Teeth-Gnashing On The Bourse

It is endless agony for investors as stock prices fall further

By Tayo Odunlami & Michael Mukwuzi

The gloom on Chief Amos Aderemi’s face last Tuesday compared well with the dark cloud that envelopes the skyline preceding a heavy downpour, as he gazed at the Daily Stock Market Report of a national newspaper. For the umpteenth time this year, the report was a horror. A frustrated Aderemi could not help but holler: “Oh! My God, I am finished.”

Over the last three years, 61-year-old Aderemi, a retired civil servant, has been passionately patronising the Nigerian stock market, pumping into some stocks virtually his entire retirement benefits and life savings. Within the period, he had steadily accumulated a total of 10 stocks across the sectors and had been, until early this year, grinning happily, as he observed his investment worth multiply. His last addition was the Japaul offer which ran from 24 September, 2007, to 31 October, 2007, at N13.50 per share. Buoyed by the consistent impressive performance of the stock market generally and the heartwarming results from his own stocks over time, Aderemi sold off his one-storey building on Bale Street, Ajegunle, Apapa, Lagos State, to garner money from which he splashed N2.5m on the Japaul offer. The following month after the offer closed, he also put N1m on the Costain West Africa plc offer which was going for N13 per share.

The old man’s plans were well laid-out. By the end of this year, he was so expectant, he would sell off a greater percentage in each of his stocks, most of which had appreciated astronomically in prices. The proceeds should be enough to buy a property he was eyeing at Ebute-Meta on the Lagos Mainland and, in terms of the property business, a more upscale location than Ajegunle. He also hoped to invest in tyre dealership and purchase a car, even if it was a “brand new” second-hand. From his investments in Costain, First Bank and Conoil particularly, he expected a windfall.

Unfortunately for Aderemi, dreams die first. Towards the end of the first quarter in the year, he began to observe a downward movement of prices in the stock market. But he was not initially perturbed. Had he not been assured by his stockbrokers that such price slide in the market was a fleeting norm that cannot remarkably impact on his fortunes, even in the short term? However, by early August, as prices fell uncontrollably and the shares of Japaul fell from N12.40k to a dismal N6, First Bank from a year high of N54.86 to N36.08, Conoil from about N140 to N109.70 and Costain West Africa from an incredible leap of N86.38 to about N25, his hope gave way to despair. Aderemi began calculating his total loss in terms of naira value. In the Japaul stock alone, he had lost about N1.4m and in Costain, not less than N.5m. When he arrived at N2.1m, he flung away his biro. He did not bother to work on losses in his eight other stocks.

The retired old investor is just one out of thousands of traumatised investors, old and young, who have been counting their losses as the bears strangulate the market. “I went to borrow N2m from my town’s union meeting and invested everything in IBTC and Diamond Bank stocks after we were encouraged last year, at our bazaar at St. John’s Catholic Church, Igando, to invest in stocks. They told me it was good business and I would make more than 50 per cent profit in a few months. But the stock that I bought at N22 per share is now selling for less than N12 and the other is not different,” lamented Richard Nwachukwu, an auto parts dealer.

Anthony Okafor, a trader who also hearkened to a clergyman’s advice to invest in shares has remained inconsolable. “It’s so bad. I bought Flour Mills at N106.50k per share for 200,000 units. Now, it is selling for less than N69.10k per share. I am heavily into debt because I diverted financial contributions by our association’s members in my care into purchasing the shares. I was made to believe that in six months, I should be able to make, at least, a 30 per cent profit. It has not been so and I have been under pressure from my colleagues to refund their money,” Okafor cried. Assuring words from this reporter that the downturn was temporary and prices would soon pick up again so he can sell to recoup his investment were unconvincing. “Didn’t you hear me? I said my colleagues want their money immediately. Although I am not an expert in this shares business, nobody can tell me there is a magic that can return the price to N106.50k so soon, if that happens at all,” he retorted.

Okafor was dead right. Any hope that the market would recover in the second quarter of the year had evaporated and most analysts are not optimistic of a spiral bullish development till the year ends. Since the Central Bank of Nigeria-induced consolidation of the banking sector generated widespread awareness of the stock business, the bears had never raged so violently. Suddenly, the manna that investors have been reaping over the last of couple of years has transformed into gnashing of teeth. Before the slump, the market had been invitingly bullish. Last year, it grew by 74.5 per cent and within the first three months of this year had appreciated by 23.7 per cent. It opened the year with 57,990.22 index points, ASI, (a measure of aggregate movement of share prices) and a market capitalisation of N10.18 trillion. Market capitalisation, the total value of listed equities or stocks which crossed N12.6 trillion early March this year, had by 2 May lost nearly N1.17 trillion, dropping to N11.43 trillion. By close of trading on 20 August, it had dipped further to N79.9 billion. ASI itself closed at 45,691.08 as against 51,485.48 a year ago.

To some discerning investment analysts, the slump in the market was like an accident long foreseen. The success of the bank consolidation exercise spurred a rash of public offers by banks. Huge short-term profits that the offers produced quickly created a wide awareness and embrace of the stock option and consequent pressure on the stock market. Both low and high networth investors, that is low income earners like artisans and junior workers in both the public and the organised private sector, as well as rich government officials, political appointees, well-heeled private sector players and local and international institutional investors, became enmeshed in a rat race to acquire any promising stock with a view to selling off in the short-term and reaping reasonable gains. Pentecostal churches and other religious organisations joined the stock market fad by providing free counselling to members on the benefits of investing in the stock market. Even orthodox churches like the Catholic and the Anglican jettisoned their conservative posture, as the issue of stocks and share purchase became an integral part of the weekly sermon. For so long, it made sense to invest in stocks as trading grew at astronomical proportion.

While the share purchase frenzy lasted, investors like Aderemi resorted to selling off their properties or, in what is known as margin trading, collecting loans from their brokers or banks to partake in the stock bumper. The latter is a standard, perfectly legal practice that is advised in a non-volatile market. Through it, investors request from their brokers or banks for part or whole loans, at agreed interest rates, to buy shares, using mainly the assets they already have with the brokers or banks, or some other acceptable asset as collateral. In the kind of lucrative stock market that had prevailed before the slump began, such investors had been earning cheap profits from cunningly buying and trading in highly rewarding stocks in the short and medium term, without putting down a kobo of their own. Some big-time investors had reaped tens and hundreds of millions of naira employing the practice because in the overall calculation, whatever interest they paid on the loans sought to purchase their shares paled into insignificance in the light of the huge profits garnered from the sale of, for instance, a Zenith Bank stock that galloped from a price of N10 per share at the initial public offer to over N60 last year.

Such investors are, however, currently experiencing the downside to margin trading. It could be suicidal, warned Adebola Damola, a stock broker. As is being reflected in the anguish of Nwachukwu and Okafor, who undertook what can be regarded as an informal form of margin trading, margin investors stand great risk of monumental losses when the market collapses, as is the situation currently in the Nigerian stock market. Paying off both the principal and interest sums on loans obtained to purchase a stock that turns out to be abysmally non-performing, as are most stocks currently, would be quite challenging and could lead to total ruination.

As stockbrokers admitted to TheNEWS last week, the margin trading practice extensively contributed to the boom the market then enjoyed. It was not uncommon to see offers – like First Bank’s – recording over-subscription levels of more than 750 per cent and – Dangote Flour – 1000 per cent. Even stockbrokers themselves resorted to margin trading, by which they obtained loans from banks to engage in speculative trading. Beside the rush of local funds into the market, foreign institutional investors and Nigerians in the diaspora also found in it an irresistible attraction to mine quick golden returns.

With nothing golden, however, in returns from the market since March, some investors are apprehensive of its crash and complete loss of their money. Every month since the price fall commenced, investors have been losing about N650 billion monthly on the Exchange. But is there an actual or an impending crash of the stock market? No, declared Alex Agbamuche, a financial planner. “What we have is a decline. The financial fundamentals of the market are still strong. A stock market decline is gradual, although crashes can occur from a decline. When a stock market decline lasts for a longer time it is known as a bear market. A bear market is often accompanied by a recession,” he explained.

But what is the difference between a crash and a decline? Agbamuche saw a stock market crash as whenever the market loses several hundred points in one day, as it happened in the one regarded as the worst crash ever, the “Black Thursday” in the United States of America which kicked off the Great Depression there. On 24 October 1929, 12.9 million shares of stock were sold in one day, triple the normal amount. Share prices fell 15 – 20 per cent, resulting in an eventual crash of the market. A situation like this occurs, the planner said, when investors panic in droves and rush to dump their shares, one competing to outdo the other in anticipation of a crash. Agbamuche did not believe the Nigerian stock market has reached such a crisis point.

So if the market is not heading for a crash, what then could be the cause of the seemingly endless bearish slide? Some capital market analysts insist that the current development is a corrective measure that would address certain fundamentals perceived to be manipulative and artificial. These fundamentals, believed to have largely been responsible for the price boom since 2005, could also in the same breath have caused a decline from the demand and supply side. To some of these fundamentals, the regulatory authorities, mainly the Nigerian Stock Exchange, have attempted to intervene.

One instance of intervention was the directive issued by the NSE Director-General, Dr. Ndi Okereke-Onyiuke that henceforth, listing of shares by way of introduction must be at the same price as the price used at private placement. Some informed voices accuse well-placed investors of offloading their shares on the exchange to raise funds for investment in the private placements of some companies at ridiculously low rates. In what can be called the capital market version of round-tripping, the investors subsequently sell off their shares at high rates when such a company eventually gets listed on the Exchange. Of course, such deals are believed to be usually achieved with the inside connivance of stockbrokers, stockbroking firms, issuing houses and NSE officials. Okereke-Onyiuke said: “We must admit in the first instance that the new rule is quite laudable since it is intended to frustrate private placement underhand deals,” an offence, she added, that would no longer go unpunished as a range of sanctions have been lined up against offenders and their accomplices.


Apart from the gains of round-tripping, some investors are also said to prefer private placement because it is devoid of the problems of returned monies and delay in issuance of certificates common with public offers. Also, the high prices of securities on the secondary market fraught with cases of price manipulation and over-pricing are understood to have made private placement a safer alternative. Developments after the NSE directive have proven it was not an immediate solution. Initially, it appeared to be achieving a desired effect as market capitalisation increased mid-June, gaining 7.04 per cent. The cheery news would turn out to be shortlived, however, as the bears returned forcefully and have dominated since then.

Margin trading was also reported to have been banned by the CBN governor, Professor Chukwuma Soludo. The report stated that the apex bank had instructed banks to stop lending to stock brokers, fund managers, hedge fund operators and, indeed, any individual for the purpose of share purchase. The CBN, however, denied the report and hinted the practice remains legally permitted. But the misinformation seemed to have wrought some damage already, as market watchers chorused it orchestrated panic dumping of shares by investors scrambling to raise money to pay off their loans to banks or stockbrokers, as the case may be. A banker at First City Monument Bank confided in this magazine that banks generally have actually stopped such lending on their own in the face of the unfavourable trend in the stock market. They have not only stopped, they have also been arm-twisting the margin borrowers to pay up. “Before now, a good number of operators in the market were engaged in taking loans from us to buy shares to make quick gains. We have been recalling our loans. It is not unlikely that borrowers are frantically selling off the shares so purchased to pay back their bank loans. The rush to sell has resulted in the glut of shares and falling prices in the market,’’ explained a stock broker. Incidentally, much as there is an abundance of supply, demand is thin. Osikomaiya Simeon, General Manager, De-Lords Securities Limited, identified this particular factor as a strong contributor to the bearish trend in the market. “Prices of shares may go down as a result of investors’ perception of the management of a company, financial fundamentals and most especially, the theory of demand and supply. Demand and supply, in the sense that, when nobody wants to buy shares, it leads to limited demand, therefore, the price goes down,” he explained. Simeon also argued that panic by some investors to sell off their shares has led to a further drop in prices. “There are many people selling and very few people are buying,” he maintained.

Some analysts see a strong correlation between the current recession in the market and the delayed passage and implementation of the 2008 budget. They argue that the delay has made many institutional investors and other portfolio holders to watch the market for policy direction before investing. But there is also another shade of opinion which traces the decline to tighter monitoring by market regulators aimed at checking such abuses as insider trading, preferential allotment and insistence that funds be used for purposes for which they were raised. Recently, Musa Al-Faki, the Director-General, Securities and Exchange Commission, SEC, raised a red flag on the market when he drew attention to the numerous cases of unclaimed dividends and Registrars’ arbitrariness. The number of unclaimed dividends in the capital market had hit N9.6b by December, 2007. Infractions by operators are on the rise. SEC has dragged 13 stockbroking firms to the Economic and Financial Crimes Commission, EFCC, and sanctioned 42 others for various malpractices this year alone. Quoted companies have also been conniving with auditing firms to doctor their accounts in a bid to present themselves as attractive to investors. Nampak and Cadbury have been caught with their hands in the till in the negative act. It is also common knowledge that strange trading in dead stocks remains a practice at the NSE.

While the slide in stock prices persists, the question of what would happen to the huge volume of Pension funds injected into the market dangles delicately. If the market does not recover, the funds, its administrators fear, could perish. The effect of this possibility was described by one economist at First Bank as unimaginable. Under the 2004 Pension Fund Act, Pension Fund administrators are mandated to invest a huge outlay of funds in the stock market. More than N1 trillion has been so injected into the market. Agbamuche allayed any fear on the safety of Pension funds. “It would be wrong to say there is no impact of the downturn in the market on Pension funds. However, Pension fund investment in the stock market is subject to statutory provisions. The PRA 2004 provides guidelines on the investment of the funds, allowing for its spread among equity, government securities, etc. So a downturn in one investment vehicle could be cushioned by good returns in the other,” he said. Bunmi Ajayi, President of the Association of Professional Bodies of Nigeria, attributed what he saw as an imbalance between Nigeria’s gross domestic product and the financial service sector as capable of destroying the stock market. The financial service sector contributes less than 20 per cent of the nation’s gross domestic product but contributes, at least, 70 per cent of the market capitalisation. Agriculture, the nation’s largest employer and a far greater contributor to the GDP, is virtually unrepresented on the NSE. Ajayi contended that with the market relying so heavily on the financial service sector, any negative development there is bound to rock the stock market. Some analysts have been pointing at upwardly mobile inflation and interest rates as negatively impacting on the market. With the stock market presently unattractive, investors are believed to be dumping their shares and turning to the money market where they can earn higher rates on deposits or fixed securities like government bonds and treasury bills where there is no volatility or uncertainty as obtains in the stock market and returns are guaranteed. Ajayi warned that if Nigeria does not develop the real sector to drive its stock market, it might experience the kind of crash that the US economy once suffered. To him, mere buying and selling on the NSE with no solid agricultural and industrial structures to truly prop the economy portends a crash.

With the bearish trend getting so protracted, would dry bones ever rise again, so to speak, in the stock business? Many analysts are not looking Ajayi’s way on the suggestion to downplay buying and selling. Unanimous in their optimism, the analysts are advising investors to intensify buying now when prices are going down. CSL Stockbrokers Limited, a subsidiary of the FCMB Capital Markets, in its Daily Market Report of 15 August, 2008, wrote under its Analyst Opinion: “While the market outlook remains bearish, investors with liquidity will do well to turn the present market pessimism into a buying opportunity in order to enjoy the wave of profit-making when the market turns. While it is difficult to say whether or not the market has bottomed out, we believe that a turning point is likely once recent actions of the monetary authorities and fiscal actions by the Federal Government begin to impact on the economy.” Investors are advised not to look at the present situation of the market, as the trend is expected to normalise sooner than expected. Citing the example of Warren Buffet, the great American billionaire who made his fortune by mopping up bearish stocks only to sell when the market had stabilised, an expert counselled that now is the best time to buy. Nigerian Stock Exchange recently took some drastic measures via intervention on new trading volume to determine stock prices. Capital market experts are calling on the Federal Government to revive the market directly by providing investors funds to buy shares that are being shunned. This way, demand would be induced to meet supply and the current unfavourable trend where demand is at an all-time low would be addressed.

An effort by the NSE Council to rein in the bear is the fixing of new volume of transactions to a minimum of 100,000 units, up from 15,000, to determine the price movement of any stock. The policy seeks to halt arbitrary trading of stocks. Before the new policy, a stock could trade for only 5,000 units before its price could move. This was later increased to 15,000 units. “We will be failing in our regulatory role if we allow a free fall of the market. There is no exchange in the world that watches downfall in its market without intervention. If there is an abnormal price hitting the roof, we will equally intervene,” declared Okereke-Onyiuke.

She also had some soothing words for troubled investors. “There is no cause for alarm. Sometimes, prices of stocks will go down and sometimes they will appreciate. In equity trading, that is expected; it is the manifestation of the market dynamism and mechanism. The market is solid, nothing is wrong,” she quipped. Not many watchers of the market will, however, agree with her claim that “the NSE does not manipulate the market and does not manipulate prices”. The NSE boss advised investors to diversify their portfolio of investments as a way of managing the effects of price loss. On the directive to the 280 stockbroking firms operating at the Exchange to increase their capital base to N1b from N250m, Onyuike stated there would be no going back on the rule. “The purpose is to have fewer and stronger stockbroking firms. So they are expected to merge to about 100 before the new law becomes operational from January 2009,” she maintained.

Incidentally, some analysts are mentioning this directive as one of the factors responsible for the current state of the market. In the last four years, the stockbrokers have been ordered to recapitalise twice, first to N10m and later to N70m. The new recapitalisation order to N1b comes with a six-month September 2008 deadline. The stockbrokers’ plea to the Finance Ministry, SEC and NSE that they be given time to look for funds to meet the required recapitalisation minimum was rejected. Boxed into a corner, the stockbrokers resorted to selling off every available shares in their kitty, thereby over-flooding the supply side. The glut of shares for sale consequently caused sharp drop in prices. Rev. Olu Odejinmi, leader of the stockbrokers and Managing Director of Clearview Securities would not agree that stockbrokers dumped shares indiscriminately on the bourse and caused the panic moments that investors have been going through. He said: “We are not against recapitalisation. But due process has to be followed. It is not fair that the authorities require us to recapitalise within a short period of six months. Since the authorities insist there is no going back, it is only fair that they give us some time. Not even the banks were given so short a period.”

Biodun Adedipe, an economist and financial analyst, assured that the Nigerian stock market remains insulated from collapse “because the fundamentals of the nation’s capital market remain sound”. Adedipe said one the factors working in favour of Nigeria is that prices of stocks traded on the NSE have not hit their equilibrium levels, judging by their naira or US dollar value, which make them cheap. The returns on investment, which he viewed as incomparable to anywhere else in the world, make the Nigerian market of interest to every discerning investor across the globe. The discerning quality of international institutional and individual investors that Adedipe referred to may currently be working against the Nigerian stock market. As prices slump and uncertainty trails government’s monetary and fiscal policies, these investors are believed to have been giving up their stake in the market. There are no official figures yet, though, to back this claim and show the extent of divestment.

This retrogression has not dampened Adedipe’s enthusiasm on the untapped potential of the Nigerian bourse. He was sure that the highest priced stock on the NSE would compare as penny stocks in other developed economies. In his words: “If you look at the price of Guinness Nigeria and that of the parent company listed on the London Stock Exchange, it is obvious that Guinness Nigeria is under-priced. Based on this, I believe foreign portfolio managers and other investors will seek investment outlets in Nigeria.” Also John Okezie, Chairman of the Progressive Shareholders Association of Nigeria, told this magazine that some stocks are overpriced, hence the market is undergoing correction. He argued that even in the face of declining prices, some stocks keep recording share price appreciation. To him, companies which are churning out impressive results but without any reflection on their share prices are those stocks whose shares have been polluted. Such firms, he said, should have their shares restructured.

Ironically, despite all the shortcomings at the Nigeria stock market, many quoted firms have been turning in impressive operating results, and good cash and stock (scrip) dividends to the admiration of investors. Guinness Nigeria plc even went ahead to announce a special dividend of N6.80 per share. Julius Berger Nigeria plc also paid special dividend of N3.75 per share having declared a cash dividend of 125 kobo per share. Chemical and Allied Products Company plc paid a cash dividend of N3.75 per share. In the Petroleum Marketing sector, while Total Nigeria plc paid a dividend of N9.50 per share, Chevron Oil paid N7.50 per share in cash dividend, Oando Nigeria plc, N6.00 per share and a bonus of I for every 5 held and Mobil, N4.70 per share plus a bonus of 1 for every four shares previously held. Even Eterna Oil and Gas was able to pay a dividend of 24 kobo per share. All dividend payments were for the financial year ended December 2007.

Same year, a study by Datatrust Stock Trading Guide indicated that Ecobank Transnational Incorporated was the leader in earnings per share, EPS, at N10.63. Nestle has N10.29, Total Nigeria, N9.42; Mobil Oil, N7.90; Chevron Oil, N7.87; Oando, N7.51 and Guinness, N7.26. Others are African Petroleum, N5.10; Flour Mills, N4.82; Julius Berger, N4.66; Lafarge-WAPCO, N3.69 and CAP plc, 3.56. The report concluded that these companies are attractive investment opportunities this year. In the Banking sector, First Bank of Nigeria, UBA plc, Zenith Bank, Intercontinental, Union Bank, GTBank and Oceanic Bank are touted as good buys. Other companies which made the list are UAC of Nigeria plc, Dangote Sugar, Guinness Nigeria, Nigerian Breweries and Nigerian Bottling Company.

To avoid heart attacks and emotional distress associated with the recent downturn in prices of stocks, Agbamuche advised investors to seek the services of certified financial planners before any venture. “There are many reasons why people invest. You could be interested in capital appreciation, dividend or bonus, among other reasons. A financial planner will consider certain factors like age, risk tolerance level, state of health and immediacy of needs before advising on the likely investment mix to achieve the desired goals,” he said.

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