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VENTURES AFRICA – The Nigerian equity market capitalization has surpassed the pre-2008 level of N12.6 trillion ($77.4 billion) as 2013 finally marked the consolidation of the recovery period for the capital market.
The recovery gained momentum in 2012 following a 35 percent appreciation in market capitalization, leading to a gradual return of local investors who fled the market in the wake of the financial crisis. This was the direct result of an increase in investor confidence, driven by a relatively stable macroeconomic environment with interest rates stabilizing at 12 percent and the naira relatively stable against the dollar.
This momentum increased in 2013. Growth from 2012 coupled with a strong across the board performance lead by indigenous producers Dangote Cement and Nestle Nigeria increased the appetite for Nigerian equities. The renewed appetite was rewarded as investments returned more than N4.25 trillion ($26.1 billion), the highest returns in any African market, beating other leading African stock markets such as Kenya and South Africa.
The 2013 performance placed Nigeria’s stock market, along with Zambia, amongst the top 10 markets in the world last year. Both nations are being touted as the next generation of emerging economies, according to a report by the UK’s Telegraph Newspaper.
The prevailing view amongst financial experts is that the market has completed a “bounce-back” phase and is gearing up for a new era in the coming years.
The 2008 Meltdown
The doom and gloom of 2008 remains fresh in the minds of close observers. The sharp plunge in market capitalization to N4.9 trillion from N12.6 trillion and drop in basis index – the measure of percentage change in the value of financial instruments – to 22,000 points from 66,000 points between March 2008 and January 2009 rattled investors driving confidence to an all time low and wiping out over N8 trillion ($49.2 billion) in investments.
The financial crisis that rocked the major economies and threw countries like Greece and Portugal into downward debt spirals subsequently spilled over to emerging markets including Nigeria. Aggressive speculative practices by banks turned the focus from real sector credit provision to short term financial gains. The tremors in the global economy and credit crisis led to a collapse of the Nigerian banking sector which previously contributed 70 percent of the NSE’s market cap. The enormous losses devastated investors. In an interview with the BBC last November, the Director General of Nigeria’s Securities and Exchange Commission (SEC) Arunma Oteh, explained that the collapse drastically affected investment in the capital market and indicated that for every dollar invested there was a $76 loss.
Five years later, the equity market has been given a new lease on life. Now rid of the financial bubble and subject to tighter regulatory oversights, the market has seen a steady turn in fortune, doubling market capitalization between January 2010 and December 2013.
An Impressive 2013
The NSE has seen a massive uptick in investor confidence in 2013 as a result of an improved global economy and structural changes at the Exchange. Under the leadership of Director General Oscar Onyema, who assumed office in April 2011, the NSE has pushed a transformation strategy to increase transparency in the capital market based on five principles: targeted business development, enhanced regulatory programs, 21st century technology strategies, enhanced market structure, and investor protection initiatives. As a result market yields are now higher than before the meltdown, boosting overall investor confidence.
The NSE’s annual 2013 review and outlook for 2014 revealed a 47 percent growth in equity market capitalization to N13.23 trillion ($82.80 billion), with the total market capitalization growing 28.9 percent to N19.08 trillion ($119.41 billion) from N14.80 trillion ($94.74 billion) by the end of 2013, making it the 2nd fastest growing in Africa, just behind Zambia.
Facilitators of the positive returns included strong corporate earnings by blue chip companies, such as banks and manufacturers of fast moving consumer goods (FMCG), greater inflow of capital and portfolio investments, and a tighter regulatory oversight by SEC and the NSE. Reforms in several sectors most notably in agriculture, oil and gas and power also had positive impacts on the financial market.
In addition to the financial gains, local investor participation has risen significantly from 50 percent foreign investor to 50 percent local investor ratio from a 70 percent to 20 percent ratio in 2012. It is believed that a boost in domestic investments will provide a spring board for further market growth in 2014.
Positive 2014 Awaits
The NSE has pegged 2014 as the year Nigeria begins the journey towards attaining Emerging Market Status, an index launched by emerging market-focused investment support provider Morgan Stanley Capital International (MSCI), designed to measure the performance of emerging market equities. It measures the attractiveness of a market to investors. Countries upgraded to EM are considered very favourable markets for investment and usually attract a higher number of equity investors after being listed. If Nigeria is listed, it will make the West African giant the third country in Africa to attain this status after Egypt and South Africa.
“Our goal is to get promoted to the emerging market Index,” an optimistic Oscar Onyema, MD of Nigerian Stock Exchange (NSE) told journalists at the NSE’s annual meeting to review performance in 2013 and projections for 2014. “We expect Nigeria to be a key beneficiary of the MSCI 2013 annual market classification review, which will see Qatar and UAE (together accounting for 30 percent of the benchmark for equity investors in frontier markets), transition from the MSCI Frontier Markets Index to the MSCI Emerging Markets Index,” the stock exchange’s boss added.
To continue sustained growth through 2014 and beyond, the NSE has rolled out a set of new strategic goals with an overall objective of further developing and diversifying the market. Over the next year the NSE aims to increase the number of new listings as it pushes towards $1 trillion market capitalization target. It also aims to operate a more orderly market based on just and equitable principles and develop enabling laws and policies to drive capital market growth, and diversification of income streams.
“In 2014, the Exchange’s primary focus will be on growing the capital market in preparation for achieving emerging market status. The NSE will facilitate access to and participation in the market; increase our footprint on the continent; and deploy a risk framework to safe-guard the market venue,” Mr Onyema stated.
The NSE’s road to recovery has been long, but the markets are currently reaping the rewards of an improved global economic outlook and careful policy transformation. Despite the political and economic challenges that lie ahead, the market indicators largely point towards a positive future as the financial market enters 2014.