Saturday, September 19, 2020 06:00 AM / by Proshare Research/ Header Image Credit: EcoGraphics
Inthe 1970s and 1980s, Nigeria's stock market was still in its infancy. The openoutcry system prevailed with most brokers running on passion or 'animal spirits' rather than logic. The mood of the market was shaped by the powerfulaphrodisiac of rumor, speculation, clean and dirty corporate numbers with adash of hubris.
The1990s was a bridge between the old and the new with the federal governmenttaking a more proactive approach towards private sector involvement in theeconomy, especially in respect of developing a mature local capital marketcapable of significant capital raise to support domestic enterprises. The 1990sdecades saw a deepening, widening, and upgrading the capital market.
Forexample, in 1990 the NSE introduced the collective investment scheme called unittrusts. The unit trust product was designed to encourage small-timeinvestors to take advantage of superior investment returns available to biggerplayers in the equities market who tend to trade stocks with large marketcapitalizations and relatively steep prices. The 1990s also saw an increase inmarket operators (CMOs) from 140 in 1992 to 226 in 1999 or an increase of +61.43%. To improve settlements and repositoryservices the Exchange established the Central Securities and Clearing System(CSCS) in 1997. The creation of the CSCS reduced the transaction settlementperiod from transaction day plus 14 days (T+14) to transaction day plus 5 days(T+5). The reduction in the transaction cycle spurred an increase in marketconfidence and improved traded volumes (the transaction cycle has since beenreduced to T+1 from T+3 in 2015). The volume of shares traded rose from N557min 1997 to N2.097bn in 1998 and N3.954bn in 1999 (seetable 4).
Table 4: NSE: Eight Years of a Transition (1992-1999)
Between2010 and 2019 the market has seen improvement but, in its numbers, but the risein market indices appears to have fallen by far short of expectations set bythe Exchange's managers in 2011. But the last two decades, and particularly thelast decade, have witnessed some triumphs with the bumps. (see table 5).
Table 5: A Contrast of Two Eras
Atthe turn of the millennium, the stock market saw a steady rise in traded equityvolumes with a significant leap between 1995 and 1999 (from N397m in 1995 toN3.9bn in 1999) before it fell into a shallow ditch between 1996 and 1997,which was ahead of the global financial meltdown between 1997 and 1998.Surprisingly the global financial crisis of the late 1990s had a minimal impacton the local equities market.
Thenext decade from 2000 to 2010 created an additional twist to the market'sevolution. The drama of high impact political engagement of the managers of theNSE and the internal squabbles between the Exchange's managers and Councilmembers between 2000 and 2010 simmered between 2010 and 2015, except theincidences of the early difficulties within SEC and between SEC and the NSE andbetween SEC and the House ofAssembly Committee on the Capital Market (see the Council members of the NSE between 2009 and 2014 )
Table 6: Aliko Dangote's Turn atThe NSE Council Steering Wheel; A Time of Growth and Simmering Conflict
Theperiod between 2010 and 2015 saw heightened market awareness and a tougherregulatory push towards global best practices, but the raw emotions ofindividuals, institutions and vested interests made for an impossible sequenceof unwinnable skirmishes. Onyema in the last ten years has brought somesaneness to the fistfights between stock market regulators and legislativeoversight bodies while making effort to upscale market sophistication. However,despite Onyema's best efforts the equities market still shows considerableweakness concerning the number of traded instruments available and the volumeof free float for prime market traded instruments.
Ona pleasant note, in March 2018 the NSE, SEC and the former management of theExchange led by the erstwhile DG, Dr. Okereke-Onyiuke, came to an amicablesettlement with the Exchange, with the stock market regulator agreeing to paythe entitlements of the affected former staff and recognize the right of Dr.Okereke-Onyiuke to the land title to her house built in Ikoyi, Lagos. Also, it wasagreed that the sack of Okereke-Onyiuke be recognized as retirement after 27meritorious years at a market that she had helped to nurture. The settlementput a decent end to a sour chapter in the Exchange's recent history.
NSE: The Story of Here and Now
Overthe last ten years, Oscar Onyema has pushed for a stronger, deeper and broaderlocal stock market. The alumni of the New York Stock Exchange (NYSE) had noillusions about the challenges he would face in a market hamstrung by narrowasset classes and relatively low domestic liquidity, but he was optimistic thatthings could be made better. In 2011 Onyema led a team of young andnot-so-young professionals in setting sail along a new course that wasuncertain but promising (see Table 7)
Table 7: NSE's New Plough Hands
Onyemahad to start the process of redirecting the Exchange towards bolder milestoneswith the support of an executive council peppered with a few prominent privatesector executives. The NSE's new CEO would have found the early days unsettlingas he would have had to navigate a minefield of tough personalities, polishedegos, and hardboiled market experience (seeillustration 1).
Illustration 1: NSE Old Boys (and Girls)of the Council
Thefirst set of things on Onyem's agenda was to make the Exchangeforeign-investor friendly by ensuring tighter market governance with stricterrules over trading practices and the submission of regular periodic reports bylisted companies (although the likes of Warren Buffet have advocated thatreports to Exchanges should be less frequent because they lead companies topursue short-term profitability goals rather than long-term corporate stabilityand value creation, thereby leaning companies towards creative accounting anddodgy financial statements). The Onyema era has so far seen the followingactions/events:
- Companies submit timely reports on insider trading actions
- Companies inform the Exchange and investors of a share's closed period for trading before an annual general meeting (AGM)
- Change in rules concerning transactions with related parties or interested persons
- Creation of new Board segments and Indices (NSE Main Board Index, NSE30 Index, NSE Premium Index, NSE Banking Index, NSE Pension Index, NSE Insurance Index etc.)
- Introduction of Exchange Traded Funds (ETFs)
- Introduction of Real Estate Investment Trusts (REITs)
Onyemahas driven a generally forward-looking agenda at the NSE but constraints ofslow economic growth, cultural/personality traits that prevent Nigerians fromoffering up equity in successful businesses, and poor administrative marketmemory have inhibited faster service delivery and market breadth. Thecombination of these factors has subdued the desired performance metrics of theExchange's CEO and his team.
TheNSE has seen four (4) listings by way of initial public offerings (IPOs) and 13offers by way of initial introduction (LBI) over the Onyema years from2011-2020. The growth in the number of listings by way of introduction ratherthan public offerings underscore the observation that Nigerian corporationstend to favor a closely-knit shareholding structure with minimal share dilutionthan a broader share structure with additional shareholders diluting corporateinfluence and dividend payouts (see illustration 2).
Illustration 2: NSE: TheComplex Alchemy of Raising Funds Locally and Abroad
Analystshave observed that new equity issues by way of IPOs have not been the preferredmethod of capital raise in the local market as most companies prefer to dealwith their working capital and long-term funding needs by a combination ofshort-term bank borrowings and retained annual corporate earnings. So far, thelocal money market has served these purposes well, as cash-seeking chieffinancial officers (CFOs) have easily needled their bank credit officers fortemporary overdrafts (TODs) or short-dated loans by way of overdrafts (ODs).
However,considering the onset of the coronavirus pandemic which has disrupted domesticsupply chains and rattled corporate liquidity, it is doubtful if past fundingpreferences would be sufficient to support future growth expectations. However,the capital market option comes with difficulties. To sell a public offer in arecession is as easy as surfing on a shark's back, investors are increasinglyshying away from parking money in risky assets, with or without polishednameplates. In other words, the omen for a successful primary market issue in2020 or 2021 remains grim.
Withthe country's recent gross domestic product (GDP) showing a modest growth of +1.87% in Q1 2020 and crimson-colored -6.10% in Q2 2020, the economic outlook issufficiently depressing to keep investors out of the local equity market for afew more months or perhaps years. This means that the poor IPO trend of thelast decade will likely be sustained.
Downloadable Versions of NSE Ten Years After Takeover Report (PDF)
1. ExecutiveSummary: NSE Ten Years After a Takeover: The Good, The Bad and Undecided - Sep 16, 2020
2. Full Report: NSE Ten Years After a Takeover: The Good, The Bad and Undecided - Sep 16, 2020
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1. NSE Ten YearsAfter a Takeover: The Good, The Bad and Undecided
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