May provided further respite and ray of hope to beleaguered investors on NSE. The Index gained a stunning 38% , surely a record gain in any one month. It was a month in which investors who took the risk in the first quarter were rewarded beyond their imagination. Value of transaction at just over N56 billion was the highest for the year which is consistent with a rising market which generates more interest.
June on the other hand was a reality check. Value of transactions at over N94 billion was the highest in 9 months. The Index reached a year high on June 2nd at 30,925 and came within whiskers of the year opening. However, by the end of the month the Index had dropped to 26,862 a 9.6% decline from May closing. This was certainly not a surprise after the record setting gains in May.
As we enter the summer the dullest time of the year, it is likely that the index will drop further from its June closing before the summer is out. Already the first few days in July indicate a declining interest in the market. Value of transactions are declining daily albeit slowly. But the signs of a bear market are there: lower lows and lower highs combined with shrinking volume.
With the new Central Bank Governor talking tough and uncertainty still hanging over the faith of some banks this is the time for caution. A time to perhaps sit still. Except for some investors still holding on to dead wood. This might be another opportunity to exit with modest losses before another round of meltdown.
Sunday, July 12, 2009
Thursday, April 30, 2009
April
April brought welcome relief after the destruction in March when the All Share Index lost 15.1% closing at 19.852. This was the first time it closed for the month below 20,000 since November 2003.
Mercifully April was much better, in fact better than February as the Index gained 8.7% closing at 21,491. The full year result for GTB contributed to the positive performance of the Index. The Index gained 8.3% in 7 days following the release of the result. Without the positive impact of GTB, the month would have closed almost flat.
The full year result of GTB restored some confidence to the beleaguered market. The level of disclosure was impressive and the performance above expectations in the light of the gloom. The result lifted some of the clouds hovering over the banks.
The value of transactions in April was also encouraging. Although just under N43 billion was exchanged a far cry from the N250 billion that was exchanged in April last year, it was the highest for the year. Indicating investors are becoming more interested in the market.
May will be pivotal. Will the gains made in April be reversed just as we saw in March? Or would the flurry of full year results (Oceanic, Ecobank, Dangote Sugar etc) and quarterly results (Zenith, UBA, Skye etc) lift the market?
That said, the feeling is that the worst is over. The Index might commence mild fluctuations till the last quarter of the year. In general the faith of the market, just like its capitalization rests on the performance of the banks. As the banks perform so will the Index. Let’s hope the result released by GTB is an indication of positive news to come.
Mercifully April was much better, in fact better than February as the Index gained 8.7% closing at 21,491. The full year result for GTB contributed to the positive performance of the Index. The Index gained 8.3% in 7 days following the release of the result. Without the positive impact of GTB, the month would have closed almost flat.
The full year result of GTB restored some confidence to the beleaguered market. The level of disclosure was impressive and the performance above expectations in the light of the gloom. The result lifted some of the clouds hovering over the banks.
The value of transactions in April was also encouraging. Although just under N43 billion was exchanged a far cry from the N250 billion that was exchanged in April last year, it was the highest for the year. Indicating investors are becoming more interested in the market.
May will be pivotal. Will the gains made in April be reversed just as we saw in March? Or would the flurry of full year results (Oceanic, Ecobank, Dangote Sugar etc) and quarterly results (Zenith, UBA, Skye etc) lift the market?
That said, the feeling is that the worst is over. The Index might commence mild fluctuations till the last quarter of the year. In general the faith of the market, just like its capitalization rests on the performance of the banks. As the banks perform so will the Index. Let’s hope the result released by GTB is an indication of positive news to come.
Thursday, March 26, 2009
Capping of Interest Rates
The Central Bank of Nigeria (CBN) issued a circular on 23rd March 2009 on bank interest rates. The CBN was concerned that interest rates have gone out of hand and something needs to be done. To address this, the Bankers Committee met on 21st March (a Saturday) to discuss. The circular was to communicate the decisions taken. The key ones were:
1) Henceforth, banks will not seek deposit at rates exceeding 15%
2) The lending rate of banks will not exceed 22% plus a maximum of 2% in fees
3) The CBN will lend to banks at a rate that is not higher than 5% above the Monetary Policy Rate (MPR).
The question is why are interest rates high in both the retail and interbank markets? Probably because there is a liquidity crisis and the banks don’t trust each other. Hence require higher rates to compensate them for the risk they are taking by lending to each other. The next question then is how will fixing rates solve the liquidity crisis?
In my view, fixing the rates will not solve the underlying crisis, which is lack of cash by banks. We have seen the effect of trying to force the market with the 1% downward rule of Nigeria Stock Exchange (NSE) and the recent closure of the Interbank Foreign Exchange market. Both measures ended up eroding confidence and had the reverse effect.
I would have thought the first thing CBN will do is to reduce the MPR. With the MPR at 9.75% the CBN is in an enviable position as it can cut rates. Some central banks have lost this option long ago. Why not drop the rate to say 7.75% and the maximum spread for lending to banks to be 3% above MPR? This should help reduce cost of funds as some banks will decide it makes financial sense to access the expanded discount window rather than access the interbank market.
Perhaps another thing that can be done is to inject more money into the economy. An idea is for the Federal Government, States and Local Governments share some more from the excess crude account. The money was saved for the rainy day. Now is the time to use it. The Federal Government can use its share to pay off the billions owed to contractors. They can also use the money for needed capital projects such as completing fast some of the Power Plants already in progress. With this more cash will flow into the banks and reduce the liquidity crisis.
The CBN has been very market oriented in the last few years. However, it has shown in the last 6 months that it is running out of ideas. Perhaps the CBN needs to work with the executive and legislature to find a way out the of the liquidity crisis that has been lingering on for over 9 months. The capping of rates can be interpreted as a cry for help. The Executive and Legislature should step up and offer help before it is too late.
1) Henceforth, banks will not seek deposit at rates exceeding 15%
2) The lending rate of banks will not exceed 22% plus a maximum of 2% in fees
3) The CBN will lend to banks at a rate that is not higher than 5% above the Monetary Policy Rate (MPR).
The question is why are interest rates high in both the retail and interbank markets? Probably because there is a liquidity crisis and the banks don’t trust each other. Hence require higher rates to compensate them for the risk they are taking by lending to each other. The next question then is how will fixing rates solve the liquidity crisis?
In my view, fixing the rates will not solve the underlying crisis, which is lack of cash by banks. We have seen the effect of trying to force the market with the 1% downward rule of Nigeria Stock Exchange (NSE) and the recent closure of the Interbank Foreign Exchange market. Both measures ended up eroding confidence and had the reverse effect.
I would have thought the first thing CBN will do is to reduce the MPR. With the MPR at 9.75% the CBN is in an enviable position as it can cut rates. Some central banks have lost this option long ago. Why not drop the rate to say 7.75% and the maximum spread for lending to banks to be 3% above MPR? This should help reduce cost of funds as some banks will decide it makes financial sense to access the expanded discount window rather than access the interbank market.
Perhaps another thing that can be done is to inject more money into the economy. An idea is for the Federal Government, States and Local Governments share some more from the excess crude account. The money was saved for the rainy day. Now is the time to use it. The Federal Government can use its share to pay off the billions owed to contractors. They can also use the money for needed capital projects such as completing fast some of the Power Plants already in progress. With this more cash will flow into the banks and reduce the liquidity crisis.
The CBN has been very market oriented in the last few years. However, it has shown in the last 6 months that it is running out of ideas. Perhaps the CBN needs to work with the executive and legislature to find a way out the of the liquidity crisis that has been lingering on for over 9 months. The capping of rates can be interpreted as a cry for help. The Executive and Legislature should step up and offer help before it is too late.
Wednesday, March 25, 2009
NSE and Alleged Price Manipulation
I read with interest an advert placed by African Petroleum (AP) on the alleged price manipulation of their stock. The advert was disturbing and has the capacity to further undermine the already fragile public confidence in the market.
There were several things that were quite disturbing about the advert. How did AP get hold of the Central Securities and Clearing System (CSCS) transactions of Dangote or is this information available in the public domain? Why is AP now crying that their price has fallen down to earth? Why did they not complain when the price went up to ridiculous levels before the public offer? Did it not go up due to the same loop hole that is now being exploited?
It is obvious especially in hindsight that prices were manipulated up during the public offer mania. We are all living through the consequences. I sincerely hope the Securities and Exchange Commission (SEC) and the Nigeria Stock Exchange (NSE) will be alive to their various responsibilities.
A situation whereby price manipulation whether up or down go unchecked by the authorities is not healthy for our market. Investors should also be reminded that it is not only when prices are going down that they should ask questions. When prices go up to levels that are obviously irrational, investors should also seek logical explanation otherwise they should stay out of the market and resist the temptation offered by a quick gain.
I also use this opportunity to call on the NSE and SEC to sanction companies that have refused to provide their quarterly earnings as required. Such sanctions should not just be a slap on the wrist but should be sanctions that are appropriate. We need better disclosure to calm investors’ nerves. Now is certainly not the time to continue to turn a blind eye on such obvious non compliance.
There were several things that were quite disturbing about the advert. How did AP get hold of the Central Securities and Clearing System (CSCS) transactions of Dangote or is this information available in the public domain? Why is AP now crying that their price has fallen down to earth? Why did they not complain when the price went up to ridiculous levels before the public offer? Did it not go up due to the same loop hole that is now being exploited?
It is obvious especially in hindsight that prices were manipulated up during the public offer mania. We are all living through the consequences. I sincerely hope the Securities and Exchange Commission (SEC) and the Nigeria Stock Exchange (NSE) will be alive to their various responsibilities.
A situation whereby price manipulation whether up or down go unchecked by the authorities is not healthy for our market. Investors should also be reminded that it is not only when prices are going down that they should ask questions. When prices go up to levels that are obviously irrational, investors should also seek logical explanation otherwise they should stay out of the market and resist the temptation offered by a quick gain.
I also use this opportunity to call on the NSE and SEC to sanction companies that have refused to provide their quarterly earnings as required. Such sanctions should not just be a slap on the wrist but should be sanctions that are appropriate. We need better disclosure to calm investors’ nerves. Now is certainly not the time to continue to turn a blind eye on such obvious non compliance.
Monday, March 16, 2009
February
In line with tradition, February 2009 was a much better month than January. The volume and value of transactions was higher. A total of N37 billion was exchanged compared to N29.8 billion in January. However, the amount was a far cry from the N375 billion that was exchanged in February 2008 (an all time record). The NSE All Share Index closed at 23,377 up 7.2%. This is the first time since February 2008 that the Index has closed higher the following month.
Unfortunately, the gains made in February have since been eroded in March. As at 13th March, the Index has dropped to 21,003 a new 52 week low and a decline of 10.2% compared to February.
In my view the outlook for the capital market does not look very good for the rest of the year. I base my opinion on the following:
- Very tight liquidity which has resulted in high deposit and lending rates. This liquidity will not ease up quickly especially with the adoption of December uniform year end at the end of this year.
- A depreciating Naira as a result of policy inconsistency from the Central Bank. This means more Naira is required to fund imports further worsening liquidity.
- High inflation which is usually not good for companies and individuals since it discourages long term investments.
- Gloomy economic outlook: Low oil price, reduced production due to OPEC quota and high government deficit. Due to the deficit the government will need to borrow locally to fund the shortfall. This will further reduce the funds available to the private sector and continue to impact negatively on cost of funds.
I therefore advice a long term view for any investment on the NSE. I expect the All Share Index to close down this year. The Index needs to go up at least 50% to close even for the year. I believe that is a tall order given the points outlined above.
For the long term patient investor, now is the time to look for quality stocks at reasonable valuations. For the trader, trade with caution.
Unfortunately, the gains made in February have since been eroded in March. As at 13th March, the Index has dropped to 21,003 a new 52 week low and a decline of 10.2% compared to February.
In my view the outlook for the capital market does not look very good for the rest of the year. I base my opinion on the following:
- Very tight liquidity which has resulted in high deposit and lending rates. This liquidity will not ease up quickly especially with the adoption of December uniform year end at the end of this year.
- A depreciating Naira as a result of policy inconsistency from the Central Bank. This means more Naira is required to fund imports further worsening liquidity.
- High inflation which is usually not good for companies and individuals since it discourages long term investments.
- Gloomy economic outlook: Low oil price, reduced production due to OPEC quota and high government deficit. Due to the deficit the government will need to borrow locally to fund the shortfall. This will further reduce the funds available to the private sector and continue to impact negatively on cost of funds.
I therefore advice a long term view for any investment on the NSE. I expect the All Share Index to close down this year. The Index needs to go up at least 50% to close even for the year. I believe that is a tall order given the points outlined above.
For the long term patient investor, now is the time to look for quality stocks at reasonable valuations. For the trader, trade with caution.
Sunday, February 1, 2009
Crash
January 2009 will go down as the worst month in the history of the Nigerian Stock Exchange. The All share Index lost 30.6% to close at 21,814. The last time the Index was below 22,000 was in 2003. The drop of 30.6% was incredible given that the cumulative losses suffered in the entire forgettable 2008 was 46%.
The value of transactions exchanged did not fare any better. Only N29.8 billion was exchanged an average of about N1.4 billion daily. This compares miserably to the N286 billion exchanged in 2008 an average of N13 billion daily. It is safe to say that what we witnessed in the last 7 months is a crash.
For the value investor times could not be more exiting. The market PE is currently about 14.3 while the dividend yield is 6%. The market has not been this attractive for quite a while. In my view the market is currently oversold and there are opportunities in most sectors. Definitely, this is not the time for the trader as there has been little volatility to trade. However, for long term investors, this is the time to seriously consider buying quality dividend paying stocks at prices last seen 5 years ago.
Year............PE.....Yield %
30th Jan 2009...14.3... 6
31st Dec 2008...16.7... 4
25th Jun 2008...27.0... 2.1
5th Mar 2008...35.9... 1.6
31st Dec 2007...30.0... 2.1
29th Dec 2006...23.4... 3.88
30th Dec 2005...16.3... 4.75
Whether investors will have the courage and liquidity to go on a buying spree is yet to be seen. One of the things I learnt during this long bear market is that fear is indeed more powerful than greed.
The value of transactions exchanged did not fare any better. Only N29.8 billion was exchanged an average of about N1.4 billion daily. This compares miserably to the N286 billion exchanged in 2008 an average of N13 billion daily. It is safe to say that what we witnessed in the last 7 months is a crash.
For the value investor times could not be more exiting. The market PE is currently about 14.3 while the dividend yield is 6%. The market has not been this attractive for quite a while. In my view the market is currently oversold and there are opportunities in most sectors. Definitely, this is not the time for the trader as there has been little volatility to trade. However, for long term investors, this is the time to seriously consider buying quality dividend paying stocks at prices last seen 5 years ago.
Year............PE.....Yield %
30th Jan 2009...14.3... 6
31st Dec 2008...16.7... 4
25th Jun 2008...27.0... 2.1
5th Mar 2008...35.9... 1.6
31st Dec 2007...30.0... 2.1
29th Dec 2006...23.4... 3.88
30th Dec 2005...16.3... 4.75
Whether investors will have the courage and liquidity to go on a buying spree is yet to be seen. One of the things I learnt during this long bear market is that fear is indeed more powerful than greed.
Wednesday, January 21, 2009
Time to Act
In the last few days, the share price of most banks quoted on the Nigerian Stock Exchange (NSE) has taken a beating. The share price of some of the banks has shed more than 40% this year alone. While I do not subscribe to the idea of a bail out of the NSE, I believe the Central Bank of Nigeria (CBN) needs to calm the nerves of investors and depositors. The CBN needs to come clean about the health of the banks.
What the market is telling us is that the earnings declared by some of the banks is probably not a true reflection of their financial condition. Otherwise why on earth will the shares of a perfectly healthy bank in a growing emerging economy be selling at a Price to Earnings ratio of less than 5 and a dividend yield of more than 10%?
I am calling on the CBN Governor to come clean about the health of our banks and the level of their exposure to the Nigerian Stock Exchange. We need him to exercise leadership and take responsibility. The CBN relaxed in September 2008 the Cash Reserve Requirement and Liquidity Ratio for commercial banks and also allowed banks to access the Discount Window by pledging Commercial Papers. This action suggests that there was at that time a serious liquidity crisis which called for the CBN to act so aggressively to improve liquidity. Despite such actions, interest rates have not eased.
Nigeria is at a cross road. The financial crisis in the West has led to the collapse of Oil price our main source of foreign exchange. The Naira has declined more than 25% against the dollar in the last 2 months. The economy and the Stock market are facing big tests. We need the CBN Governor to step up and allay our fears and restore some confidence.
What the market is telling us is that the earnings declared by some of the banks is probably not a true reflection of their financial condition. Otherwise why on earth will the shares of a perfectly healthy bank in a growing emerging economy be selling at a Price to Earnings ratio of less than 5 and a dividend yield of more than 10%?
I am calling on the CBN Governor to come clean about the health of our banks and the level of their exposure to the Nigerian Stock Exchange. We need him to exercise leadership and take responsibility. The CBN relaxed in September 2008 the Cash Reserve Requirement and Liquidity Ratio for commercial banks and also allowed banks to access the Discount Window by pledging Commercial Papers. This action suggests that there was at that time a serious liquidity crisis which called for the CBN to act so aggressively to improve liquidity. Despite such actions, interest rates have not eased.
Nigeria is at a cross road. The financial crisis in the West has led to the collapse of Oil price our main source of foreign exchange. The Naira has declined more than 25% against the dollar in the last 2 months. The economy and the Stock market are facing big tests. We need the CBN Governor to step up and allay our fears and restore some confidence.
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