The dormant state of the new issues market poses a major problem to companies in the efforts to rebuild operating capacity in the post financial crisis operations. It also explains the limited recovery the stock market has been able to achieve so far. Liquidity and investor confidence remain well below what the market needs to come alive again.
The stalemate seems to close recovery opportunities to mostly small- and medium-scale companies shut out of credit markets by high interest rates and stringent credit conditions. This is responsible for the present inability to achieve a market wide recovery so far. The need for low cost funds is mounting in order to stimulate productive activity and the largest source of cheap funds – the capital market should engage the attention of market regulators.
Only the industry leaders and big corporate names managing to operate with high interest rates have been able to maintain profit capacity so far. The hosts of small players that represent growth companies with high employment potentials are still nowhere to be found on the recovery tracks more than five years after the stock market crash.
The result of this development is that stock market liquidity is severely limited. Trading is concentrating on the few large companies while the weak institutions are left out of the present market recovery trend.
Overall market numbers are obscuring the fact that a larger number of listed companies are unable to rebuilt operating capacities and join the market recovery trend. Judging market recovery by the all-share index and market capitalization, which are dominated by the NSE 30 companies, will therefore be misleading. Government’s gesture to assist players in the secondary arm of the capital market will equally need to be extended to assist the small operators rebuild operating capacities and resume profitable trading.
The equities market remains folded up in the short end of it with investors focused on short-term returns. This does not create a favourable ground for initial public offers. It is the outcome of the regime of high short-term interest rates, which has altered the risk-return rule in financial assets to the detriment of the long-term end of the market.
A rebalancing of financial policies, which the Central Bank of Nigeria has promised to embark upon will normalize the risk-return relationship in favour of the equities market. This will stretch out investment horizon by discouraging excessive concentration in the money market. It presents a favourable platform that we can begin to build on in reactivating the primary market.
CBN’s promise of gradual reduction in interest rates and encouragement of productive sectors presents a great opportunity that capital market regulators need to rebuild investor confidence in the market. We expect that they should exploit the apex bank’s new policy approach of directing credit to productive sectors to make a case for the weak and struggling companies listed in the Nigerian Stock Exchange. The move will improve performance prospects of these broken down companies, which will no doubt improve investor confidence, boost the liquidity of their stocks and permit their return to the new issues market in the medium-term.
The prospects for a total market recovery are presently hindered by the situation where investors are clustering around the big companies that can muster reasonable operating capacity and give returns on a continuing basis. The small and weak companies unable to secure new money they need to rebuild their operations are no longer getting attention in the equities market. This means they are presently shut out of both the credit and capital market windows.
The consolidating mood of the equities market needs regulatory intervention now. Otherwise, the small and the weak players could become weaker still, as investors continue to cluster around major equities.
Regulators should not lose sight of some fundamental issues that underlie the new issues market. These centre on the fact that public offers spring forth from a prospering economy. The performance of the economy and how to improve it should therefore be a key element of any efforts to reactivate the primary market.
The main attraction of public offers is the high prospects for companies coming to the market for new money to grow wealth for shareholders. Most companies cannot do so in a declining earnings or slow growth environment. Companies have to find a new room for growth and that growth should be strong enough to improve returns prospects in the future.
Where consumer spending remains weak and most companies are facing great difficulties pushing sales, the high returns expectations for new issues cannot easily be realised. This means the essential conditions that favour new issues are still missing.
The main factor holding back initial public offers is the apparent inability of most companies in the market to grow profit and build capital gains for investors. General economic performance needs to step up and most sectors need to make substantial recovery and resume growth for companies to be able to deliver on the high rate of returns needed to reopen the primary market window.
We are convinced that capital market regulators are no longer helpless in reviving the market. We expect therefore that they should take decisive actions to prop up the market. A fundamental step in this direction is to help the operators rebuild and expand operating capacities towards stronger growth. The Central Bank seems to have offered them the right policy environment to act now.