*Stakeholders lament CBN’s high interest rate
*Say it will affect market performance in 2nd half
16 September 2013, Lagos – The positive sentiment at the Nigerian stock market at the beginning of the year has continued to impact on performance of the market which has recorded a 26 per cent growth in the last eight months. The market indicators, which are the barometer of the health of the financial market, as at the end of third quarter of 2013 showed that share prices of most of the companies listed in the exchange have risen by 26.6 per cent.
The average of all the prices gained during the period has caused the value of all shares listed at the stock exchange to hit N11.533 trillion at the end of trading last Thursday, September 12, 2013, compared to the N9.109 trillion it started the year with.
Also during the period, the share price of Nestle Nigeria Plc crossed the N1, 000 marks for the first time in the history of Nigerian stock market to close at N1, 088 per share, following high demand by domestic and foreign investors, a mark of the growing confidence by both local and foreign investors in the Nigerian economy.
The Index had opened in the first day of trading in January at 28,078.81 points to close Thursday September 12, 2013 at 36,224.44 points, showing a gain of 29 per cent. Similarly, the market capitalisation rose by 26.6 per cent from N9.109 trillion it opened with in January to N11.533 trillion as at the close of business on Thursday. The stock market ended Thursday with investors trading 150.58 million ordinary shares valued at N1, 732,683.
However, the market had reached a new high of above N12 trillion this year before dropping due to the vagaries of demand and supply of the market.
Notwithstanding the positive growth, operators and other stakeholders in the financial market have raised fresh alarm over the continuous retention of Monetary Policy Rate (MPR) at 12 per cent by the Central Bank of Nigeria (CBN), saying it will affect quoted companies’ performance and capital market indices for the remaining part of the year.
Analysis of the performance of the capital market showed that the month of August closed at 36,248.53 points, a loss of 151.85 points. Month-to Date-showed a total loss stands at 2,102 points or 4.40 per cent.
Thaddeus Investment Advisors & Research Limited in its opinion of the Nigerian stock market as at August, 2013 said “The top 25 stocks (category A) are institutional interest-driven stocks with minimal retail participation. Category B has a better balance of institutional and retail interest-driven investor participation. We put the ratio at 2:1 with the greater portion going to institutional interest; Category C consists of retail interest-driven stocks with minimal institutional participation.
For Category A, price performances (Year-to-August 30th) are better than the Nigerian All-Share Index (29.09 per cent) as market value decreases. Only four stocks in the top 10 most capitalised companies have price performances better than the market, while eight of the last 15 in Category A have price performa
nces better than the overall market. In a nutshell, as market value decreases, price appreciation improves among Nigeria’s 25 most capitalised companies.”
It also noted that stocks outside of the top 75 are much less actively traded compared to the top 75 and therefore are largely stagnant in terms of price movement. The average price performance as at reference date of August 30th was six per cent for Category D relative to the overall market at 29 per cent.
“Retail investors drive stock volatility and stocks that have a decent level (in excess of 30 per cent),” adding that retail investor participation based on value not volume will on average have a better price performance than stocks that have retail investor interest less than 30 per cent. Retail investors participate more in stocks that are cheap on an absolute basis. This has nothing to do with valuation” it added.
Also commenting on the performance of the stock market for the period under review, Tola Odukoya, President, Dunn Loren Merrifield, an independent equity research and analytical company, said; “ Overall, activities in the capital market during the review period was lifted by secondary market activities in equities with a few primary issues.
He explained that companies’ results were also encouraging, especially for banks, “although this may not be sustained for the rest of the year based on new guidelines and regulations from the CBN.
He stated that the slowdown in activities in the bond market persisted following the federal government’s shift to the international financial market for its borrowing, whilst the monetary and interest rate environment continued to deter states and corporate organisations from raising funds in the market.
Also speaking, Mr. David Adonri, Managing Director/CEO, Lambeth Trust & Investment Company Limited, noted that year-to-date, the equities market appreciated by 29.10 per cent, led by the industrial goods sector, which rose by 54.69 per cent.
He stated that the only sector that declined within the period was the Alternative Securities Market, ASeM, which lost 1.92 per cent, while saying that the recently re-activated platform for retail bond trade had been very active.
However, the equities market is not expected to be upbeat for the remaining part of the year. It may momentarily firm up when quarter three financial results are released, but the usual season trend would prevail thereafter, he affirmed.
Also, in its review of the economy and capital market performance for the first half of the year, titled, Nigeria Strategy Report, ARM Research noted that Nigeria had a difficult second half, 2013, with the strains which showed up simultaneously in both asset market and currency performance pointing clearly to the source of ongoing pressures on both fronts just like other emerging markets.
“Remarkably, as we had anticipated, a surge in domestic interest, which put the spotlight on the less fancied market segments helped limit the damage on overall equity indices, though a harried defense of the Naira put up by the CBN in the wake of surge in portfolio outflows may not have had the commensurate impact on bond prices despite substantial recovery in reserves across the period.
“However, there were positive developments on many fronts, the most important being the emergence of a robust recovery in the banking sector and a sustained run of single digit inflation, which we believe signals the onset of a much more stable backdrop for policy and market outlook.
The Nigerian stock market ended the first half of the year on a positive note, returning 28.8 per cent gain in overall market performance as the All Share Index (ASI) closed at 36,164.31 points. It is about 80 per cent higher than the previous year’s level.
The index also had crossed the 40,000 points mark before retreating to close last week Thursday at 36,476.30 points. Market value as at the end of the half year peaked at N12.84 trillion, surpassing the previous year before also retreating to N11.61 trillion at the close of trading on Thursday. This was attributed to profit takers.
Operators and other stakeholders in the market have appreciated the level of performance when they considered the 2012 performance under review. Market value was singularly enhanced by the listing of Dangote Cement which accounts for 25 per cent of total market capitalisation. Analysis shows that average daily transaction in the half year is 475 million shares; this is higher than 360 million shares average daily transaction recorded in the entire 2012 period.
Sectoral review revealed that the Banking sub-sector remained the most active as it witnessed a lot of activity both in the first and second quarter of 2013. The NSE Insurance Index led the sectoral indices with a return of 30.4 per cent, followed by NSE Oil and Gas with 28.61 per cent return.
Expectations were high that insurance stocks will rally as earnings of the insurance companies begin to pour in the second half of the year. Insurance stocks were worst hit by the price correction. Consequently, the Insurance Index ended the quarter with a negative return of 10.36 per cent, while the Oil and Gas Index took the lead amongst losers with a drop of 13.45 per cent.
Meanwhile, in reaction to the MPR, the CBN had explained that its monetary policy committee was faced with three choices, namely, increase in interest rates in response to the ‘upward trend’ in headline and food inflation; a reduction in interest rates in view of declining core inflation and Gross Domestic Growth, and retaining current monetary policy stance in view of conflicting price signals and global uncertainties.
The committee apparently rejected option one, as being “potentially pro-cyclical, considering the structural nature of recent inflationary pressures”. Option two was equally rejected on the grounds that it was “likely to send wrong signals of a premature termination of an ‘appropriately’ tight monetary stance. The committee had, therefore, resolved to retain the MPR, which determines the rate at which banks lend to their customers at 12 percent.
Speaking to Vanguard while assessing the performance of the stock market for the first half of the year, Mr. Adebayo Adeleke, a Director of May & Baker Plc and National Secretary of Independent Shareholders Association of Nigeria (ISAN), said; “The first half of the year is good for the stock market. The results from the companies so far released are good, showing improved liquidity.
“However, going forward, the policy thrust of the CBN on MPR is going to adversely affect the capital market at the end of the second half. In the third quarter, if this MPR remains unchanged, the effect might not show significantly. The reason is that interest payable and other expenses will be on the rise and this will affect the bottom line of these companies quoted on the NSE.”
Continuing, he said, “How can companies survive with high lending rate of 20 and 25 per cent from the banks. We are likely to see companies take precautionary measures from borrowing because the cost of goods will be high and consumers demand would defi
“So, this will definitely affect the economy. An interest rate of 25 percent does not augur well for the development of our country. In fact, the CBN should look at the monetary policy with human face. This argument that it is fighting inflation does not hold water. After all, if it continues to hold interest rate higher, the cost of production will be passed to consumers in form of high prices of goods.”
In his own assessment, Evangelist Anthony Omojola, a senior member of ISAN said, “To some people, the market and economy had a mixed fortune. For me, the market has performed well when compared to the corresponding period of 2012.”
Continuing, he said, “One positive development in my opinion during the period under review is the return of domestic investors. Shortly after the market crashed up to 2012, the Nigerian stock market was dominated by foreign investors, the balance has shifted in favour of domestic portfolio investors (especially the Pension Funds Administrators ,PFAs) while efforts are on to attract retail investors to the market.
In addition to the foregoing, good corporate earnings broadcast, revamped regulatory framework and expanding product bouquet are some of the factors that drove the market in half year 2013. I expect that the launch of AseM (Alternative Securities Market) will galvanise capital formation for SMEs, while formalising of the Over-the-Counter trading of securities through the establishment of National Association of Securities Dealers, NASD platform will enhance the market in the coming months.”
On the MRR, he said, “the hike in interest rate is killing the market and the economy in general. The interest rate on deposit is low compared to the lending rate. How would this encourage people to save? The act is capable of hindering economic growth. The Lagos Chamber of Commerce and Industry (LCCI) was lately reported to have decried as ill-advised and insensitive, the retention of the Monetary Policy Rate (MPR) at 12 percent by Central Bank’s Monetary Policy Committee (MPC).
” So, I think the continuation of a tight monetary regime would have the following outcomes – persistence of high interest rate, deepening of the unemployment crisis, financial intermediation role of the banks will continue to be undermined, recovery of the real economy will remain sluggish, capacity of enterprises to create jobs would continue to be inhibited, stock market recovery would continue to be slow and the capacity of banks to support the economy would remain severely constrained. So government should strive to ensure that mo
netary policy support the fiscal policy.”
Continuing, he said “For example, if CBN’s lending rate of 12 percent to banks instigates current borrowing cost of 20 – 28 percent to the real sector, such high cost of borrowing increases production cost and also makes made-in-Nigeria products uncompetitive against imported substitutes, which are generally aggressively supported with conversely lower single digit interest rates in export economies.”
*Peter Egwuatu & Nkiruka Nnorom, Vanguard