October 2008 will go down as one of the worst months for the Nigerian Stock Exchange (NSE) All Share Index (ASI). The Index closed at 36,326 down 21.4% from its opening. This is the worst performance in any one month between 1995 and 2008. The Index has now lost 37.4% year to date and is down 45% from its peak in March 2008.
Value of transactions has all but collapsed. Only N39.7 billion was exchanged in October an average of less than N2 billion a day. This is the worst so far this year and a far cry from the N388 billion exchanged in February 2008. Another record set in October was that the Index went down throughout the month. There was no single positive day for the Index. It was so bad that on some days no stock gained. Another unwanted record!
The 1% cap on downward movement on prices was removed on 28th October which allowed October to set some of the above records. Despite the meltdown, the removal of the cap is a welcome development. We need the market to bottom out sooner rather than later. The 1% cap was merely postponing the inevitable.
By the end of the week most of the banking stocks were selling at more than 50% off their 52 week high. The ASI itself is back to the level last seen in January 2007. If care is not taken, all the gains of 2007 will be wiped out by the end of next week.
What we witnessed in October is probably a once in a generation event. The NSE has been wrecked by the financial tsunami tormenting the world financial markets. The collapse of markets all over the world in the last few months precipitated by the sub-prime mortgage crises in the United States has confirmed the impact of globalization and the interconnectedness of world economies.
Next week will be interesting. I shudder to think that another 25% decline is in the offing. The worse is surely over. Or is it not? Stay tuned.
Friday, October 31, 2008
Tuesday, October 28, 2008
Back to Sanity
After two months of the bizarre ill advised 1% cap on downward price movement of stocks on the Nigerian Stock Exchange, the rule has been modified to its previous position. Effective 28th October stocks can move up or down by 5% which was the previous position before 27th August.
The Index promptly fell to 40,163 loosing 3.5% from its previous days close. That is all well and good. The sooner most stocks bottom out the better for everybody. The daily downward slide of the last 36 consecutive trading days has been very damaging to investors’ confidence. The continuous daily slide was largely due to the 1% cap. Now it is gone and hopefully the market will bottom out within the next 20 trading days at worst.
Another rule that seems to have been modified is the 100,000 units rule before an upward or downward movement in price. This has reportedly been modified to 50,000 units. Although this is yet to be confirmed, it will also be another positive development. Some “illiquid” stocks have been stagnant for a while due to this rule.
It will take some time before confidence will return and investors start pouring money into the market. However, the above measures will help boost confidence and hopefully we would see some upward movement in the Index before the year runs out.
In the meantime, my eyes are on the value of daily transactions which have been very low this month. Until this goes up significantly, there will be no meaningful recovery.
The Index promptly fell to 40,163 loosing 3.5% from its previous days close. That is all well and good. The sooner most stocks bottom out the better for everybody. The daily downward slide of the last 36 consecutive trading days has been very damaging to investors’ confidence. The continuous daily slide was largely due to the 1% cap. Now it is gone and hopefully the market will bottom out within the next 20 trading days at worst.
Another rule that seems to have been modified is the 100,000 units rule before an upward or downward movement in price. This has reportedly been modified to 50,000 units. Although this is yet to be confirmed, it will also be another positive development. Some “illiquid” stocks have been stagnant for a while due to this rule.
It will take some time before confidence will return and investors start pouring money into the market. However, the above measures will help boost confidence and hopefully we would see some upward movement in the Index before the year runs out.
In the meantime, my eyes are on the value of daily transactions which have been very low this month. Until this goes up significantly, there will be no meaningful recovery.
Saturday, October 25, 2008
Illiquid
Our stock market has become illiquid. There are no buyers. Value of transactions has dried up. The daily average Naira value of trades in October has been less than two billion Naira. The All Share Index has continued its downward slide unabated.
If anybody had told me six months ago that Access Bank will be selling at less than ten Naira I would not have believed it. Access closed at N9.88 on 24th October, a 20 month low. The 2009 forward PE ratio of Access is 6.1 while the 2009 forward dividend yield is 9.8%. It is not just Access, most of the quoted banks are selling at what appears to be a bargain. A few are still pricey (eg Union and Wema). The only rational explanation for this collapse is that the “Financial Tsunami” that has wrecked havoc in Europe and US is taking its toll on our banks.
The main fear I have however, is that the short term profitability of some of the banks could be compromised due to their exposure to margin loans. If the stock market does not recover to its February level within the next six months, some banks will be forced to write off several billions of Naira.
In the light of the above, it would be prudent to discount the forecast profit of the banks in carrying out valuations. Using Access bank as an example and discounting their forecast earnings by 25%, the forward 2009 PE ratio becomes 7.8 and the dividend yield 7.9%. The result still shows that Access is currently selling at an attractive price.
For the long term investor (at least 3 years horizon) who is not exposed to Nigerian banks, and who has an appetite for risk, this is a good time to consider buying selectively. The key word is selective. Valuations should be done with discounted forecast earnings. For those of us who are already in, my advice is, stay put.
Other sectors worth watching are foods and beverages and healthcare. These two sectors are generally immune to a slowing economy as we must all eat and health is wealth. The healthcare sector is still pricey but could be attractive if its looses another 20%. Dangote Sugar in the Foods & Beverages sector is attractive and worthy of consideration.
Slowly, slowly the market is looking attractive, perhaps even presenting us with an opportunity of a life time. Do we have the confidence, courage (and dare I say – liquidity) to grab it? I hope so.
If anybody had told me six months ago that Access Bank will be selling at less than ten Naira I would not have believed it. Access closed at N9.88 on 24th October, a 20 month low. The 2009 forward PE ratio of Access is 6.1 while the 2009 forward dividend yield is 9.8%. It is not just Access, most of the quoted banks are selling at what appears to be a bargain. A few are still pricey (eg Union and Wema). The only rational explanation for this collapse is that the “Financial Tsunami” that has wrecked havoc in Europe and US is taking its toll on our banks.
The main fear I have however, is that the short term profitability of some of the banks could be compromised due to their exposure to margin loans. If the stock market does not recover to its February level within the next six months, some banks will be forced to write off several billions of Naira.
In the light of the above, it would be prudent to discount the forecast profit of the banks in carrying out valuations. Using Access bank as an example and discounting their forecast earnings by 25%, the forward 2009 PE ratio becomes 7.8 and the dividend yield 7.9%. The result still shows that Access is currently selling at an attractive price.
For the long term investor (at least 3 years horizon) who is not exposed to Nigerian banks, and who has an appetite for risk, this is a good time to consider buying selectively. The key word is selective. Valuations should be done with discounted forecast earnings. For those of us who are already in, my advice is, stay put.
Other sectors worth watching are foods and beverages and healthcare. These two sectors are generally immune to a slowing economy as we must all eat and health is wealth. The healthcare sector is still pricey but could be attractive if its looses another 20%. Dangote Sugar in the Foods & Beverages sector is attractive and worthy of consideration.
Slowly, slowly the market is looking attractive, perhaps even presenting us with an opportunity of a life time. Do we have the confidence, courage (and dare I say – liquidity) to grab it? I hope so.
Thursday, October 9, 2008
Financial Tsunami
A financial tsunami is currently sweeping the world, wrecking havoc and threatening to significantly damage entire economies. We are definitely in the middle of a major financial crisis the like of which the world has not seen in generations.
It all began in the US last year when home owners with sub-prime mortgages began defaulting on payments. This led to cash flow problems for a lot of banks which led them to squeeze credit. A large number of these banks had to take big losses which led to the melt down of their share prices and ultimate collapse of some Wall Street speculators. Major casualties include Bear Sterns, Lehman Brothers, AIG, Freddie Mac, Fannie Mae, Washington Mutual, IndyMac and the list goes on.
The greed of Wall Street and living beyond one’s means lifestyle of Americans has finally come home to roost sucking in the entire world. Due to globalization, what is essentially a crisis manufactured in the United States, has become a major world crisis. American banks have bundled up these toxic mortgages and sold them to banks in Europe & Asia. Sovereign funds not fully grasping the full magnitude of the crisis pumped in money into several American financial institutions in the last one year. They are now forced to write off these bailouts as several of these companies go bankrupt or are taken over for peanuts. Oil prices have gone south on fears of world recession threatening economies of major oil producers including Nigeria.
Our capital market in Nigeria has not been spared. The difference however is that our banks are not really distressed. The fall in share prices is more due to market liquidity drying up than because our banks are distressed. This is why the recent suggestion by Nigerian Stock Exchange (NSE) that banks should bail out the capital market is dangerous. How can NSE suggest our banks should risk depositors’ money by propping up share prices of quoted companies some of which are over valued anyway? No value will be added to the economy except to enrich a few people in the process. I hope the banks have more sense than to engage in such dangerous speculation.
The drying up of liquidity was probably caused by a combination of many factors including:
1) The exit of foreign portfolio managers from our market between February & June this year.
2) The apparent over valuation of the market which led to the exit of discerning local investors from the market.
3) The global financial crisis which has led to reduction in speculators both foreign and local.
4) The continued slide which continues to undermine confidence scaring away new money from the market in the process.
As we live through this historic crisis, I hope our banks and regulators will learn valuable lessons. Nigerian banks post consolidation are gradually embracing the culture of consumer loans. We see on a daily basis in our newspapers adverts by banks of all kinds of consumer loans. These banks need to ensure their risk management is robust enough to deal with the added new risk they are taking.
The crisis was mostly caused by Wall Street greed and American debt culture. Nigerians and Nigerian banks will do well not to be sucked into this dangerous debt culture whose ultimate outcome is the destruction of wealth and livelihoods.
It all began in the US last year when home owners with sub-prime mortgages began defaulting on payments. This led to cash flow problems for a lot of banks which led them to squeeze credit. A large number of these banks had to take big losses which led to the melt down of their share prices and ultimate collapse of some Wall Street speculators. Major casualties include Bear Sterns, Lehman Brothers, AIG, Freddie Mac, Fannie Mae, Washington Mutual, IndyMac and the list goes on.
The greed of Wall Street and living beyond one’s means lifestyle of Americans has finally come home to roost sucking in the entire world. Due to globalization, what is essentially a crisis manufactured in the United States, has become a major world crisis. American banks have bundled up these toxic mortgages and sold them to banks in Europe & Asia. Sovereign funds not fully grasping the full magnitude of the crisis pumped in money into several American financial institutions in the last one year. They are now forced to write off these bailouts as several of these companies go bankrupt or are taken over for peanuts. Oil prices have gone south on fears of world recession threatening economies of major oil producers including Nigeria.
Our capital market in Nigeria has not been spared. The difference however is that our banks are not really distressed. The fall in share prices is more due to market liquidity drying up than because our banks are distressed. This is why the recent suggestion by Nigerian Stock Exchange (NSE) that banks should bail out the capital market is dangerous. How can NSE suggest our banks should risk depositors’ money by propping up share prices of quoted companies some of which are over valued anyway? No value will be added to the economy except to enrich a few people in the process. I hope the banks have more sense than to engage in such dangerous speculation.
The drying up of liquidity was probably caused by a combination of many factors including:
1) The exit of foreign portfolio managers from our market between February & June this year.
2) The apparent over valuation of the market which led to the exit of discerning local investors from the market.
3) The global financial crisis which has led to reduction in speculators both foreign and local.
4) The continued slide which continues to undermine confidence scaring away new money from the market in the process.
As we live through this historic crisis, I hope our banks and regulators will learn valuable lessons. Nigerian banks post consolidation are gradually embracing the culture of consumer loans. We see on a daily basis in our newspapers adverts by banks of all kinds of consumer loans. These banks need to ensure their risk management is robust enough to deal with the added new risk they are taking.
The crisis was mostly caused by Wall Street greed and American debt culture. Nigerians and Nigerian banks will do well not to be sucked into this dangerous debt culture whose ultimate outcome is the destruction of wealth and livelihoods.
Sunday, October 5, 2008
September
September was a tough month for investors in Nigerian quoted equities. The NSE All Share Index declined for 17 straight days loosing 6.1% in the process and down 20.3% for the year. Value of transactions during the month was a meagre N134 billion, the lowest for the year. Most stocks were on offer throughout the month with no buyers in sight.
The current situation should not come as a surprise given the trend in the last 6 months. The 1% limit placed on downward movement in stock prices has not stopped the decline. What it has succeeded in doing is driving away speculators from the market. Without speculators, liquidity has all but disappeared. In addition, the continued daily slide has continued to weigh on investors mind further draining away their fragile confidence in the market.
The Central Bank of Nigeria announced further measures in September to improve liquidity. These included the reduction in Cash Reserve Requirement and liquidity ratio for banks. So far the new measures have not affected the market positively.
What next? Can it get worse? The reality is that we are in uncharted territory. World markets have been in a state of turmoil throughout the year with almost all markets in negative territory for the year. The good news however, is that Nigerian banks have not been involved in the reckless financial engineering that has threatened the very survival of some US banks.
My advice is to stay out of the market if your horizon is less than 2 years. For those with a long term view, now is the time to consider value investing. There are definitely bargains to be had.
October promises to be interesting. Will the year low achieved on August 26th be breached? We will know in the next two weeks. Stay tuned.
The current situation should not come as a surprise given the trend in the last 6 months. The 1% limit placed on downward movement in stock prices has not stopped the decline. What it has succeeded in doing is driving away speculators from the market. Without speculators, liquidity has all but disappeared. In addition, the continued daily slide has continued to weigh on investors mind further draining away their fragile confidence in the market.
The Central Bank of Nigeria announced further measures in September to improve liquidity. These included the reduction in Cash Reserve Requirement and liquidity ratio for banks. So far the new measures have not affected the market positively.
What next? Can it get worse? The reality is that we are in uncharted territory. World markets have been in a state of turmoil throughout the year with almost all markets in negative territory for the year. The good news however, is that Nigerian banks have not been involved in the reckless financial engineering that has threatened the very survival of some US banks.
My advice is to stay out of the market if your horizon is less than 2 years. For those with a long term view, now is the time to consider value investing. There are definitely bargains to be had.
October promises to be interesting. Will the year low achieved on August 26th be breached? We will know in the next two weeks. Stay tuned.
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