Experts ask NSE to diversify products, include short selling for price discovery. Some investment experts are asking the Nigerian Stock of Exchange (www.nse.com.ng) to diversify products and include short selling for enhance price discovery in the market.
At the moment, short selling which allows investors to borrow shares and immediately sell with the hope they can scoop them up later at lower prices is not a feature in the stock market.
Analysts stressed that weak macroeconomic condition; low sentiments in the market are the key reasons why Banks and other companies impressive profits have failed to raise stocks prices.
It was noted that foreign portfolio investment came weak in the third quarter of financial year 2019, again.
They understand that the cumulative effect is on the performance of the market where institutional investors have remained bearish, largely in the year.
The experts however okay the efficiency of the Nigerian Stock Exchange in capturing real time information and pricing listed stocks. They said the exchange is not the problem.
Analysts said inability of the stock market to reward performance is beyond earnings releases, rather other factors like macroeconomic condition in relations to investors’ sentiments.
“Nigerian stock market prices sentiments more than it does earnings, as it unable to put price on uncertainty in the macro-economic condition in general”, a Professor of Economics told MarketForces.
Market observers take specific interest on commercial banks that declare about N100 billion profits in but their prices are at significant variance with the bloated earnings.
Stakeholders wondered for long enough as to the reason why earnings season performance from banks do not have significant impacts on stock prices over the years.
Banks profits has become normal ritual, quarterly, half yearly and annually but nothing significant to show for micro-investors, though large tickets investors don’t feel the same in totality.
Damilare Asimiyu of GTI Capital group said what the Nigerian equity market as a whole is going through can be described as a period of “sentiment low beat” as both foreign and domestic investors have many uncertainties beclouding their investment projection.
According to him, this could be attributed externally to global uncertainties arising from trade and geopolitical tension, and in the domestic economy, weak macroeconomic fundamentals.
“As regards the main issue in your question, any prudent investor will not really be deceived by what I will describe as a “make shift” performance of most Nigerian banks in the last three to four quarters, due to shocks.
“If you critically analyse the financials of these banks we are talking about in the last three to four quarters, their good bottom lines has being mainly impacted by high earnings from trading activities.
“This is mostly from fixed income instrument with lucrative yields in most part of 2018 and not their primary line of business – which is interest income”, he told MarketForces.
Asimiyu said: “this implies that fundamentally, the performance of the Nigerian banks mirrors the trend in the broader economy where GDP growth has continued to trail the population growth rate in the last four to five years.
“Hence, for any investor that understand the impact of macroeconomic fundamentals on the sustainable performance of public limited liability companies like these banks in the medium-to-long term, the best thing to do is to remain a speculative until sustainable positive driver(s) for the economy is spotted”.
MarketForces while addressing the issue also seeks lasting solutions.
On this note, Asimiyu said: “To solve this problem, there are both fiscal and monetary policy actions that must be taken.
He said that on the fiscal side, the government must come up with drivable medium-to-long term macroeconomic policies that will raise the hope of investors, that come 2-3yrs, Nigeria’s economy growth will hit 5% or more.
He also stated that the macroeconomic policies must be ones that will ease the business operating environment, reduce multiple tax, increase demand for goods and services by customers, and reduce economic vulnerability to external shock like the crude oil price crash of 2014.
“On the monetary policy leg, the capital market regulators must continue to intensify effort to gain investors’ confidence by promoting and upholding transparency in the system.
“While Nigeria needs to maintain attractive yield rate environment in order to continue to bait foreign investors, I think with the current development in the external environment, a further reduction in the MPR (below 13.5%) will impact equity market positively”, Asimiyu said.
Tunji Adeniran CFA said that market is very efficient and stock exchange is not the problem. To Adeniran, Banks are over performing and may continue to do so in the foreseeable future.
He said however, the positive performance does not reflect on the share prices due to horn effect.
According to him, In the long run, companies cannot outgrow the economy. Every investor knows that the economy is very fragile with barrage of issues.
He said Nigeria is suffering from what economists call twin deficit and no concerted efforts to fix it. This is what is sending investors away from buying stocks.
Chidiebere Onwuka, an investment expert said stocks are not optimally priced because institutional investors, Pension Funds as an example, are not taking their rightful place in the market.
Onwuka said: “Do you know that at a point few months ago, the expected dividend yield on Zenith was over 20% and yet pension funds were not buying”?
“I tried to get margin to buy but stockbroking firms I approached were too scared to lend even when I offered 400% collateral”.
“I don’t think it’s about the efficiency of the stock exchange. The sentiment towards Nigeria is weak; there are a number of macro concerns, policy uncertainty and recently the CBN policy that creates worries for the banks”, Kayode Omosebi, Senior Associate, Financial Advisory ARM Investment told MarketForces.
“When there are uncertainties about the future earnings alongside macro concerns that could hurt investment, sentiment will be low”, he added.
Omosebi said that’s why there are stocks that look very attractive but nobody is buying into them. It is sentiment driven and not an exchange problem.
The market reflects and acts on the information regarding companies and industries as a means to determine the value placed on the corporates, Olumuyiwa Adebayo ACCA, Finance Manager at Sahara group said.
He said the banking sector of the financial industry is not an exception. In the most recent time, the economy of the country has continued to dwindle.
Adebayo said though the economy is said to have been out of recession, the banks have continued to show improved financial performance but backed up by poor liquidity, upsurge Non-Performing Loans (NPL), Corporate Governance concerns.
This include inadequate lending power, lack of positive outlook for their ratings, plus the narrative of contagious risks in the industry may have accounted for the negative performance of their in the NSE.
This makes it crystal clear that their poor performance in the capital market cannot be solely attributed, or mainly attributed, to perceive ‘market inefficiency’.
“Also, harness technology that promotes efficiency of trading, re-jig market rules and regulations to match international best practices, etc.”, Adebayo said.
