  fiver per cent downward limit after several analyst and stockbrokers complained that the policy was more detrimental to the listed stocks. 

The NSE should be commended for previously taken the following measures to correct the NSE downtrend:
Postponing of the uniform fiscal year-end deadline for commercial banks from December 31, 2008 to December 31, 2009.
Suspension of the N 1 billion capitalization for stock brokerage firms
 Issuance of an exemption to the provisions of the relevant sections of CAMA, to permit quoted companies to buy back up to 20 per cent of their shares to curb the spate of bearish trading in the market by the office of the Attorney General of the Federation
Policy reversal to allow commercial banks to continue extending margin loans to inventors
Nevertheless, more has to be done to bring back confidence to the NSE.  One of the biggest problems is that majority of the listed stocks have too many shares outstanding.  Shareholders are basically "under the water", therefore they tend to sell into any uptrend.  As I suggested in the past, the governing body of the NSE has to encourage most of these companies with the approval of their shareholders to perform share reconstructions.  This has to be done with very strict guidelines with eyes towards building strong shareholders values to prevent these shares from declining after the conclusion of the exercise.

Additionally, Sec, NSE, and CBN have to put strict guidelines in place to prevent listed companies from implementing policies that are destructive to value creation. For example the recent pronouncement by several Nigerian banks to raise funds through bond issues was value destructive which will further exacerbate the problems of the Nigerian Stock Exchange. By issuing these bonds, the funds that investors will use to buy stocks will instead be used to buy corporate bonds; thereby postponing any early recovery.
These banks should spend time instituting internal reform such as risk management procedures, loan approval procedures, share reconstruction, etc before raising funds through debt. Heal thy self should be the motto for most of these banks now. Raising funds through corporate bond will increase their debt profile and simultaneously increase the amount paid for debt services, reduce cash flow, net income, EPS, and dividends. These reductions in the aforementioned financial indicators and ratios will negatively impact the valuation of these banks share prices. Therefore this is not the time for destructive behaviour.

 The Financial Standard Newspapers, Tuesday December 1, 2009.

 

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