Cautious optimism – The Nation

  • Not yet time to celebrate the stock market surge 

FAR from sounding the alarm bells,  managers of the Nigerian economy will no doubt do well to pay attention to the Nigerian bourse. In every respect, the signals are that the good times are finally back. On January 11, the Nigerian Stock Exchange (NSE) All-Share Index (ASI) crossed the 43,000 mark – the first time since the market hit the nadir in 2008. The same day, market capitalisation also hit a historic record high of N15.317tn – again crossing the psychological milestone of N15 trillion after nearly a decade. In what smacks of an unmistakeably bullish trajectory, the market capitalisation would close at an unprecedented N16.154 trillion on Friday.

In all, the surge of 12 percent since the beginning of the year puts the local bourse at the top as the best performing stock market in the world.

The developments call for celebration and caution. Celebration because, apart from signalling a general improvement in the macro-economy, the overall indications are that investor confidence is returning, albeit gradually, to the market as indeed the larger economy.

Caution because a closer look at the factors underlying the swing in fortune merely highlights the issues at the heart of the economy’s exposure to exogenous forces and hence its continuing fragility.

First is the Investors’ and Exporters’ foreign exchange window introduced by the Central Bank of Nigeria (CBN) last year, said to have boosted the confidence of foreign investors. Clearly, if we understood the imperative of that initiative in the context of the need to bring some stability to the forex management regime at the time, the development, coming when it did, must be seen as an admission of the immense challenges of managing a problem of forex supply. In other words, while the creation of the window may have helped significantly to assuage the fears of the investors, it comes nowhere close to being the magic bullet to address the forex crisis in any fundamental sense, or even in a demonstrably sustainable manner in an environment where even the most basic raw materials – not to talk of basic consumer goods – are imported.

The same is no less true for the second factor touted for the performance – the rise of crude oil price at the international market. Oil and its price of course remain the proverbial elephant in the room. Its impact on the bourse is self-evident: increase in oil price means a vastly improved foreign exchange earnings and reserves– a critical determinant in the decision on whether the foreign investor plays or exits the market – whether or not he can cash out on his asset at whatever time of his choosing.

Already, there are concerns about the high relationship between Nigerian stock market and global oil price which the managers of the economy can ignore at great risks to the country. That Bloomberg, for instance, puts the 120-day correlation between Nigerian stocks and Brent crude price as around the highest in two years should ordinarily be sobering, given the potentially devastating impact of an oil price crash.

Moreover, if there are any lessons from the 2008/9 stock market crash when the hordes of portfolio investors hit the road at the first signs of trouble, and consequently taking down our bourse from its one-time high of N13.5 trillion in March 2008 to an unprecedented low of N4.6 trillion by the second week of January 2009, nothing in the local bourse is known to offer any real impediments to an investor who, for whatever reasons, wants to exit.

Rather than embark on celebrations, what we expect of the economic managers is to keep working at deepening the economy. Apart from being a sure way to deepen the market itself, the in-grown capacity therefrom will undoubtedly make the economy not only more attractive to genuine investors but one less susceptible to exogenous shocks.

It is certainly not too early for the Securities and Exchange Commission (SEC) to step up its regulatory activities to forestall the wide-ranging abuses and infractions by operators such as we saw in 2008/9.

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