The Nigerian capital market has experienced huge volatility in the last few years. In this interview, managing? director, Partnership Investment Limited and council member of the Nigerian Stock Exchange; Victor Ogiemwonyi speaks with Stanley Oronsaye on the market trend and what needs to be done to salvage the situation.
How would you assess the Nigerian capital market since the beginning of the year?
The Nigerian capital market in 2011 has disappointed a lot of? investors. The-stock market recovery of 2010 after the crash in 2009 has now been lost. The bond market is however, experiencing some growth. The newly announced interest rates will take away from these modest gains. You can conclude that 2011 has been a very bad year for the capital market.
Has the market reached bottom or do investors still need to prepare for the long haul ahead?
There is no way to tell if the market has reached bottom, but one thing is obvious, all through 2009 and the serious depreciation of the last few months, the index has had resistance at the 19000/20000 mark.
That is, the market is yet to fall below this level. This does not mean there can’t be new lows. Investors must have a view of the market to stay invested. If you have a long-term view of the market you should stay invested, and if you are not currently invested in the stock market and you have the money, this is the best time to buy stocks. The market is undisputably cheap. With average price/earnings ratio below 10 and some of the best companies listed on the Exchange trading at historical lows. However, if you don’t have a three to five-year time horizon then don’t get into the market yet.
Are there regulatory decisions that could have been taken to salvage the market at this time?
There is no silver bullet to salvage the market. The issue is that of lack of confidence and lack of liquidity. The regulators are doing their best to put in place corrections that will give investors confidence that some of the past infractions will not repeat itself.
The liquidity that is needed must be massive and long term.? The suggestion I have is to invest the first proceeds of the Sovereign Wealth Fund (SWF) into the Stock market for the reasons that, it is the only reasonable avenue for any government intervention that will make market sense. First, the SWF is going to become the largest single institutional investor in Nigeria and will also be doing this for the best business reasons.
The market is cheap and investing in Nigeria right now is the best options it has. Every other jurisdiction is going through a crisis, Europe and America included. It will mean investing in major companies in Nigeria that will grow and create employment and pay taxes. It will also become a major source of revenue for the Fund itself, when it starts getting dividends in the near future. The market needs investments that will be massive enough to restart the market and make it long term in nature. The SWF has all these.
Do you think the stock market needs a bailout, and if yes, how would this be implemented?
I have just outlined above the kind of bailout that will make sense.
It will not involve government putting any money, so it does not create political problems later. Those who are calling for direct Government intervention should be careful. They better know what they wish for. I think the SWF as an institutional investor using the same criteria for any of its investments will be the best intervention that I see.
Some people say the market is over regulated and this is doing more damage. Do you agree?
There is some sense of that, but given the current crisis, the regulator’s? presence is obviously inevitable. However, we hope that as soon as the market gets it’s bearing, they will go back to what it used to be. Over regulation in any industry is more curse than blessing.
Are there specific government policies that you think would have direct positive impact on the market at this time?
I cannot talk of specific policies that will dramatically change things immediately, but any policies that will reflate the economy may help, but then there is the problem of inflation that can also be damaging to the economy. There is obviously a need to get government to spend smartly. Many Nigerians feel there is so much waste and spending on non important things that unless we restrain our government, we may soon find ourselves where Greece and others like it, are today.
As one who has always preached market transparency, did you envisage that the damage to market confidence would be so deep, considering that the market is yet to recover, nearly three years after?
Nobody would have predicted the depth of the crisis. The problems today are more than the stock market collapse. The insecurity and the threat to the world economy have all combined to undermine the system.
The banking reforms also created instability that has dislocated businesses. There is no doubt that the reforms are needed, but some critics say the implementation could have taken a more methodical approach to minimise the problems we see today.
Some analysts have said existence of market makers would go a long way in reviving the market. Why are they yet to come on board?
There is need for market makers to deepen the stock market, so that the demand and supply equilibrium can always be there. The problem was that the regulator got it wrong in putting the cart before the horse.
Without a proper securities lending system in place, you cannot get market making to go on. Besides, market making is not by being labelled a market maker. Those who will make market in particular stocks must either have it or have where to get it. There is also the need to have the liquidity to support it, which presently does not exist. There is now new effort to get this right. Once the proper things are put in place it will work and this will be another market innovation that will help deepen the stock market.
Recently, the Council of the Stock Exchange approved nine new issues. Does this signify a gradual return of confidence that could spread to the secondary market anytime soon?
Yes. The market is gradually getting to the understanding that the numbers we see now will be the new market. If you like, call it the new normal. Don’t forget that the index and market capitalisation we see as low now, were actually normal just five years ago. Issuers who want to raise money will have to step up and be ready to do a harder sell. Once these new issues go to the market, and investors buy them, that will signal for a return to normal.
Considering the role of banks and other institutional players, do you think that much consideration is given to the impact of government policies on the stock market?
This is one major issue that has to be taken into consideration every time a policy is going to be put in place. Consideration for what it will mean for the stock market and the entire economy is important.
There have been policies that were not well thought out and the impact had some very bad effect on the market. I also think educating the public on the importance of the stock market and its impact on the economy will be a starting point.
Investors now show more interest in bond instruments than equities.
Is this flight to safety good for the market and the investor in the long term?
The investors in the bond market are the traditional investors in that market, usually institutional investors. We are still trying to get the retail side of the bond market going. Flight to safety is usual when volatility takes over the market as we have seen in the last several months. The Fixed income market, like the bond market is where people can be sure their investment will not depreciate. That is where they will go.
What word do you have for that investor out there who is still unsure whether to stake his funds in the market or not?
The stock market has always made people rich in good times. Throughout history, it has always given the best returns on the long run. But it is also not the market for the faint hearted. If you are a true investor willing to make an investment that you can forget for the next five years, this market is for you. And you stand to make a kill when the market returns. I cannot tell you when that is, but it will surely come. If you are the speculative type who looks to the next morning’s newspapers to check stock market prices for the previous day, to find out how your investment is doing, then do not get into the market yet.
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