Economic Update

Published 11 Aug 2013

Capital markets in Nigeria have been growing at a rapid clip over the past year, with the country’s advantages as an investment destination attracting foreign cash, and reforms improving the bourse’s competitiveness. However, the exchange remains vulnerable to exogenous changes, and boosting liquidity would help this promising market mature.

The Nigerian Stock Exchange’s (NSE’s) All-Share Index (ASI) rose 28.7% in the first half of the year, compared to a 4.2% rise in the same period of 2012. This continues a trend set in the second half of 2012, with the ASI gaining nearly 70% for the 12-month period ended in June.

These impressive gains came despite a correction in June, when the exchange lost around 4.3%, possibly led by a decline in hunger for emerging market assets after the US Federal Reserve announced the tapering down of its quantitative easing programme. In early July, the market experienced a degree of volatility, with speculators looking to make quick gains, but overall investor confidence has been retained. Banking and insurance have proved to be the most volatile sectors, and have gained the most when the index rises.

The exchange has picked up strongly over the past year largely due to overall market conditions: investor enthusiasm for emerging-market stocks, and Nigeria’s rising profile as an investment destination with a huge internal market and improving macroeconomic fundamentals. As of May, foreigners accounted for almost 43% of market activity, an indicator of Nigeria’s international appeal as a destination – though possibly also a sign of the heavy and baleful influence of overseas “hot money” that is withdrawn in bad times.

Local press reports suggest that the stewardship of Aliko Dangote as the president of the NSE has also benefitted the exchange. Dangote resumed his position in June after a spell in other roles, and has been credited with bringing greater stability to the market.

The NSE, currently Africa’s third-largest exchange by capitalisation, is focusing on several core priority areas to improve its long-term performance: transparency and governance; market efficiency through better processes and rules; infrastructure and technology; capacity building and skill development; and the liquidity, turnover and size of the market.

These developments could help limit the volatility that has characterised the ASI in recent years. Having surged by 74.7% in 2007, it fell 45.7% in 2008 and 33.7% in 2009. After recovering by 18.9% in 2010, it slid by 16.3% in 2011. Such variations reveal relatively low liquidity; speculative flows can have a disproportionately big effect on the market. The market’s reputation has been hit by scandals in the past decade, including margin lending by banks in 2009. The resulting financial crises damaged Nigeria but also led to pressure for better regulation and oversight. The hope is that, like South-east Asian economies after their own financial crisis in 1997, the lessons have been learned.

The NSE is now targeting total market capitalisation of $1trn by 2016, around 10 times the current level, which should significantly increase the bourse’s ability to absorb external shocks. According to Oscar Onyema, the CEO of the NSE, companies active in some of Nigeria’s largest and most vibrant economic sectors should be encouraged to list.

“A good stock market should be reflective of the economy in which it operates. If you look at agriculture, which currently makes up 40% of GDP in addition to oil and gas, utilities, and telecoms, which is the fastest-growing sector of the economy, we want that to be reflected in the exchange. When well represented, a stock market can be a strong barometer for a national economy,” he told OBG.

Other markets in the region have had success with encouraging oil and gas interests to list. The nearby Ghana Stock Exchange, a bourse far smaller than the NSE, benefitted enormously from a secondary listing by London-listed explorer Tullow Oil in 2011, a move that virtually doubled the exchange’s total capitalisation.

Local markets are deep enough to support capital-intensive schemes, whether in oil and gas, infrastructure or elsewhere, according to the Nigeria’s Chartered Institute of Stockbrokers (CIS), which has urged companies in sectors including housing and power to list on the NSE to finance expansion. The CIS aims to deploy the N3.4trn ($21.4bn) that it says is lying dormant in pension funds, adding that brokers should develop products to encourage funds to invest that money in capital markets. Proposed revisions to the pension system could help in this regard.

The penetration of the NSE by foreign investors is a good sign of the exchange’s appeal and accessibility, which should stand it in good stead. Yet it remains vulnerable to international fluctuations. Recent changes to regulations have helped strengthen the market; greater liquidity (and the higher stability that it brings) and a broader range of products should enhance both the NSE’s attractiveness to long-term investors, domestic and foreign, as well as to key local companies looking to tap into new sources of funds.