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Though the Nigerian equity market ended on a positive note in the last three years, the impacts of fiscal and monetary policies on it have been of concern to stakeholders. OLUWAKEMI ABIMBOLA writes on market players’ demand for right policies
The Nigerian capital market in 2022 closed on a positive note, thus bucking a trend of going southward in a year preceding an election year. The market posted 19.98 per cent growth last year. And this year, it has grown 8.76 per cent this year of Tuesday, May 30.
Analysts have attributed the trend of elections having an adverse impact on the market to the high involvement of foreign investors, who often exited the market during the general election in Nigeria over concerns for the safety of their investments.
Speaking on the trend, the Managing Director/CEO of Arthur Stevens Asset Management Limited, Olatunde Amolegbe, said, “That was what we saw in 2015 and 2019. You know the normal investors’ apathy during the election period because of fear of violence and other election-related risks. And during the 2015 and 2019 election cycles, the participation of investors was predominantly foreign, so when the foreign investors became skittish and limited their participation in the market, that was why we saw the dip we saw during those election cycles.
“However, things seem to have changed a little bit in the last few years, because foreign investors have exited and participation by local retail investors has increased significantly in the last few years. What you saw in 2022 was a situation where local retail investors were more confident in the country. You are not seeing the flight to safety that you saw in the last two elections. Because local investors are already here anyway, mostly Nigerians.”
The improved participation of domestic investors in the capital market and their obvious confidence saw the market capitalisation hit N30tn, on February 27, the first trading day after the country’s presidential election.
However, that upswing was not sustained in the following weeks after listed companies posted results and investors reacted. The market dipped but has started to rebound even as there are mixed sentiments, comprising pockets of buy interest across fundamentally sound stocks and bearish sentiments arising from an upward reversal of yields in the fixed income market.
One of the sore points during the former President Muhammedu Buhari administration was the significant drop in foreign participation in the market, which analysts have blamed on government policies, including the foreign exchange market volatility, which made it difficult for foreign portfolio investors to repatriate their funds.
The Director General of the Securities and Exchange Commission, Lamido Yuguda, is optimistic that the government of President Bola Tinubu will stabilise the forex market.
He said, “This is a situation that is not permanent. We expect the foreign exchange situation in the country to substantially improve. There are a lot of economic developments in the country today that are actually laying the foundation for a much more vibrant foreign exchange in the country.”
Setting an agenda for the new administration, the Executive Vice Chairman of Highcap Securities Limited, David Adonri, said it only had to do two things; reactivate the primary market and keep the secondary market buoyant.
The stockbroker said, “The capital market profited from the misfired policies of this administration at the secondary market level. The last administration came up with a lot of policies that expanded the money supply in the economy, and the money filtered into the secondary market, making the secondary market buoyant for some parts of the administration, but the primary market, which is the essence of the capital market, did not benefit at all through the eight years of this administration. Except that it served as a platform for public borrowing, this crowded out funds from the private sector.
“While we expect the secondary market to remain buoyant in the new administration, the major task confronting the new administration is to reactivate the primary market and make it perform its role for the economy, which is capital formation.”
Suggesting ways to achieve this, Adonri stated that the key was fighting inflation with complementary fiscal and monetary policies.
“The primary market relies on the interplay between the yield on debt securities and the yield on equities. What affects the yield on debts and also the yield on equities is the condition of the macro-economy.
“For the yield of equities to go higher than that of debt, the point of transmission into the capital market, which is inflation, must also be reined in. Inflation must decline to a lower single digit, to enable interest rates to fall in the economy. When interest rates fall, the yields on debt will fall, and they will fall to the point where the yields on equities will be higher, so financial assets will start flowing to equities.
“The Federal Government must manage the economy using appropriate fiscal and monetary policies to crash interest rates. And in fighting inflation, it must not be done in the senseless way the immediate past administration had done it, because they used fiscal policies to neutralise monetary policies and thus achieved no results in fighting inflation. While fiscal policies were expansionary, monetary policies were contractionary when both sets of policies were either supposed to be expansionary or contractionary at the same time,” Adonri said.
According to a professor of capital markets at Nasarawa State University, Uche Uwaleke, the administration of President Tinubu needs to formulate policies that will encourage companies to get listed on the capital market.
He said, “The Nigerian capital market is still small in terms of market capitalisation to GDP, with a relatively small number of listed companies, less than 160. The Tinubu administration can change this narrative by using fiscal incentives to attract more companies to list on the Nigerian Exchange.
“One way it can do that is by using a company income tax rate that discriminates in favour of listed companies. Another option is to grant a one- or two-year tax holiday to new companies that list on the exchange.”
Uwaleke, who is also the president of the Association of Capital Market Academics of Nigeria, added that the Buhari administration can also boost activity in the capital market by implementing the privatisation of government enterprises such as the NNPC Ltd through the Nigerian Exchange.
“Perhaps the greatest expectation from the incoming administration is that it should provide adequate support, through the Ministry of Finance, for the implementation of the Nigerian Capital Market Master Plan (2021–2025). As a first step, the new president will be expected to sign into law the new Securities and Investment Bill 2023, already passed by the National Assembly,” he advised.
Speaking with The PUNCH, the President of the Chartered Institute of Stockbrokers, Oluwole Adeosun, and the Tinubu administration need to place a premium on the capital market.
“First is to properly situate the capital market in the scheme of things in the Nigerian economy. The capital and money markets must receive balanced attention for the economy to grow maximally, even optimally, as the capital market provides the barometer that measures the state of the economy.
The second is to address the issue of trading liquidity. Get the banks and CBN to give more support to capital market operators. We have to revisit margin lending/trading in the financial markets.
Furthermore, persuade the pension funds to invest a lot more in equities to create the stability that will motivate other high-net-worth individuals to invest.”
On the issue of multiple forex rates, Oluwole said, “We expect a stable and unified exchange rate, which will increase the level of foreign investors’ participation in our market. We also expect policy and positive pronouncements that will boost the confidence of stakeholders.”
The Chief Executive Officer of the Nigerian Exchange Limited, Temi Popoola, during a closing-gong ceremony last week, pointed out that government policies have a great impact on the market and expressed a willingness to work with the Tinubu administration on such policies.
He said, “The age-old question for the capital market has always been how to get more corporations to list on the exchange. Federal Government’s policies have influenced listings on the market. For instance, in the 1970s, as a result of the indigenisation policy introduced by the then administration, listings grew from 6 to 81.
“We are looking to collaborate with the new administration to develop the right policies that promote listings in our market with the support of stakeholders like the Chartered Institute of Stockbrokers, Association of Securities Dealing Houses of Nigeria, Association of Issuing Houses of Nigeria and others.”
For a research analyst at Atlas Portfolios Limited, Olaide Baanu, the Tinubu government has only one job: to encourage more companies to join the capital market.
He said, “The new government needs to encourage and bring more companies to the market for more liquidity and transparent capital formation.”
The Country Manager of Spektra Inc., Ayotunde Alabi, urged the incoming government to quickly strip itself of the sensationalism surrounding its victory at the polls and get down to work.
According to him, there is a need to boost investors’ confidence.
He said, “If you look at the trends of the flow of foreign portfolio investors in the capital market, you will see that it is negative. Most of these guys have looked for ways to exit the country.
“For example, people are exchanging stocks that are dual listed. The first responsibility of any government for the capital market right now is investor confidence. If it is my government, how am I ensuring that my government is doing enough to attract foreign portfolio investors? All policies that could hamper the capital market should be laid to rest.”
Head, Financial Institutions Ratings at Agusto & Co, Ayo Olubunmi, urged the government to have a rethink on fuel subsidy, amid declining revenue and high debts.
He added, “A significant proportion of our Eurobond is maturing next year. How do you want to address it? Another very important thing that needs to be looked at is the FX issue. The illiquidity is getting too much. What policies can be put in place to ensure that the pent-up demand is actually met? Everybody knows that there is a serious challenge in terms of the FX. Strategies to manage FX in the last couple of years have not been effective. The next question is, ‘How do you resolve that?”
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