It’s Shake Up Time

Established in 1960, the Nigerian Stock Exchange (NSE) has become the largest capital market in the West African region, with a market cap of $82.80 billion for equities and $119.41 billion when all other instruments are taken into consideration as of end-2013. While it has some way to go before claiming the title as Africa’s largest capital market, currently held by the Johannesburg Stock Exchange (JSE) at $1,007 billion in end-2013 market cap terms, the NSE is showing signs of increasing maturity and importance to the Nigerian economy as a whole. The NSE’s market cap at end-2013 was the equivalent of 23.45% of GDP, well up on similar figures from its neighbors in the West African region. Over 2013, the market cap on the NSE rose 26.03% in US dollar terms, ending the year above the previous high point for the exchange of May 2008, when equities topped out at $75.09 billion, before plunging in the wake of the global financial crisis (GFC). Turnover volumes on the exchange also improved by 54.57% in YoY terms over 2013, reaching $26.10 million daily, while according to the NSE some 49.06% of all market activity as of November 2013 was in the hands of local investors. For the year, the NSE was home to 190 listed companies, while the total number of listed securities including bonds and other instruments came to 254. In terms of bonds, four state and municipal bonds, and one government bond, supra-national bond, and corporate bond were issued over 2013, with capitalization remaining relatively steady at $36.61 billion.

While 2013 was the zenith for the NSE, toward the end of 2014 the market began to question valuations in the light of perceived macroeconomic weaknesses, while hot money fled to more fertile pastures. The NSE’s All Share Index (ASI) ended 2013 at 40,472.13 points, and then rallied over January 2014, before market sentiment turned sour over February, falling to 37,308.60 points near the end of March. The market rallied again until early July, reaching 43,039.42 points, the highest level since 1Q2007 thanks in part to MSCI in June increasing Nigeria’s weight on the frontier markets index from around 12% to 19% following the graduation of the UAE and Qatar markets to emerging market status. However, fears over falling oil prices, a weak NGN, and internal security concerns saw the market plunge to 33,914.25 points at the start of December 2014, revealing a 16.20% loss in YTD terms. Over the January to August 2014 period, 57.4% of all transactions were conducted by foreign investors, with a daily trading volume of $42.11 million over 3Q2014. Total market cap at end-3Q2014 was $83.31 billion for equities, though this number very much comes before the subsequent fall in the market.

In terms of market segmentation, the finance, industrial goods, and consumer goods sectors form nearly 90% of market cap on the main ASI index, with oil and gas related stocks forming but a slither—surprising for a country so reliant on this sector’s revenues to drive the economy. As for the major market players, at the start of December 2014 Dangote Cement, with a market cap of $15.81 billion, was the clear top market player, with its local and regional expansion plans to clearly make it one of the world’s largest cement producers at play. It’s nearest listed market rival, Lafarge WAPCO, by comparison, had a market cap of just $1.87 billion. Breweries were also an important category under the consumer goods segment, with Nigerian Breweries revealing a market cap of $7.05 billion, outpacing market rival Guinness Nigeria on $1.22 billion. Nestlé Nigeria was another strong player in the consumer goods segment, with a market cap of $3.46 billion. Although financial stocks are one of the main players as a group, only three make it into large cap status: GTBank ($3.85 billion), Zenith Bank ($3.22 billion), and FBNH ($1.60 billion), although UBA and Access Bank are definitely knocking on the door of large cap status. As for the oil and gas sector, just two companies made large cap status—Forte Oil ($1.32 billion) and Seplat ($1.20 billion)—though prior to the recent market reverse Oando ($961.76 million) would also likely have made the cut.

With campaigning for the 2015 general elections well underway, it is unlikely the market will be able to recover much of its lost ground without clarity as to the country’s economic policy objectives going forward. Whoever wins the elections will have some harsh choices to make, as oil revenues still form a large slice of public sector revenues, and their loss will either mean further budget cuts or the launching of new government bonds to cover any potential deficit, potentially drying up liquidity. For those looking to trawl the market for potential diamonds in the rough, the NSE is starting to show some strong long-side potential for equities, though picking the right moment and hedging for any further falls in the naira will be a challenge.

JUST TOO MANY

Consolidation of the brokerage industry is once again being mooted, with the NSE presently playing home to 307 brokerage houses. While fewer in number than more mighty institutions such as the NASDAQ (350), the large number of Nigerian brokerage houses is well above those of partially comparable markets such as the Borsa Istanbul (97), JSE (62), or Warsaw Stock Exchange (48). So divided is the brokerage pool that a report in 3Q2014 from the NSE noted that the top 10 brokerage houses accounted for 60% of commissions earned (around $1.7 million each), with the other 297 brokerages splitting the rest of the pool, earning on average just $39,000 in commissions a piece. The “mom and pop” nature of the vast majority of brokerage houses is making it difficult for the NSE and market regulators to properly oversee daily operations, and weakens the overall reach of the market to international investors. In cooperation with Nigeria’s Securities and Exchange Commission (SEC), the NSE is looking to force consolidation through more careful market surveillance, as well as the imposition of significantly higher minimum capital requirements, which for dealer/brokers will be set at NGN300 million (approximately $1.85 million). As well, tentative steps are being taken to encourage the presence of large foreign investment banks in the capital markets, to better allow the movement of liquidity between major global financial centers and Nigeria’s illiquid capital markets. These and other actions should see the number of brokers fall to under 100 in the coming year should the reforms come to full implementation. In November 2014, the NSE revealed that it had begun cutting brokerage numbers, removing two dealers for infractions concerning the “unauthorized sale of clients’ shares.”

REGIONAL HOPES

In order for the region to better capitalize on the available investment pool, the West African Capital Market Integration (WACMI) program is currently working to link the markets of Ghana, Nigeria, and the West African Stock Exchange (BRVM). The BVRM brings together the capital markets of Ivory Coast, Benin, Burkina Faso, Mali, Niger, Senegal, Togo, and Guinea Bissau, and together held a total market cap of $11.86 billion. Although the NSE would bring the lion’s share in terms of equity market cap to the table, Ghana would also add a healthy $25.84 billion at 2013 prices, making it the second largest contributor. Current plans envision the launching of a virtual West African Securities Market (WASM) at the end of 1Q2015, although aligning trading regulations and platforms may make this a challenging date to meet.