Falling equities, low investor confidence discouraging public offering

Continued dipping of prices of equities and poor investor confidence are discouraging issuers from raising funds in the nation’s capital market, BusinessDay investigations have shown.

Besides, cumbersome regulatory requirements and costs of the issue are counted among the inhibiting factors that have led to the drying up of public offers of shares since the market crash four years ago.

Also, the anticipated reversal in capital flow, brought about by a downward review of the $85 billion monthly stimuli by the Federal Reserve of the United States, has the potential of reducing offshore portfolio investors in the local market to cover the gap.

One of the ways the Fed can stimulate the US economy is by quantitative easing (QE) through which bonds are purchased with newly created money.

Bismarck Rewane, chief executive, Financial Derivatives Company Limited said, “Traditionally, quoted companies issue new equity when prices are high. Public offers of shares have dried up since the market-crash of 2008-09. Low equities’ prices and poor investor confidence had discouraged issuers from raising capital in the public markets.”

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The equities market created a historical record last Friday as Nigeria’s All-Share Index (NSEASI) declined by 5.85 percent on speculation that foreign investors would exit, following likely easing of the US Federal Reserve’s stimulus package, qualitative easing (QE) programme, thereby pushing up the yields on the United States’ Treasury products.

Foreign investors accounted for 43 percent of trade on the NSE in March and 61 percent in all of 2012, while net foreign inflows into Nigerian equities amounted to N29.3 billion ($182 million) in March, compared with N93.8 billion in 2012, according to data from the bourse.

Analysts at the FSDH reported on Tuesday, that “the equities market depreciated to close the week as the Nigerian Stock Exchange All Share Index (NSE ASI) lost 5.85 percent to close at 37,249.23 points. The market capitalisation also recorded a loss of 5.85 percent, to close the week at N11.96 trillion (approximately US$71.89 billion).”

Similarly, analysts at Afrinvest said, “We attribute companies’ rebuff of public offerings to cold disposition towards diluting their shareholdings in the interim. The regulatory requirements and costs of issue may also be a barrier. In addition, the upsides of debt issue in terms of tax shield effect of the interest cannot be undermined.

Domestic investors currently control approximately 57 percent (as at March 2013) of transactions, while FPI has consistently shown increased interest in the stock market. We do not expect this trend to rescind in the near term.”

Razia Khan, analyst with Standard Chartered Bank, London, said, “Perhaps it is only because raising equity capital, other things being equal, is more expensive, this is not Nigeria-specific. This applies everywhere.”

Also, concerns over the stimulus package by the Federal Reserve that would increase yields on instruments have put foreign investors playing dominant roles at the local market on the edge, so as to take opportunity from the easing.