For the second time this year, the authorities saw it fit to intervene in the capital market. The market was in a free fall as the All Share Index (ASI) was down 35% from its peak and down 25.5% for the year as at 26th August. The measures taken were effective 27th August.
One positive measure was the reduction in transaction fees. This is a welcome development as the fees charged are rather too high compared to other exchanges. One very negative measure which had an immediate impact was the capping of downward movement of price of all stocks to a maximum of 1% daily. Upward movement was retained at 5% daily. A similar measure was enforced in early June when prices were not allowed to fall for 1 week. No date has been announced for the removal of the 1% cap.
This one way cap is disturbing as it amounts to manipulation. Any capping should be the same both ways. The last time a cap was applied and then removed, the ASI went on a free fall loosing 28% resulting in this new cap. So when will this temporary fix end?
Since the cap, the ASI has gained 10.6% in just three days. Most stocks have suddenly become scarce. Just a day earlier there were no takers but now everybody wants to get in on the action.
I see this capping as an opportunity to exit some weak stocks as prices move up to break even territory. Some stocks showed serious weakness during the bear run and one would be better off selling them.
On the other hand, this is not the time to buy assuming one can even get anything to buy. The constant changing of the rules of the game erodes confidence and discourages long term investing. The authorities have shown they have no appetite for a declining market. Who knows whether they might decide in the future to peg upward movement during a bull run?
My approach is simple. Sell off weak stocks and buy nothing until sanity returns.
Sunday, August 31, 2008
Tuesday, August 26, 2008
Never Argue with Market Trend
Although I am not a practitioner of Technical analysis, I was very concerned when on 8th August the NSE All Share Index (ASI) dropped to below 50,000 for the first time in over a year. Since then the Index has been in a free fall loosing 18% in August. Out of 18 trading days in August, we have had only one positive day and that was a meager 0.16% rise. August has also produced the longest loosing streak for the year (11 consecutive loosing days and counting). It has been a very testing month with value of transactions also drying up to less than 40% of what was recorded in February.
When we welcomed August, I was not very optimistic going by past trends. From August to mid September is usually the time of the year when the Index and Value/Volume of transactions slow down and/or falter. However, I have never witnessed such level of decline. And that is including the bear years of 1997-1999. Looking at the data from 1995 to date, we have never had such level of decline in one single month. The worst so far was July 1999 when the ASI lost 17%. Unless something positive happens in the next 3 trading days, August is on track to be the worst month in 13 years.
So what can one do? All the books I have read so far have advised staying out of a bear market. In their opinion when panic sets in investors throw out all rational thinking and dump stocks at ridiculous prices. They advice staying out until a new positive trend develops: higher highs and higher lows. This advice has been vindicated in the last four months. If one had stayed out of the market from April when the negative trend became obvious one would have been in good shape. In fact the opportunity to get out was available in June. Alas some of us refused to take the advice of experienced experts. We stayed in. Rationalizing that GTB at N22 was cheap etc. Two months down the line GTB fell to below N20.
Never argue with the market, the experts say and they are right. When the trend is downward, stay out (unless you are an astute short seller). When the trend is upward get in. Cut losses short and let winners run. It is that simple. Alas only a few practice it with discipline. I hope when the next bear calls we would have the discipline to follow the wisdom of experienced traders.
When we welcomed August, I was not very optimistic going by past trends. From August to mid September is usually the time of the year when the Index and Value/Volume of transactions slow down and/or falter. However, I have never witnessed such level of decline. And that is including the bear years of 1997-1999. Looking at the data from 1995 to date, we have never had such level of decline in one single month. The worst so far was July 1999 when the ASI lost 17%. Unless something positive happens in the next 3 trading days, August is on track to be the worst month in 13 years.
So what can one do? All the books I have read so far have advised staying out of a bear market. In their opinion when panic sets in investors throw out all rational thinking and dump stocks at ridiculous prices. They advice staying out until a new positive trend develops: higher highs and higher lows. This advice has been vindicated in the last four months. If one had stayed out of the market from April when the negative trend became obvious one would have been in good shape. In fact the opportunity to get out was available in June. Alas some of us refused to take the advice of experienced experts. We stayed in. Rationalizing that GTB at N22 was cheap etc. Two months down the line GTB fell to below N20.
Never argue with the market, the experts say and they are right. When the trend is downward, stay out (unless you are an astute short seller). When the trend is upward get in. Cut losses short and let winners run. It is that simple. Alas only a few practice it with discipline. I hope when the next bear calls we would have the discipline to follow the wisdom of experienced traders.
Tuesday, August 5, 2008
Liquidity
The Nigerian financial system has been suffering a liquidity squeeze for some months. The stock market has felt the full force of the squeeze as Naira value of trading has been on the decline since early March. The All Share Index (ASI) has also lost 22% since its all time high achieved on 5th March this year.
One common explanation offered for the decline in liquidity is the proposed common year end for all banks. This is as a result of desperation of some banks to attract deposits to boost their balance sheets. Previously some of the banks have used inter bank borrowings to boost their balance sheets at year end. However, these funds will no longer be available if the common year end is implemented.
The Central Bank of Nigeria (CBN) concerned with the outrageous deposit rates some banks have been offering out of desperation to attract deposits decided on July 23rd to postpone the policy implementation to December 2009 instead of December 2008. The postponement only lasted 13 days as the CBN announced on August 5th that the policy has been completely cancelled. Banks can now do as they wish.
Will the policy reversal improve the liquidity situation? Yes it will. But in my view not to the level that will push the Index back to record territory.
Liquidity will take some time to improve significantly. This is because another major cause of the liquidity squeeze will take time to disappear. This is the effect of the capital raising of banks and other companies on the liquidity of individuals and institutional investors. More than N1.5 trillion was raised through IPO’s and PO’s in the last two years. This is a significant amount representing more than 14% of the current market capitalization. To put it in context Guaranty Trust Bank had N365 billion deposit liabilities as at 29th February 2008. So taking out N1.5 billion (this does not include funds raised through private placements) from the banking deposit system is bound to create a strain on the system.
Therefore unless something happens to accelerate the replenishment of funds in the pockets of Nigerians and Institutional investors, the liquidity squeeze will continue for another couple of months. Perhaps even till the implementation of the 2009 budget.
The banks off course can help accelerate the replenishment by offering cheap credits to consumers using the capital they have raised. This might take some time as some of the banks have expensive deposit liabilities raised during the “desperation” period.
My outlook for August and September remain the same. I don’t expect any significant upward movement in the ASI.
As is the usual trend, October might offer some respite buoyed by the policy reversal, gradual improvement of liquidity and year end positioning.
I hope so.
One common explanation offered for the decline in liquidity is the proposed common year end for all banks. This is as a result of desperation of some banks to attract deposits to boost their balance sheets. Previously some of the banks have used inter bank borrowings to boost their balance sheets at year end. However, these funds will no longer be available if the common year end is implemented.
The Central Bank of Nigeria (CBN) concerned with the outrageous deposit rates some banks have been offering out of desperation to attract deposits decided on July 23rd to postpone the policy implementation to December 2009 instead of December 2008. The postponement only lasted 13 days as the CBN announced on August 5th that the policy has been completely cancelled. Banks can now do as they wish.
Will the policy reversal improve the liquidity situation? Yes it will. But in my view not to the level that will push the Index back to record territory.
Liquidity will take some time to improve significantly. This is because another major cause of the liquidity squeeze will take time to disappear. This is the effect of the capital raising of banks and other companies on the liquidity of individuals and institutional investors. More than N1.5 trillion was raised through IPO’s and PO’s in the last two years. This is a significant amount representing more than 14% of the current market capitalization. To put it in context Guaranty Trust Bank had N365 billion deposit liabilities as at 29th February 2008. So taking out N1.5 billion (this does not include funds raised through private placements) from the banking deposit system is bound to create a strain on the system.
Therefore unless something happens to accelerate the replenishment of funds in the pockets of Nigerians and Institutional investors, the liquidity squeeze will continue for another couple of months. Perhaps even till the implementation of the 2009 budget.
The banks off course can help accelerate the replenishment by offering cheap credits to consumers using the capital they have raised. This might take some time as some of the banks have expensive deposit liabilities raised during the “desperation” period.
My outlook for August and September remain the same. I don’t expect any significant upward movement in the ASI.
As is the usual trend, October might offer some respite buoyed by the policy reversal, gradual improvement of liquidity and year end positioning.
I hope so.
Sunday, August 3, 2008
July
I welcomed July with a lot of optimism. Unfortunately, July turned out to be the second worst month of the year as the NSE All Share Index lost 5.1%.
There were a lot of corporate announcements as expected. However, they failed to lift or excite the market as value of transactions at N191 billion was the lowest for the year. In fact some stocks lost ground despite announcing positive results and dividends. E.g. Access Bank which started the month at N17.64 closed at N15.98 ex div.
Traditionally, the values of transactions in August and September have been low. However, the Index has shown no consistent pattern. In 2007, the Index went down in August compared to July but it went up in 2006 and 2005.
In my view, the 5.1% loss we experienced in July might not be repeated in August. However, I don’t expect a gain of more than 5% as well. In fact 5% or more will be a major surprise. This is because the only major announcement expected is from Zenith, otherwise it will be mostly quite. Furthermore, the liquidity squeeze might still continue despite the postponement of the common year end to December 2009. Unless liquidity suddenly improves I don’t expect any major rally.
In August as has been in the last 2 months, my strategy is that of wait and see. Purchases could however be made if the opportunity presents itself e.g. GTB at N23 and FBN at N27 (post bonus and ex div).
I hope we get some respite in August despite my lack of optimism.
There were a lot of corporate announcements as expected. However, they failed to lift or excite the market as value of transactions at N191 billion was the lowest for the year. In fact some stocks lost ground despite announcing positive results and dividends. E.g. Access Bank which started the month at N17.64 closed at N15.98 ex div.
Traditionally, the values of transactions in August and September have been low. However, the Index has shown no consistent pattern. In 2007, the Index went down in August compared to July but it went up in 2006 and 2005.
In my view, the 5.1% loss we experienced in July might not be repeated in August. However, I don’t expect a gain of more than 5% as well. In fact 5% or more will be a major surprise. This is because the only major announcement expected is from Zenith, otherwise it will be mostly quite. Furthermore, the liquidity squeeze might still continue despite the postponement of the common year end to December 2009. Unless liquidity suddenly improves I don’t expect any major rally.
In August as has been in the last 2 months, my strategy is that of wait and see. Purchases could however be made if the opportunity presents itself e.g. GTB at N23 and FBN at N27 (post bonus and ex div).
I hope we get some respite in August despite my lack of optimism.
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