In the last few days, the share price of most banks quoted on the Nigerian Stock Exchange (NSE) has taken a beating. The share price of some of the banks has shed more than 40% this year alone. While I do not subscribe to the idea of a bail out of the NSE, I believe the Central Bank of Nigeria (CBN) needs to calm the nerves of investors and depositors. The CBN needs to come clean about the health of the banks.
What the market is telling us is that the earnings declared by some of the banks is probably not a true reflection of their financial condition. Otherwise why on earth will the shares of a perfectly healthy bank in a growing emerging economy be selling at a Price to Earnings ratio of less than 5 and a dividend yield of more than 10%?
I am calling on the CBN Governor to come clean about the health of our banks and the level of their exposure to the Nigerian Stock Exchange. We need him to exercise leadership and take responsibility. The CBN relaxed in September 2008 the Cash Reserve Requirement and Liquidity Ratio for commercial banks and also allowed banks to access the Discount Window by pledging Commercial Papers. This action suggests that there was at that time a serious liquidity crisis which called for the CBN to act so aggressively to improve liquidity. Despite such actions, interest rates have not eased.
Nigeria is at a cross road. The financial crisis in the West has led to the collapse of Oil price our main source of foreign exchange. The Naira has declined more than 25% against the dollar in the last 2 months. The economy and the Stock market are facing big tests. We need the CBN Governor to step up and allay our fears and restore some confidence.
Wednesday, January 21, 2009
Sunday, January 4, 2009
2008 In Review
The year 2008 is a year to forget for most investors on the Nigerian Stock Exchange (NSE). The All Share Index closed the year at 31,451 down 45.8% from its opening position for the year. Based on available data, this is the worst year for the Index between 1995 and 2008. Infact the loss suffered in 2008 is worse than the cumulative loss of 27% suffered between 1997 and 1999.
The All share Index went down for 10 consecutive months, also a record. The FSDH Banking Index was down 57%, the Insurance Index 54% and Manufacturing Index 43%. Only the Petroleum Marketing Index closed up 19%. Value of transactions also collapsed from an average daily figure of N18.5 billion in February to a paltry average of N2.2 billion in December. The most devastating loss was suffered in October as the Index lost 21% the worst decline in 13 years. It was not pretty all round.
The ASI reflected global trends. Most markets were down in 2008. The NSE was especially hard hit by regulatory incompetence and earlier excesses that led to serious over valuation of a large number of stocks.
One of the few positives one can take away from 2008 is the lessons learnt from the long drawn out bear market. The 12 lessons articulated by Brent Arends are worth heeding. They can be found at www.marketwatch.com/news. Here are some of the lessons I have learnt:
1) Cut your losses short. See my earlier post on this topic.
2) Liquidity is key. All bull markets are rooted in easy money. Once that disappears, chances are the market will commence a downward trend.
3) Be properly diversified across sectors. A portfolio composed of Banks and Insurance companies fared far worse than the ASI.
4) Be flexible in your analysis.
5) If you are a trader and the market shows a downward trend, stay out unless you can short.
6) You can underpay for a bad company and still never recover.
7) Avoid being trapped in bear psychology. Between 1995 and 2008, only four years ended down.
8) There is no such thing as a permanent hold decision. Sell when the fundamentals begin to deteriorate.
I look forward to 2009 with the hope that the worst is truly behind us. I cannot really imagine another year of 40%+ decline.
The All share Index went down for 10 consecutive months, also a record. The FSDH Banking Index was down 57%, the Insurance Index 54% and Manufacturing Index 43%. Only the Petroleum Marketing Index closed up 19%. Value of transactions also collapsed from an average daily figure of N18.5 billion in February to a paltry average of N2.2 billion in December. The most devastating loss was suffered in October as the Index lost 21% the worst decline in 13 years. It was not pretty all round.
The ASI reflected global trends. Most markets were down in 2008. The NSE was especially hard hit by regulatory incompetence and earlier excesses that led to serious over valuation of a large number of stocks.
One of the few positives one can take away from 2008 is the lessons learnt from the long drawn out bear market. The 12 lessons articulated by Brent Arends are worth heeding. They can be found at www.marketwatch.com/news. Here are some of the lessons I have learnt:
1) Cut your losses short. See my earlier post on this topic.
2) Liquidity is key. All bull markets are rooted in easy money. Once that disappears, chances are the market will commence a downward trend.
3) Be properly diversified across sectors. A portfolio composed of Banks and Insurance companies fared far worse than the ASI.
4) Be flexible in your analysis.
5) If you are a trader and the market shows a downward trend, stay out unless you can short.
6) You can underpay for a bad company and still never recover.
7) Avoid being trapped in bear psychology. Between 1995 and 2008, only four years ended down.
8) There is no such thing as a permanent hold decision. Sell when the fundamentals begin to deteriorate.
I look forward to 2009 with the hope that the worst is truly behind us. I cannot really imagine another year of 40%+ decline.
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