For two major reasons, it took four straight years for the Nigerian stock market to begin to rebound after the 2008 Stock Market fiasco. The first reason was the severity of the crash which entrenched deep-seated fear and eroded investors’ confidence in the market. The second, was because the Nigerian stock market is a mono-product market which trades mainly on equities. Characteristically, mono-product markets takes a very long time to rebound after destabilization because they do not offer investors alternative investment safety nets to migrate to especially in crisis period.
Upon rebound, the market hit an all time high in November 2013, and closed the year strong. Market capitalization stood at N13.226 billion showing a 47 percent growth. The equities retuned 36.06 percent year to date (YTD) in dollar term, and was trailed with a wide margin by the S& P 500 which progressed 26.11 percent YTD, while the UK FTSE ASI returned 11.80 per cent YTD in dollar term. Conversely, Brazil’s Bovespa and South Africa FTSE/JSI had declining returns of -26.95 percent and -6.72 percent respectively.
The performance of the Nigerian stock market can be attributed to three major factors, namely, the determination and ardous efforts of the regulatory authorities, especially the Securities and Exchange Commission (SEC) to reposition the market through effective policies and structural adjustments, the activities of foreign portfolio investors and the appointment of market makers who created liquidity. The SEC appointed 10 market makers for equities and 10 for bonds.
The Director General, SEC, Ms. Arunmah Oteh means business. She is dynamic and determined. She will go a long way as she continues to understand the peculiarities of the Nigerian stock market, its political and socio- psychological dynamics. Among other things, Ms. Oteh has been an advocate of collective investment- a mutual trust scheme that pools the resources of investors together and managed by professional fund managers on behalf of the investors. The scheme is reported to have hit $1 billion as at end of 2013.
The stock market remains a veritable source of wealth creation and mobilization of long term funds for economic development. As the market opens the year in optimism five years after the 2008 historic crash, it is strategic to put in perspective the factors which orchestrated the crash; in order to serve both as a reminder and guide towards better regulation and operation by stakeholders.
A development that set the stage as it were, prior to the crash, was the flurry of bastardized private placements which flooded the market in 2007/2008. Issuers of the so called private placements promised to list the issues on the stock exchange thereafter, which promised prospects of capital gains. This seduced investors en masse from the secondary market and resulted to an out flow of massive investible funds estimated at over N800 billion for subscription of the “Private placements” and created a lull in the secondary market. Till date, none of those issues have been listed as promised which remains a challenge to SEC.
The main factors which finally precipitated the crash are as contained in an independent report, captioned “A Strategic Report on the Stock Market Downturn vis-à-vis Banking Consolidation’’, which I wrote and delivered to the regulatory authorities – CBN, SEC and later on, NSE, to provide insight to the market crash.
The report outlined the roles played by banks, CBN, stock brokers and NSE respectively, either overtly or covertly in the crash and also made recommendations to guard against future occurrence; though it is acknowledged that one cannot be too careful with the stock market going by the concept of Brownian motion- a concept which describes random movements such as particles in a fluid and which is applied to stock market movements.
On the role of banks, the report noted they invaded the stock market after the banking consolidation as they advanced heavy margin loans to market players, which in some cases were used to play the bank shares in a calculated move to shore up their share prices for quick gains. This created a bubble in the market. Unfortunately, CBN did not regulate margin loans as it did not realize how destructive it can be to stock markets when things go awry in the market. And when the apex bank finally decided to ban the practice, it mismanaged information on the ban which created panic in the market and triggered a massive dumping of shares by investors in a typical demonstration the hard mentality.
Sadly, the development coincided with the exit of foreign portfolio investors in the wake of the global financial crisis. Thus, it became a double whammy for the Nigerian stock market as share prices fell with uncontrollably with confounding rapidity.
In order to guard against future occurrence, it was recommended that CBN liaised closely with NSE/SEC on policy issues on the stock market, and also evolved guidelines on margin loan which should not exceed a certain percentage of banks’ total loan portfolio. In accordance, CBN pegged the limit at 10 percent and has since been liaising closely with other regulatory authorities.
The banks also abused universal banking which prompted their disastrous invasion of the stock market. They failed to realize that the underlying principles guiding stock market operation can be far more complicated than many operators understand it. And that could be why CBN abolished universal banking and reintroduced merchant banking which offers specialized skill on investment banking.
Corporate governance was another major factor that contributed to the market crash. There was a breakdown in regulation which signaled the presence of a destructive mechanism in the system, particularly in the banks. Some CEOs had become autocrats and circumvented processes in loans advances and administration. The report canvassed for corporate democracy as an integral part of good corporate governance which often engenders superior investment decisions.
Stock brokers’ role in the crash was through emotional trading, on the back of heavy margin loans. In the process, brokers became oblivious of the fact that automation had changed the dynamic of the market which had become more volatile. This is in addition that trading activities on the market is skewed 67-70 percent to the banking sector, thus any upheaval in the banking sector would generate a domino effect on the entire market which was the case when CBN abruptly stopped margin loans and banks were prompted to make margin calls. And Bedlam came to the market.
By: Arize Nwobu