Efforts by the Nigeria’s Stock Exchange

This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.

The NSE has set a very high goal of market capitalization of $1trn in 2016. As with many things in Nigeria, there is also a masterplan for the capital markets – a lot of emphasis are put by the NSE on strategic development of the market, to attract investors and make it as transparent as possible.

The NSE recognizes that many investors still view Nigeria with a negative investment sentiment from the 2008 market blowout as well as the events of the last couple of years. A lot of efforts are put to educate investors of the changes at the exchange now. There have been a lot of emphasis on encouraging companies to do proper corporate governance. There is a corporate governance ranking system for the listed companies, with the goal to develop a corporate governance ranking that will reveal the compliance the companies have with the exchanges rules. There is also a whistle-blower service for the capital markets.

The SEC has seen budget cuts, to fund itself, the commission has stepped up penalties on market participants. This is resulting in better policing of the corporate governance rules, but is also discouraging some participants.

NSE recognizes the need to provide a safe, transparent market to attract investors from across the world and is working towards such market conditions. This is done by means of putting out as much information as possible, so that investors can make informed decisions. The NSE website is content rich, giving generic information as well as more specific information – reports of companies that have been involved in bad behaviour, as well as the previously mentioned corporate governance rankings.

The technology used in transactions is highly innovative, it’s to international standards. A lot of efforts have been put to also introduce new services and assets. Short selling is soon to be introduced in the markets. There is also a platform for OTC trading of shares in unlisted companies.

For growing the market, the exchange is trying to get new companies listed. This is necessary for the goal of $1trn market capitalization as well as to increase the liquidity. Market making companies have been introduced on the market to increase liquidity, they haven’t gained much traction yet, but they are considered something that the market needs in the long term.

The NSE and SEC have implemented multiple reforms to enhance corporate governance of the listed companies and make the market more appealing to investors. For instance, the NSE introduced a new rule in 2012, requiring a minimum float of 20% for listed companies, with an exception for the big multi billion market cap ones. The securities commission has introduced a directive for a minimum capital requirement for companies that are listed on the exchange.

There is a desire to create a retail market of some sorts by the NSE. The NSE recognizes the potential in the domestic investor pool – out of 180 million people, there are only about 5 million registered investors.

There are efforts put in place to increase the financial literacy of the population, from capital market essay writing competitions for students, to seminars across the country. A programme “Investor Clinic” has been conducted, targeted at high net worth individuals and up-skilled professionals. The program aims to educate people on the reforms made and the zero tolerance against infractions, to communicate that there are new rules that everyone is aware of and any infractions will see action taken against.

The NSE has 30 other locations outside of Lagos, this provides a platform for organizing seminars to promote financial literacy. There have been 300 education literacy seminars around the country in the last 2 years. Similar activities are seen with foreigner investors – there have been roadshows organized by the NSE in Asian countries, to promote the markets, with the CEO’s of listed companies attending as well.

A lot of the education activities won’t see immediate impact due to their nature, it’s a process and the exchange is just at the beginning steps of this process.

A lot of the success of the market in the long term will depend on the NSE, its policies and activities. For long term investors, it’s important to follow the execution and progress with any plans the exchange puts forward.

Introduction to the NSE

This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.

Nigeria’s capital market overview

The Nigerian Stock Exchange (NSE) is the second biggest in Sub-Saharan Africa in terms of market capitalization. The total market cap of NSE is now at around $70bn. There were 197 companies on the exchange at the end of 2014.

The market crashed in 2008 and a lot of efforts have been put to create new reforms and make it more appealing to the investors. The market is way more diversified in 2015 than it was in 2008, but it still only represents a small fraction of what the Nigeria’s economy has to offer. For example, the big industries, such as telco and oil, are quite underrepresented in the market. There is not a single telecommunications company on the exchange.

The stock market is a great investment option, since it has the most liquidity Nigeria can offer. You can jump in and out of the markets, it’s quite common for people to trade in multiple developing world stock markets or African exchanges. The Nigerian market is liberal – funds can be moved out without too many restrictions, compared to other developing countries.

The low oil prices and Naira devaluation made some investors exit the market in 2014. For the most part, foreigner investors are still sitting on the sidewalks. The ones who hold stocks are trading actively – foreigner versus domestic trade volumes are at around 50/50, yet foreigners hold only about 25% of the stocks.

The domestic investors have a tendency to buy and hold the stocks for a long time. The capital markets don’t see much benefit in terms of liquidity from such domestic investors like pensions funds, as they simply hold the stocks for a long time. There is also a lot of interest in fixed assets by the domestic funds, as they have high returns, resulting in decreased activity in the equities markets.

There are 242 registered brokers, but the trading is dominated by the top tier of brokers – the top 10 brokers accounted for 43% of the trades in 2014. The SEC have greatly increased the minimum capital required for the brokers, while the NSE requested new technological standards to match international standards.

Transactions costs for trading in the capital markets are very high – 1.855% when buying and 2.2% when selling imposed by the NSE and the SEC has a 0.03% levy on trades. The NSE fees will be reviewed and the SEC fees have already gone down from 0.06%.

Concerns in the exchange

While the stock market offers liquidity compared to the other investment options in Nigeria, liquidity still remains a major concern in the market. Out of the 197 companies, only about the top 40 see some liquidity for their stock. The lack of liquidity is driven by the domestic investors either holding their stocks and not trading or paying most attention and investments at the fixed income assets.

The equities market could see a lot more liquidity if the interest rates went down, as the high interest rates are generating fixed income assets. The foreigners sitting on the side-lines waiting to see the developments of the market, are also limiting the liquidity potential of the equity markets. Once the foreigner investors fully return to the market and make their investments, the liquidity is expected to increase.

While the stock market is a great opportunity for the foreigner investor to invest in Nigeria, it doesn’t really fit well with the business landscape of the country.

The NSE is working hard to increase the corporate governance of listed companies, yet the majority of the entrepreneurs in Nigeria are not used to corporate structures. There is a business culture of getting things done, there is no time for structured protocols. This is not the case with just small or medium companies. The telecom companies are resistant to listing on the stock exchange due to them having to become a lot more transparent, this in turn gives them less of a competitive advantage. A listed companies books are a lot more transparent, this attracts the government taxation agents. There are also general costs involved with being a listed company.

Overall, there are simply many disadvantages for a company to list and some of the multi-nationals simply don’t have a need for capital, so they don’t list.

The NSE is becoming more regulated and demanding better corporate governance, yet it also wants to list new companies. This surely is great for the exchange and the nation in long term, but considering the Nigerian landscape, these goals contradict each other in the short term.

Investing in the Nigerian stock exchange

This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.

Recent market activity

The top 30 companies by market cap, the NSE30, haven’t fully recovered yet from the downfall in 2014, investors are waiting to see if the long term growth challenges will be tackled. Mid-cap and large-cap companies saw big loses in 2014, the small-cap ones returned 8.25% over the year. This reflects the economic situation quite well – the big companies are to see if their growth is to be continued, while the small ones grow no matter what, due to not being affected by the macro economic problems. Position against growth is what is valued by investors.

Since there are concerns regarding Naira devaluation, extraordinary returns are required for foreigners to get involved at the moment.

The Q1 of 2015 saw increased volumes in trading at the Kenya’s stock market – this is perceived to be due to the elections at Nigeria. The “wait and see” approach by investors have made some stock greatly discounted.

Market forces and sentiment

The slowdowns and any issues in the economy are reflected in the capital markets and provides a tough environment for the markets to thrive. If there is one problem, the market will shut down quickly. This is quite bad for the listed companies, as they are volatile to the overall view on Nigeria.

The investment appetite and involvement can be changed by some policies. For example, the CBN introduced a one year minimum holding period for federal government’s bonds after the 2008 downturn. This was lifted in 2011 and the fixed income markets saw an increased activity – fund managers don’t want to be locked in when the developed markets raise their interest rates.

Any new regulations can be directly reflected in the equity market. For instance, a banking regulation that required banks to raise cash reserves resulted in reduced outlook for profitability. This was well reflected in the stock prices of the banks. Such reflections also increase uncertainty and in a market such as Nigeria the effect is usually a sell-off.

The big indexes have a big influence on the market and investment sentiment.

Any big upcoming events causes withdraw of the capital and a “wait and see” approach by the investors. There are African focused funds, capital can be transferred to other African nations while the developments in Nigeria pan out.

There are initiatives in place for West Africa wide capital markets integration – trading between the countries with an ease using electric interconnection. Any new assets introduced, as well as any NSE activities, can have an effect on other assets. Decreased interest rates would reflect themselves in the stocks going up, due to some investors moving their capital from fixed income to equities, for instance.

Playing the Nigeria’s stock exchange

There are multiple ways foreigner investors can play the Nigerian capital markets. It comes down to the length of time an investor wishes to stay in the market. There is a tendency for the emerging market fund managers to move in and out of markets, looking for under-developed markets with the prospect of improving. This results in a rotation of in and out of Nigeria by these investors.

The long term investors that wish to hold their stocks should be looking at industries driven by domestic consumption – FMCG and food markets. A lot of the international food brands see their profits coming from Africa.

Funds such as Ashmore Group and others are well invested in the 30-35 largest Nigerian stocks. Most of their stocks are focused on the domestic consumption, revealing insights in the research and assumptions they have one the market. Investors can mirror some of the big emerging fund activities in Nigeria.

The emerging funds also provide a great opportunity to invest in Nigeria and other frontier markets using the developed world’s stock exchanges. Ashmore Group is traded at the London Stock Exchange, other groups such as T. Rowe Price have emerging market funds, traded at the NASDAQ.

There are ETF’s trading at the NSE, but they are not gaining much popularity, as investors that want to deal in Nigeria directly much rather see their investments and make decisions, instead of handing their money over to someone else.

Perhaps the greatest opportunity is in the NASD – a centralized and transparent over the counter securities exchange. Many of the Nigerian companies use NASD for their capital requirements, as they don’t face all of the concerns associated with a public listing on the NSE. There is also a reasonable level of liquidity for the securities. While the companies are not as well regulated, they are mostly small companies that have a lot of growth potential. NASD is the way for investors looking to hold their stocks for a while for a potentially big return. There are Nigerian boutique investment companies that guide investors at investing in the NASD.

Investing in Nigeria’s fixed income assets

This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.

Bonds and fixed income assets remains very popular amongst foreigner and domestic investors. The high interest rates are driving away most interest from the equities and to the fixed income assets.

Some people have empathized the fact that it’s not particularly the Africa’s economy that’s rising, but rather the Africa’s debt. In Nigeria’s instance, the total debt to GDP ratio is around 30%, 75% of the debts are also long term, giving plenty of room to borrow more.

There is an appetite for Nigerian debt in the world’s financial hubs. Nigeria also benefits from the option to raise money in the Islamic Bond market, where the interest rates are lower. This is especially important due to the fall of oil prices, as even though there is interest for Nigerian debt, high interest rates in the Euro bonds are expected.

The government is currently retiring domestic bonds, it’s reflected in the budget – $4.25bn has been allocated yearly to retire bonds. The number of domestic listed bonds fell from 55 to 52 in 2013 and 2014. The government can get better rates in the offshore markets – in January 2011 the country issued $500m in a 10 year bond at a coupon of 6.75%. Depending on one’s assumptions about where the Naira will stabilize, this might provide a great opportunity in investing at the domestic two digit return bonds.

Generally, businesses prefer debt over equity due to various reasons, such as lack of structure and emotional ties to the business. Corporate’s issuing bonds remains a low popularity choice however – that is to be expected with the safe federal governments bonds paying two digits. The big multi nationals can raise their debts in the markets abroad, such is the case with Dangote Group. Banks have a tendency to only raise their tier-2 capital by bonds, as they have access to the cheaper option of deposits. As of the end of 2014, the corporate bond cap was at $723mn. There is a level of corporate debt restructuring happening as well.

There have been 20 bond issues by 15 states, they have raised a total of $2,74bn. The coupons varies from 13.5% for Lagos to 15.5% for Bauchi states. Lagos state enjoys lower interest rates due to its perceived image as a business hub and the internal revenues it creates. State bonds are guaranteed and observed by the federal government. African government debt is generally used at keeping the electorate happy – to hire and pay bonuses to the military, civil servants and police.

One of the biggest opportunities in the debt markets is the massive infrastructure deficit – huge infrastructure and housing projects are going through. The real estate bonds might see a lot of demand in the capital markets, as most other bonds are traded OTC.

There is little to non-existing activity in the secondary bond markets, this remains the biggest issue with liquidity. If bonds are to be bought, they will be held for a long time.

There is an opportunity with treasury bills. Treasury bills are issued in 3, 6 and 12 month periods with bi-monthly auctions. In 2012 and 2013 around $22bn of T-bills were issued. The statistics are not yet available for 2014, but the first half saw $13.6bn issued.

If Nigeria is able to increase the overall demand for fixed income assets, the interest rates might come down and more issuances will be seen, as there is more demand for them. This was already witnessed when in 2012 foreigner investors expanded their market share in the fixed income assets. A CBN’s lift of a 1 year minimum holding also saw an increased interest – investors don’t want to be forced to hold their fixed income securities in case the US interest rates goes up. If the US rates did went up, the Nigerian government would be forced to increase the interest rates as well.