N2.1trn equties loss questions Market Makers liquidity role

The recent fall which pushed Nigerian equities to seven year lows with a N2.01 trillion loss is raising questions on the role of Market Makers (MM)

introduced to the stock market barely four years ago when a similar loss scenario played out.

Also, Nigerian stocks have fallen into bear market territory as the sliding prices of the country’s main export – oil – takes a painful toll on the West African nation’s finances.

Consequently, Nigeria has become the latest country to join the bear club as its benchmark equities gauge, the Nigerian Stock Exchange All Share Index, has slumped more than 20 per cent since the start of 2016. The index has fallen a further 4.1 per cent today to 22,550.83 points as brent dipped as low as $27.67 as one point earlier today.

However, Market Makers are dealing members of the Nigerian Stock Exchange (NSE) who  were appointed and assigned to enhance the stock market’s liquidity of particular securities, in accordance with NSE rules. The process involves entering bid and offer prices in the automated trading system for a specified security under conditions stipulated by the NSE.

While stakeholders in the market realise that Market Markers couldn’t have saved the over $30billion (about N6trillion) lost in equities value since June last year, they believe active Market Making roles could have as well provided a hedge against constant free fall. Primary Market Makers are the foremost liquidity provider for particular securities and  have undertaken to assume the role, while supplemental Market Makers are meant to act as  supplementary liquidity providers. “Market Makers have done well, though they are not perfect. We will continue to ensure their functions over time work better. There is a lot more everybody in the ecosystem can do together to save the market”, Oscar Onyema, chief executive officer, Nigerian Stock Exchange, said recently, in response to BusinessDay questions at the NSE 2015 market recap and outlook for 2016.

The NSE appointed primary Market Makers are: Capital Bancorp Plc, Chapel Hill Denham Securities Limited, CSL Stockbrokers, Dunn Loren MerrifieldLimited, FBN Securities Limited, Futureview Securities Limited, Greenwich Securities Limited, Rencap Securities Nigeria Limited, Stanbic IBTC

Stockbrokers Limited, and Vetiva Securities Limited. The supplemental Market Makers are: Capital Assets Limited, Capital Bancorp Plc, Cordros Capital Limited, FCSL Asset Management Company Limited, FSDH Securities Limited, Greenwich Securities Limited, Investment One Stockbrokers International Limited, Magnartis Finance & Investment Limited, Partnership Securities Limited, Rencap Securities Nigeria Limited, Stanbic IBTC Stockbrokers Limited, and United Capital Stockbrokers Limited.

Listed stocks at the Nigerian Stock Exchange have lost about N2.1 trillion in eleven trading days into 2016 as Nigeria struggles with oil price shocks and the resultant impact on the naira. Stocks trading at the Nigerian bourse began this year with equities market capitalisation at N9.850 trillion and NSE  All Share Index (ASI) at 28,642.25 points, but the market performance indicators declined to N8.086 trillion and 23,514.04 points respectively last weekend.

The NSE ASI closed Monday at 22,550.83 points and market capitalisation lowered at N7.755 trillion.

This huge value loss which has continued into this week is driven largely by sell-off and has created attractive entry levels and an opportunity for value hunters to invest in equities at relatively cheap prices, including stocks, plus those which Market Makers are meant to make market on. In line with his vision to deepen the Nigerian capital market and make it the gateway to Africa capital markets, Onyema and his team introduced many initiatives. Apart from restructuring various sectors in the market, the Exchange also reviewed its listing requirements to encourage new listings and introduced new products.

Similarly, in a major move to deepen the liquidity in the market, the Exchange introduced Market Making and Securities Lending. Market Making started with the appointment of 10 Market Makers in April 2012, and they commenced with making markets in 15 stocks on September 18, 2012.

The initiative commenced with 15 securities, and these included PZ Cussons Nigeria Plc; Nigerian Bag Manufacturing Company Plc; International Breweries Plc; Lafarge Africa Plc; Fidson Healthcare Plc, Redstar Express Plc. Others are Zenith Bank Plc, Sterling Bank Plc, DN Meyer Plc, Diamond Bank Plc, FCMB Group plc, Fidelity Bank Plc, Nigerian Breweries Plc, Guaranty Trust Bank Plc and UAC Nigeria Plc.

By the end of the first six months of the programme, 52 securities were included in the basket of market making stocks. Looking at some of these market making stocks as indicated in Vetiva Capital research, Diamond Bank plc declined 15.42percent week-on-week (w/w) to close at N1.81; FCMB declined 21.33% w/w to close at N1.18; Nigerian Breweries declined 11.51% w/w to close at N96.90; and UACN declined 15.27% w/w to close at N17.15.Also, another market making stock – PZ Cussons Nigeria plc declined 13.78% w/w to close at N20.08; Lafarge Africa declined 17.38% w/w to close at N86.75; GTBank plc declined 25.31% w/w to close at N13.37; and Zenith Bank plc declined 26.82% w/w to close at N9.44 among others.

“Oil prices are expected to tank in coming weeks, as Iran seals deasl with the west, which is expected to heighten the supply glut in the market. That, along with CBN capital control measures will keep FPIs sitting on the sidelines or dumping Nigerian equities.

Furthermore, FY-15 corporate performance expectation remains feeble and does not support a market rebound. “We maintain our expectation of a bearish market in the short term; banking on a possible reversal of market drags which will trigger a rebound. Value stocks are getting more attractive with prices at ridiculously low points. Hence, we advise bargain hunting for long term horizon of more than 2 years”, said United Capital research analysts. “The Nigerian bourse continued on a downward slope this past week as intense selling pressure steered the heavyweight Financial Services, Industrial Goods and Consumer Goods sectors to 19%, 16% and 9% respective declines for the week. Selling showed no respite through the week as oil prices reached 12-year lows and global risk-off sentiment pushed stock prices lower all through the week; the NSE ASI lost 13% w/w to put the index at negative 17.8% ytd in its worst start to the year since the 2009 financial crisis. “Whilst we note the opportunity for bargain hunting across select large caps, we think macroeconomic concerns will continue to weigh on market sentiment in the coming week even as oil prices remain under pressure”, says Vetiva Capital analysts in their breakfast report. Looking at last week’s market performance and outlook this week, research analysts at Dunn Loren Merrifield said, “the market demonstrated negative dynamics as barrage of selling across board beset domestic equities throughout; caused by risk-off sentiments stemming from dampened economic growth prospects and the plunge in oil prices.

The Nigerian Bourse is expected to be largely bearish this week due to lack of catalysts to drive the market.”

Meanwhile, Nigeria is struggling to cope with crude prices that have fallen to below $30 a barrel, while investors are holding off from pouring money back into the country until there is clarity over whether the currency will be devalued to compensate for the drop in oil revenue. With the backing of President Muhammadu Buhari, the central bank has restricted supplies of foreign currency, curbing growth and all but pegging the naira at 197-199 per dollar since March last year.

“The oil price is scaring’’ investors away, Lanre Buluro, head of research at Primera Africa Securities Ltd., said by phone from Lagos.  There is also “no clarity on the exchange rate,’’ he said.

The slide in stocks comes only one trading day after the bourse introduced a circuit breaker on Jan. 15 to limit price swings. Trading on the Nigerian Stock Exchange will be stopped for 30 minutes if the All Share Index moves more than 5 percent from the previous day’s close between 10:15 a.m. and 1:45 p.m., the bourse said. The market will close for the day if the circuit breaker is triggered for a second time.

“Using a circuit breaker to shore up the market — rather than to avoid volatility — is deeply flawed,” John Ashbourne, a London-based economist at Capital Economics Ltd., said in an e-mailed note to clients. “Nigerian equities face fundamental pressures, not least the country’s slowly-unfolding currency crisis, which is deterring foreign investors. Indeed, a circuit breaker may well push dealers to sell faster than they otherwise would; the effect is akin to calling last orders at a crowded bar.”

FCMB Group Plc, a lender and money manager, fell an eighth day, retreating 8.5 percent to 1.08 naira, a record low. Lafarge Africa Plc declined 9.7 percent to 78.30 naira, its biggest decline in more than 14 months, while Stanbic IBTC Holdings Plc decreased 9.7 percent to 12.23 naira, its biggest drop since October 2008.

Oil accounts for two-thirds of government revenue and about 90 percent of its foreign currency earnings. The commodity’s slump is weighing on growth, which is estimated to have slowed to 3.2 percent last year, the slowest pace this century, according to a Bloomberg survey of economists. It’s also spurring speculation that the official exchange rate of the naira will be lowered, with prices on three-month naira forwards weakening to 251 per dollar on Monday, matching a record low.

Nigerian central bank Governor Godwin Emefiele must appear at a hearing in Abuja, the capital, at 11 a.m. today, to explain a slide in the naira on the black market and amid calls from the main opposition party for him to quit. The shortage of dollars has led to the naira weakening in the past several months on the parallel market used by companies that aren’t banks. The black market rate fell to 300 against the dollar for the first time last week and was at a record 305 on Thursday.

Iheanyi Nwachukwu, with agency report