The strongest selling points of the Nigerian Stock Exchange (NSE) are the reforms and new products it is putting in place, together with the sizeable pools of funds available domestically for investment – a point often missed on cursory examination. However, the state of the economy today is not positive for the exchange. We could cite, inter alia, an economy in modest contraction, squeezed household consumption and uncertain foreign exchange availability despite the liberalisation of exchange-rate policy with effect from June 20, 2016. Market capitalisation has shrunk from $83bn to $47bn in the past two years.
Looking ahead, the exchange will be well positioned for the upturn in the economy. Securities lending has the potential to boost the liquidity and evolution of the market. The exchange itself is the driving force in clearing the obstacles to its launch. It is also alone in sub-Saharan Africa, outside South Africa, in having admitted exchange-traded funds for listing. Three more were listed in 2015. On the listing of ordinary shares, there are several gaps to be filled in sectoral terms as three segments account for 88% of total market capitalisation. Some omissions are striking – no oil producers and no significant players in the services industry. MTN Nigeria, the largest company in the country, has pledged to list some shares on the NSE. New listings are critical to enhancing the depth and marketability of the offer on the NSE.
Similar to other exchanges in emerging markets, it also has to contend with the trend of multinational parent companies buying back minority holdings in their local operations. We are confident that the gaps can be filled. We are hopeful of a few new listings in the next 18-24 months from the upstream oil, consumer goods and industrial goods segments.
The federal government also has a major role to play. An opportunity presents itself with the proposed restructuring of the Nigerian National Petroleum Corporation. The new administration plans to sell off parts of the national giant such as gas operations and a stake in the four refineries. Whenever the government auctions slots in the broadband infrastructure, or acreage under a new oil bidding round, it could also apply a listing condition.
Beyond private sector government transactions, the NSE is in the process of demutualising itself, and has already appointed financial advisors and legal consultants. In Nairobi local stockbrokers sold 66m shares in 2014. Their stake was thereby reduced to 56% and will be trimmed to below 40% in 2017.
As for the pools of investible money domestically, the largest is held by the pension fund administrators, which had N5.5trn ($17.4bn) in assets under management (AUM) at the end of March 2016. Holdings of domestic equities stood at N470bn ($1.5bn), equivalent to 8.6% of the total. Considering the pattern of monetary policy in recent years, it is no surprise that the share of government securities amounted to 67.5%. The second-largest pool are the regulated mutual funds, with AUM of N283bn ($893.4m) as of May 2016, while equity funds held N12.7bn ($40.1m). Funds that are not regulated by Nigeria’s Securities and Exchange Commission – the Asset Management Corporation of Nigeria, high-net-worth individuals and charitable foundations – are the other important domestic players on the exchange.
We therefore have the regulatory environment, the pools of investible funds and good listing prospects in place for the NSE to enjoy a considerable lift once the economy reverts to broad-based growth. Once foreign exchange is again freely available, the offshore portfolio community should return in earnest. Before we reach that point, it is worth mentioning the strong investment case for cement and construction stocks in today’s climate of foreign exchange shortages. Their use of domestic inputs is high and they stand to benefit from the focus of the current administration capital spending on public works to boost growth.
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