The Bulls Are Back

Just when the Nigerian stock market seems to have dashed investors’ hope of any sustainable recovery aftermath the 2008 global financial crisis, a review of trading performance in 2012 and the outlook for 2013 have shown that the bulls are back.

At a market appraisal session organised recently by the Nigerian Stock Exchange (NSE) to evaluate 2012 market performance and make projections for 2013, the Chief Executive Officer of the NSE, Oscar Onyema, said notwithstanding certain market-specific challenges, the NSE’s major index in 2012 closed with its strongest performance since 2008, while other indices topped their performance pre-global financial meltdown. For instance, the NSE All-Share Index gained 35.45% in 2012, while the market capitalisation of listed equities grew by 37.31%, from ₦6.54 trillion to ₦8.98 trillion. Also, the average daily turnover for equities was ₦2.65 billion or 2.71% up. Mr. Onyema, who responded to a couple of questions from journalists, spoke on several market-related issues. FinIntell was at the appraisal session; we present the excerpts:

The bulls are back again in the market with stock prices hitting the roof. How sustainable are the current bullish trends?
An efficient market really needs to take into consideration different buying effectives, trading strategies, and investment philosophies. In terms of raw volume, I will say that they are sustainable. In fact, we need more activities in the market because liquidity and depth are structures we are trying to build. In terms of price movement, the indices we have in the market are reflective of the fundamentals. Sectors that are not doing well experienced decrease in returns, as seen in the insurance and oil & gas sectors; while those that are doing very well recorded increase, as shown in their financial statements –like the banking and the consumer goods sectors.

Therefore, I will say that the market is reflecting the pricing, and if you look at those prices and where the All-Share Index is today, it is not where it was in 2008 or the previous year. I will also beg to argue that the quality of companies we have in the market today is virtually higher than the previous because we are trying to clean up the market to make sure that the financials that are out there, and the companies that are coming to the market are of good qualities.

What checks and balances are being put in place by the Exchange to avoid hostile takeover bids?
We have a surveillance department that we created, and the job of that department is like an undercover detective. They do a lot of work that you (investors) shouldn’t know about except an offence has been committed. So far, we are satisfied with the number of cases that they brought to us because the people that were perpetrating the crime did not know that we were watching them.

Let me use this opportunity to tell anybody that wants to manipulate the market that we are watching very closely; if we catch you, we will come after you with everything that we have. This market needs to be the market where people play on level playing field. So, things that are contrary to that, such as insider trading and general market manipulation, will not be tolerated in this market.

Is the newly introduced Fixed Income Market Making (FIMM) Programme designed to move the heat from the equity market?
The idea of introducing fixed income market making programme into the market is not a new one. What is new is our approach to doing it. We believe that the over-the-counter (OTC) bond market is already taking care of the institutional size ticket in the fixed income market in Nigeria. However, there is no feasibility into the pricing –the price discovery, especially pricing at the retail level was not there, and that is the shortcoming that we are looking to plug by introducing a retail market for fixed income. What we announced recently were the six firms that will be market makers in fixed income; we actually launched the real trading on the 1st of February.

It (the FIMM) is not necessarily designed to take the heat off the equities. What we are trying to do is to give you (investors) a plate of asset classes that you can use to construct a well diversified portfolio so that if you wanted to buy equity you can have options. Remember, my mantra is you must have asset class allocation and within which each asset class, you must have diversification so that if you look at equities, you can invest in large, mid or small capitalised companies. And if you look at fixed income, you can invest in FGN (Federal Government of Nigeria) bonds, State or Corporate Bonds or a combination of them.

And you can also begin to look at ETFs (Exchange Traded Funds). The current ETF we have gives you exposure to gold. I don’t know of any other security that we have in this market right now that gives you exposure to gold; because we don’t have listed gold mining company. So, those are the kinds of innovations that we want to bring in that allows you to construct a well balanced portfolio with the different products that we are rolling out.

While the Exchange has reduced cost of activities on the secondary market, what is the Exchange doing to reduce cost on the primary market?
The truth of the matter is that even though you may think that the cost of activity in the primary market is high, if you benchmark it against other markets that I have worked with, it is actually low. The total amount an issuer is asked to pay in the primary market by law, is probably 4.35% of the value of the transaction.

In America, an investment banker alone will charge five to six percent of the value of the transaction; not to mention other parties to the transaction. I think a lot of work needs to be done in the primary market to make the listing of shares and other products more efficient; but in terms of costing, we are very competitive.

Some delisted companies from the Exchange have identified high cost as reason for delisting. What is the Exchange doing about this?
When you (companies) list on the Exchange, there are certain reasons why you list as a company, such as you want to raise funds, diversification of ownership in the security, you want to change the balance of equity and debt to optimise it, you want to reduce the cost of branding, legacy issues, etc.

When you list, there is a barge of honour that you get as a listed company because you have gone through a lot of documentations and a lot of reviews. We have opened your books, we have looked at your properties, and we have sent people to your factories to make sure that the factories are there, etc.

We don’t want to list any company that cannot pay our fees; our fees are very reasonable. If a company cannot pay the fees, it means that they are not doing enough business to even be listed. What we also want to do is to have a clean plate of companies that are good quality companies that can be the next barge of African Champions. By definition, an African champion is a company that is doing more than $1 billion business. And a $1 billion company cannot be complaining of high fees; I think our highest fee is ₦4.2 million. I believe there are some other reasons why some companies delisted, but I don’t want to go into specific company. A number of them just haven’t met our requirements and we want to enforce our rules.

Some listed companies have not submitted their results, yet the Exchange is insisting that their share prices cannot go below par. Shouldn’t there be the need to allow free fall of share prices where possible?
We are going to set up a committee to work with the industry, the companies and everybody else to see if the market structure today, where we have par value as the lowest you can go, is the right market structure. We will see what other markets are doing and actually come up with something. Nornah Awoh, a senior stock market correspondent and analyst, will be part of that committee to ensure we carry everybody along.

Will the NSE be an issuer of ETFs or is the Exchange going to create a platform to allow companies issue ETFs?
We are creating a platform that allows other companies issue ETFs. What we have noticed is that most of the underline instruments that companies use in operating the ETFs are the exchanged underline instruments. So, it is really a form of collaboration with issuers. But we don’t want (the NSE) to be an issuer. We want other people to issue; it is the exhibition of labour so that you have experts do what they know how to do best.

The NSE will also collaborate with international Exchanges so that we can get best practices from them and in some cases, their technical know-how in some of the areas that we want to go into.

How has the primary market makers performed based on the mandate given to them?
I will give you some numbers, but I want to put a context to the numbers. You remember when we started the market making programme in September; we said it was a six months roll out period. We added that in those six months, we will not be holding the market makers to the target obligations because we want them to complete their roll out and get some experience on how to do market making.

Even the market structure that we had introduced, which was unique in Nigeria, has never been done before. We are still in the roll out period and we only have 39 companies that have been rolled out. We are very fixated on the fact that we have to complete the roll out within six months. Once we complete the roll out, we will hold them to the obligations, and then we start working on the roll out of supplemental market makers. The complete programme is that you will have primary market makers and supplemental market makers. In the roll out, we have been collecting and sharing data with each market making firm and pointing out where we think they can do more or where they need to move things around.

So, it is a collaborative set up. Although, in terms of market participation rate, the last set of numbers I looked at, the rate was less than one percent for the primary market makers. However, I can tell you that their presence has brought a lot of confidence that there is somebody willing to make you a market so that you can get in and out at their prices.

Why is the Exchange delaying on its demutualisation plan? Or is the NSE depending on the Securities and Exchange Commission (SEC) to be demutualised?
On if the Exchange is depending on the SEC to be demutualised, the answer is No! You will recall that there was a technical committee that was set up last year to come up with a framework that the SEC can approve, which will then allow anybody that wants to demutualise to go through and implement the process.

For example, if we decide that we don’t want to wait for the rule of SEC before demutualising, and we come up with a document that says we are now demutualised; if we take such document to SEC for approval, on what basis are they going to be doing the approval?

So, the technical committee’s report is at the SEC waiting for their board to review and come out with the guideline for how demutualisation will occur. Then, the Exchange will take a decision whether to demutualise or not, and then follow the law that has been set down to achieve the demutualisation process. So that is the state we are now.

To protect the interest of investors, should the Exchange be looking at companies’ managements instead of just placing stocks on technical or full suspension?
If you have been following the market, you will know that last year, we introduced some markers (buyers beware kind of information). We said we will no longer be doing technical suspension right away. We will first of all, put a mark indicating ‘Below Listing Standard (BLS)’ on erring companies as well as three other marks on them, depending on what the situation is. The marks will be next to the symbol of the company so that the buyers will know that the company either is below listing standard, restructuring, delisting, or the company is awaiting regulatory re-approval. That’s the first step.

The second step was that we increased the fine from ₦10,000 to ₦100,000. We brought in all the company secretaries and their chief finance officers and told them we are not interested in their money; we are interested in the early submission of their financials. We said we will work with you proactively to submit your financials on time. We started calling them two months before time to tell them that their financials are becoming due. We ask what their challenges are and see whether we can help them. We have done a lot of things in that area; it is a whole programme.

Technical suspension is towards the last action. If we see that we have tried our best, the company has tried its best but cannot meet the standard, that’s when the company go on technical suspension. And when you go on technical suspension, it is the first step in delisting you. When we place you on technical suspension, you will not be there forever. We will progress from there to full suspension and to delisting.

Yes, the shareholders suffer. And why do the shareholders suffer? The shareholders are the owners of the companies. When you see your company on technical suspension, you should call the management. You are the owners of the company. You should demand to know why they are on technical or full suspension or why they are getting delisted.

If you follow corporate governance and if everybody that has shares takes interest in how their companies are run, it will benefit all of us. On going after the management individually, we will look at that and see whether it makes sense and if it is even possible.

What does a company benefit by being listed on the Exchange?
Companies benefit many things. I have told you some of the reasons why they list. We have also increased the drawer by introducing value added services. So, we are giving visibility to the companies, we are helping them in terms of institutional services which helps them to meet corporate governance standards, as well as structure them very well for continuity.

There are so many reasons companies come to the market. We have 200 companies that are benefiting from the market that is why they are here. Do we need to do more, advocating for improvement and for certain or additional government benefits for listing on the Exchange? The answer is yes, and we are doing a lot in those areas. I think we have written a position paper to the government talking about things like listed companies should have a first bite of the apple on government contract. For example, listed companies should have enhanced tax rate. So, if you are a listed company, you get a lower tax rate. We have made those arguments and we will continue to pursue them.

Most of the stocks that went up in 2012 are FMCG stocks that have foreign investors. This shows there is no depth in the market; and that was the same point we got to in 2008 when the bubble burst. Shouldn’t the NSE be thinking of increasing depth in the market?
We agree to that. We believe that the value we have seen is on the back of foreign investors. We are happy to note that local investors are beginning to come back to the market. Local investors now account for 44.3% of total market activity as at November 2012, up by 38.38% from 2011. We are working very hard to bring in new products. We are also working very hard to bring in new quality companies and we believe that what we saw in the market in 2012 is encouraging for issuers.

Hopefully, we will see more companies coming into the market this year. Already, we have listed two and the projections are higher. But the listing decision is a company’s decision; not the Exchange’s decision. We do not want to give you numbers. We are actually very bullish that the primary market will pick up this year.

Are you still optimistic about meeting the $1 trillion market capitalisation target for 2016?
Let me put certain things in perspective. When we gave that target, we said that a number of things needed to align, and we also said that it is an inspirational number. The things that needed to align, such as the government saying they want to deregulate the power sector; they want to privatise power –that means you have 16 utility companies that can come into the market. We need the support of the government to make sure that those 16 companies come into the market. We have telecom companies that are not listed, even though they have more than 100 million subscribers.
We are talking to those companies, but we also need the support of the government to make sure that telecom companies come into the market.

We have the Petroleum Industry Bill (PIB). The PIB provides for unbundling of the national oil companies. It will also facilitate the oil majors to do something (for the market) if they wanted to. Again, the right environment needs to be there. We appeal to the National Assembly to approve or pass the PIB bill even if they have to make changes to it. The oil and gas sector is kind of slowed down because everybody is waiting to see what gets passed. So, there are many drivers. We did not just pick $1 trillion from the air.

The market capitalisation of the NSE is 17% of the GDP; that is one of the lowest in Africa. What we are saying is that we projected the growth rate of Nigeria, we projected how we can increase the market capitalisation as a percentage of GDP over time; and if everything lines up, if the utility companies come in, the telecom companies come in, the oil companies come in, and agricultural sector, another key area, comes in, our target would be achieved.

We are still very optimistic that the transformation agenda that the government is driving which we have aligned ourselves with will come to fruition and that will drive the listing of these companies on the Exchange. You can be chasing a business throughout the year, and it is just in December that the business comes through and you meet your target. Just because we have spent 18 months doesn’t mean that we are losing faith. We are still very much focused on achieving the $1 trillion mark. The target is across all of our products; not just equities –Fixed income, the ETFs that we are bringing on board, and other instruments. So, that number is really a number across five product categories that we have.

The SEC has just approved an OTC market being promoted by the National Association of Securities Dealers (NASD) which offers an alternatives window for unlisted companies. Is the NSE ready to take the forthcoming competitive challenge?
I believe the Exchange Commission actually gave two approvals for OTC market –the NASD and the FMDQ. We whole heartedly support it. We think it will increase the size of the pie, and we don’t see them as direct competitors. That is why we have invested in those companies. We have invested in NASD and in FMDQ. We believe that NASD –which will be trading companies that are not listed in the market through the OTC platform –will attract companies that would be a good source of investment. We actually see them as being complimentary to the effort of the Exchange; we don’t see them as competitors.

We are looking to put on screen the OTC market for fixed income. The OTC is a huge market in Nigeria that we cannot ignore, and we think that what we are trying to do on the fixed income side will be complementary to what the FMDQ market is trying to do because it is an institutional market while we are a retail market. With those two markets working together, we will have appropriate price discovery and bigger coverage across the country. Competition only creates for better market and makes the market bigger.

Again, in our market development efforts, we are supporters of the two platforms. Actually, we are co-owners of those companies because we have investments in them. We want them to do well, so there is nothing wrong for them to start business. It is really in our own interest if they do well. We put our money where our mouth is; we believe that those two platforms are good for the market place, and they will make the market more robust.

What is the NSE doing to attract new listings in the area of Initial Public Offers (IPOs)?
IPO is important to us. We cannot say that the market is completely back until the IPO market is back. Last year, we announced that 20 companies would be listing because the companies indicated interest, but only two companies were listed. So, this year we do not feel comfortable to put numbers to companies that will be listing. As companies list, the public will be informed.

We also need active government support in terms of providing the necessary environment to make it attractive for companies to list. There are certain things that are within our control and some outside our control to getting the IPO market back and alive again. We are collaborating with the Exchange Commission to make sure listing process is as easy as possible.

What message do you have for foreign investors that are still sceptical about investing in the Nigerian capital market?
Foreign investors should know that the Nigerian stock market has been repositioned to build a credible gateway into Africa. The Nigerian market is too big to be ignored if you (foreign investors) are looking to access market in Africa, and given that Africa as a region has one of the fastest growing rates. So, if you are looking to capture a higher return in African markets, the Nigerian stock market is the best place to be.

Please comment on the impact of the current interest rate.
The lower the interest rate the better it is for the equity market because it means that instead of people investing in the money market they can get higher returns in the equity market. Also, low interest rate makes it is easier for companies that are listed on the capital market to borrow from banks because it is cheaper and the cost of doing business will be lower which means more profits for the companies. So, it will be a good thing for the equity market if interest rate is lower.

The budget of SEC was not approved by the House of Representative due to the feud between the House and the Director General of SEC, Aruma Oteh. Don’t you think the non-approval of SEC’s budget will affect your activities as an operator in the market?
Quite frankly I think that the feud between the National Assembly and the Director General of SEC shouldn’t be taken this far. If you are going after an individual you don’t need to go after the entire organisation. The SEC is an organisation that was set up by law and it needs to function according to the law that set it up. We believe that the capital market as a whole will be affected if the SEC cannot fund its operations because we have rules that we are submitting to them for approval. We have a lot of things that we are working on that they need to approve. If we also look at the broker-dealer community and all the other players in the market such as the registrars, the trustees, they all have to go back to the statutory regulator. So, it is important that the issues are settled quickly to allow the statutory regulator to be a strong regulator and to be able to do its job according to the act that has set it up.