The Nigerian capital market has given both investors and market watchers a measure of concern since the beginning of 2014. The Nigerian Stock Exchange (NSE) opened 2014 in an upbeat trend, as market capitalization hit a record N13.226 trillion. That is just about the point it was before the calamitous share price meltdown of March 2008.
Even with the pessimism of an election year spendthrift, few expected the massive share price depreciation recorded in the first quarter of 2014. The capitalization of the NSE tumbled by N780 billion to close at N12.446 trillion on March 31, 2014.
Since the calamitous outing of the first quarter of the year, the market has fluctuated between massive depreciation and marginal gains. As at the close of transactions on April 30, the losses had barely been reduced to N559 billion as the capitalization of the NSE inched up to N12.667 trillion.
The massive share price depreciation in the NSE in the first four months of 2014 was primarily triggered by the monetary policy of the Central Bank of Nigeria (CBN) and marginally by the profit taking posture of foreign portfolio investors.
The CBN has monetary policy as the only potent weapon in its anti-inflation arsenal. In the first quarter of the year, the apex bank in a desperate bid to stem the massive assault on the naira in the foreign exchange market, notched the cash reserve ratio (CRR) on public funds from 50 per cent to 75 per cent, while the CRR on private sector funds was hiked to 15 per cent.
The liquidity squeeze pushed public funds out of the reach of banks, while at the same time making private sector funds relatively expensive for them. The policy which is inevitable to save the naira and stem inflation, had the effect of making money market instruments more attractive than equities in the capital market. At the moment, an investor can obtain as high as 18 per cent as deposit rate for a nine digit fund in the money market.
Investors responded by dumping banks shares for the higher returns on investment in the money market. The dumping of shares triggered massive share glut, especially in the banking sub-sector of the NSE, and exerted downward pressure on prices.
Worse still, the policy had resulted on catastrophic liquidity squeeze on banks, making it extremely difficult for them to create risk assets. The liquidity contagion in the financial system was even more debilitating in the capital market because banks could no longer advance loans to investors to mop up the share glut in the NSE. The second factor that could be blamed for the dwindling fortune of the NSE is the profit taking posture of foreign portfolio investors.
The price earning ratio (PER) of NSE in the last 12 months is higher than what obtains in emerging markets like South Africa, Dubai and India. Having pumped up the share prices in the NSE with considerable investment, some of the foreign portfolio investors are now taking profit and moving to other emerging markets where they would equally pump up the share prices and take profit later.
The catastrophic share price meltdown of 2008 may be well behind us. No one expects share prices to tumble the way it did during those three financially asphyxiating years. However, in an election year, the inflation warriors in CBN expect politicians to bombard the economy with tremendous liquidity.
In other words, the hostile financial regulatory environment that triggered the dumping of capital market instruments for their money market counterparts and engendered a liquidity squeeze in the capital market would almost certainly persist. However, we believe that the NSE is rugged enough to take the pounding. The worst that could happen would be the current fluctuation in share prices.
