NSE is the capital market in Nigeria. One would expect to see a replicated performance of what obtains in Wall Street; albeit, the reverse seems to hold. The indexes paraded on the floor of the NSE have always been volatile; however, losses are more frequent than gains. The reasons for this trend are not far-fetched.
What drives the performance of a capital market is the availability of capital to trade with and the level of confidence exhibited by investors. The NSE has always been overwhelmed with trades in existing securities. Major IPOs are seldom in the market. Whilst issues from companies like MTN and Lafarge have moved the market, the absence of regular IPOs, mergers, and acquisitions executed through the stock exchange market is centrist to the not-so-impressive relative performance. Should the NSE be blamed for this? Maybe not. The state of the Nigerian economy largely determines the spate of industrialization which, in turn, affects IPOs and mergers. This, notwithstanding, the NSE needs to create an avenue where the existing firms can raise capital through stocks. Avenues would mean creating an efficient cost structure and a support system to implement prerequisites required for listing.
Apart from the dearth of IPOs and other fresh market activities, the NSE index has been led by banking stocks and a few consumer good companies. A healthy capital market ideally should have a seemingly balanced weight of companies across all sectors of the economy. This is needed to diversify the market and position investments across different sectors of the economy. To validate this claim, we can test by examining the major market movers daily. It is not surprising that banking stocks stimulate and constrain the market. Equity investors and stockbrokers are equally trying to keep their risk exposure at a minimum and they would do this by playing safe on banking stocks, knowing fully well the certainty that the banks would post a huge profit by year-end
The prevalence of bearish sentiments constitutes another bane to the virility of the stock market in Nigeria. This has been influenced by the lack of appetite on the part of investors to hold certain stocks. From the basic law of demand and supply, a situation of excess supply will drive the price of an underlying down. This explains why the NSE index performs poorly when the wave of bearish sentiments is ‘torrential’. The pertinent question is: what causes bearish sentiments to exist? The factors are limitless, but they can be grouped into macroeconomic factors, company factors, and personal factors. For a developing country like Nigeria with multiple exposures to macroeconomic shocks, bearish sentiments are bound to remain. Equally important are news, events, and profit figures of companies trading on the floor of the NSE. A piece of adverse news will spring up bearish sentiments and worsen the NSE indexes.
The NSE itself requires a wholesome investment requirement in technology and human capital. Top stock markets in the world boast of advanced technological inclusion in their daily operations and a crop of tech-savvy stock market professionals. Technology comes at a price that has to be paid to enhance the stock market. Again, I emphasize the need to train traders on the floor of the NSE on recent developments in stock trading.
In submission, the growth potentials desired by policymakers in Nigeria will never be achieved if the efficient policies do not tailgate the capital market. There have to be policy directives to engender improvements in the market.
Written and edited by Michael Ogunremi
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