I read with interest an advert placed by African Petroleum (AP) on the alleged price manipulation of their stock. The advert was disturbing and has the capacity to further undermine the already fragile public confidence in the market.
There were several things that were quite disturbing about the advert. How did AP get hold of the Central Securities and Clearing System (CSCS) transactions of Dangote or is this information available in the public domain? Why is AP now crying that their price has fallen down to earth? Why did they not complain when the price went up to ridiculous levels before the public offer? Did it not go up due to the same loop hole that is now being exploited?
It is obvious especially in hindsight that prices were manipulated up during the public offer mania. We are all living through the consequences. I sincerely hope the Securities and Exchange Commission (SEC) and the Nigeria Stock Exchange (NSE) will be alive to their various responsibilities.
A situation whereby price manipulation whether up or down go unchecked by the authorities is not healthy for our market. Investors should also be reminded that it is not only when prices are going down that they should ask questions. When prices go up to levels that are obviously irrational, investors should also seek logical explanation otherwise they should stay out of the market and resist the temptation offered by a quick gain.
I also use this opportunity to call on the NSE and SEC to sanction companies that have refused to provide their quarterly earnings as required. Such sanctions should not just be a slap on the wrist but should be sanctions that are appropriate. We need better disclosure to calm investors’ nerves. Now is certainly not the time to continue to turn a blind eye on such obvious non compliance.
Wednesday, March 25, 2009
Monday, March 16, 2009
February
In line with tradition, February 2009 was a much better month than January. The volume and value of transactions was higher. A total of N37 billion was exchanged compared to N29.8 billion in January. However, the amount was a far cry from the N375 billion that was exchanged in February 2008 (an all time record). The NSE All Share Index closed at 23,377 up 7.2%. This is the first time since February 2008 that the Index has closed higher the following month.
Unfortunately, the gains made in February have since been eroded in March. As at 13th March, the Index has dropped to 21,003 a new 52 week low and a decline of 10.2% compared to February.
In my view the outlook for the capital market does not look very good for the rest of the year. I base my opinion on the following:
- Very tight liquidity which has resulted in high deposit and lending rates. This liquidity will not ease up quickly especially with the adoption of December uniform year end at the end of this year.
- A depreciating Naira as a result of policy inconsistency from the Central Bank. This means more Naira is required to fund imports further worsening liquidity.
- High inflation which is usually not good for companies and individuals since it discourages long term investments.
- Gloomy economic outlook: Low oil price, reduced production due to OPEC quota and high government deficit. Due to the deficit the government will need to borrow locally to fund the shortfall. This will further reduce the funds available to the private sector and continue to impact negatively on cost of funds.
I therefore advice a long term view for any investment on the NSE. I expect the All Share Index to close down this year. The Index needs to go up at least 50% to close even for the year. I believe that is a tall order given the points outlined above.
For the long term patient investor, now is the time to look for quality stocks at reasonable valuations. For the trader, trade with caution.
Unfortunately, the gains made in February have since been eroded in March. As at 13th March, the Index has dropped to 21,003 a new 52 week low and a decline of 10.2% compared to February.
In my view the outlook for the capital market does not look very good for the rest of the year. I base my opinion on the following:
- Very tight liquidity which has resulted in high deposit and lending rates. This liquidity will not ease up quickly especially with the adoption of December uniform year end at the end of this year.
- A depreciating Naira as a result of policy inconsistency from the Central Bank. This means more Naira is required to fund imports further worsening liquidity.
- High inflation which is usually not good for companies and individuals since it discourages long term investments.
- Gloomy economic outlook: Low oil price, reduced production due to OPEC quota and high government deficit. Due to the deficit the government will need to borrow locally to fund the shortfall. This will further reduce the funds available to the private sector and continue to impact negatively on cost of funds.
I therefore advice a long term view for any investment on the NSE. I expect the All Share Index to close down this year. The Index needs to go up at least 50% to close even for the year. I believe that is a tall order given the points outlined above.
For the long term patient investor, now is the time to look for quality stocks at reasonable valuations. For the trader, trade with caution.
Sunday, February 1, 2009
Crash
January 2009 will go down as the worst month in the history of the Nigerian Stock Exchange. The All share Index lost 30.6% to close at 21,814. The last time the Index was below 22,000 was in 2003. The drop of 30.6% was incredible given that the cumulative losses suffered in the entire forgettable 2008 was 46%.
The value of transactions exchanged did not fare any better. Only N29.8 billion was exchanged an average of about N1.4 billion daily. This compares miserably to the N286 billion exchanged in 2008 an average of N13 billion daily. It is safe to say that what we witnessed in the last 7 months is a crash.
For the value investor times could not be more exiting. The market PE is currently about 14.3 while the dividend yield is 6%. The market has not been this attractive for quite a while. In my view the market is currently oversold and there are opportunities in most sectors. Definitely, this is not the time for the trader as there has been little volatility to trade. However, for long term investors, this is the time to seriously consider buying quality dividend paying stocks at prices last seen 5 years ago.
Year............PE.....Yield %
30th Jan 2009...14.3... 6
31st Dec 2008...16.7... 4
25th Jun 2008...27.0... 2.1
5th Mar 2008...35.9... 1.6
31st Dec 2007...30.0... 2.1
29th Dec 2006...23.4... 3.88
30th Dec 2005...16.3... 4.75
Whether investors will have the courage and liquidity to go on a buying spree is yet to be seen. One of the things I learnt during this long bear market is that fear is indeed more powerful than greed.
The value of transactions exchanged did not fare any better. Only N29.8 billion was exchanged an average of about N1.4 billion daily. This compares miserably to the N286 billion exchanged in 2008 an average of N13 billion daily. It is safe to say that what we witnessed in the last 7 months is a crash.
For the value investor times could not be more exiting. The market PE is currently about 14.3 while the dividend yield is 6%. The market has not been this attractive for quite a while. In my view the market is currently oversold and there are opportunities in most sectors. Definitely, this is not the time for the trader as there has been little volatility to trade. However, for long term investors, this is the time to seriously consider buying quality dividend paying stocks at prices last seen 5 years ago.
Year............PE.....Yield %
30th Jan 2009...14.3... 6
31st Dec 2008...16.7... 4
25th Jun 2008...27.0... 2.1
5th Mar 2008...35.9... 1.6
31st Dec 2007...30.0... 2.1
29th Dec 2006...23.4... 3.88
30th Dec 2005...16.3... 4.75
Whether investors will have the courage and liquidity to go on a buying spree is yet to be seen. One of the things I learnt during this long bear market is that fear is indeed more powerful than greed.
Wednesday, January 21, 2009
Time to Act
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.
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.
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.
Tuesday, December 16, 2008
2009 Budget
The President presented the 2009 budget to a joint sitting of the National Assembly on 3rd December. The benchmark oil price used was $45/barrel. The Federal government will spend N2.87 trillion from a projected revenue of N1.78 trillion. Consequently, the estimated deficit is N1.09 trillion.
The deficit could be financed via several means which include the devaluation of the Naira and internal and external borrowing. Since the announcement of the budget, the Naira has depreciated from N120 to $1 to N140 to $1 a decline of more than 16.5%. The market is therefore anticipating a devaluation of the Naira in 2009 hence the sudden increase in demand of dollars in the Foreign exchange market. The Central Bank has since jumped in to “defend” the Naira. How long this defense will last is anybody’s guess. However, it is safe to assume that unless oil prices rises above $65/barrel, the Naira will remain at N140 to 1$ or fall further.
The budget does not offer much hope for the capital market. The Federal government needs to borrow to fund its deficit. It is quite obvious that banks don’t have much to lend, since a large chunk of their loanable funds are trapped in the comatose Nigerian Stock Exchange (NSE). This further tightening up of liquidity means interest rates will not ease up anytime soon.
As the Naira depreciates, inflation is likely to go up further reducing purchasing power and Naira liquidity. This will lead to less cash being available to individual investors to speculate on the NSE.
The various State governments will soon present their 2009 budget. Just like the Federal government, most of the states will be running a huge deficit in 2009 which will largely be financed through borrowing. The outlook for 2009 can therefore only get worse.
My conclusion from the above is that 2009 will also not be all that rosy for the NSE. The 51% decline so far recorded in 2008 is not likely to be repeated in 2009. However, I don’t expect a more than modest gain. The Index will probably not recover to its early 2008 level until in 2010 or beyond.
The one thing that could change this rather gloomy outlook is a change in oil price. If the average oil price for the year ends up being above $65/barrel, then the capital market might benefit from spill over effect. We can only hope it does.
The deficit could be financed via several means which include the devaluation of the Naira and internal and external borrowing. Since the announcement of the budget, the Naira has depreciated from N120 to $1 to N140 to $1 a decline of more than 16.5%. The market is therefore anticipating a devaluation of the Naira in 2009 hence the sudden increase in demand of dollars in the Foreign exchange market. The Central Bank has since jumped in to “defend” the Naira. How long this defense will last is anybody’s guess. However, it is safe to assume that unless oil prices rises above $65/barrel, the Naira will remain at N140 to 1$ or fall further.
The budget does not offer much hope for the capital market. The Federal government needs to borrow to fund its deficit. It is quite obvious that banks don’t have much to lend, since a large chunk of their loanable funds are trapped in the comatose Nigerian Stock Exchange (NSE). This further tightening up of liquidity means interest rates will not ease up anytime soon.
As the Naira depreciates, inflation is likely to go up further reducing purchasing power and Naira liquidity. This will lead to less cash being available to individual investors to speculate on the NSE.
The various State governments will soon present their 2009 budget. Just like the Federal government, most of the states will be running a huge deficit in 2009 which will largely be financed through borrowing. The outlook for 2009 can therefore only get worse.
My conclusion from the above is that 2009 will also not be all that rosy for the NSE. The 51% decline so far recorded in 2008 is not likely to be repeated in 2009. However, I don’t expect a more than modest gain. The Index will probably not recover to its early 2008 level until in 2010 or beyond.
The one thing that could change this rather gloomy outlook is a change in oil price. If the average oil price for the year ends up being above $65/barrel, then the capital market might benefit from spill over effect. We can only hope it does.
Thursday, December 11, 2008
A Year to Forget
On 6th November, the All Share Index (ASI) went up for the first time in 43 trading days. It was a welcome respite. The relief lasted only 8 trading days during which the ASI gained 12.6% and closed at 38,018 on 17th November. Since then it has been all downhill once again.
From 17th November to 11th December the Index lost a further 23%. The ASI closed at 29,262 on 11th December, a year low. The last time the Index was this low was in August 2006.
Based on the records for the Index from 1995 to 2008, this year is on track to close with the biggest decline for the Index. The worst so far was 1998 which recorded an 11.9% drop. The cumulative losses between 1997 and 1999, the 3 bear years was 27.5%. The year 2008 is set to eclipse this. 2008 is indeed a year to forget.
What we are witnessing is unprecedented. Our very own financial Tsunami, the like of which we have never seen. Oil price has collapsed, the Nigerian Stock Exchange ASI is down 49.5% year to date and our banks are suffocating under the weight of margin loans. Suddenly it is no longer so rosy for the banks with Zenith, Ecobank and Skye all reporting a poor quarter July to September 2008. I am sure others will follow in due course.
The best thing to do now for those already invested is to do nothing! It is too late to sell to cut losses assuming you can find a buyer. And with the meltdown not showing any sign of slowing down, averaging down is not ideal.
As 2008 draws to a close, i am looking forward to 2009 with the hope that it can’t get worse. Or can it?
From 17th November to 11th December the Index lost a further 23%. The ASI closed at 29,262 on 11th December, a year low. The last time the Index was this low was in August 2006.
Based on the records for the Index from 1995 to 2008, this year is on track to close with the biggest decline for the Index. The worst so far was 1998 which recorded an 11.9% drop. The cumulative losses between 1997 and 1999, the 3 bear years was 27.5%. The year 2008 is set to eclipse this. 2008 is indeed a year to forget.
What we are witnessing is unprecedented. Our very own financial Tsunami, the like of which we have never seen. Oil price has collapsed, the Nigerian Stock Exchange ASI is down 49.5% year to date and our banks are suffocating under the weight of margin loans. Suddenly it is no longer so rosy for the banks with Zenith, Ecobank and Skye all reporting a poor quarter July to September 2008. I am sure others will follow in due course.
The best thing to do now for those already invested is to do nothing! It is too late to sell to cut losses assuming you can find a buyer. And with the meltdown not showing any sign of slowing down, averaging down is not ideal.
As 2008 draws to a close, i am looking forward to 2009 with the hope that it can’t get worse. Or can it?
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