The silver lining in Nigeria’s Capital Market collapse

Amidst the unflattering euphoria surrounding the Nigerian Stock Exchange, Nigerians have been presented with a strategic opportunity to regain the dominance of this once promising capital market.

A few years back, I wrote an article on the Nigerian capital market, lauding the bourse and those at the helm of directing its affairs for turning around its fortunes from a near-collapse in 2008 to one of the fastest growing exchanges in the world. At the time (precisely February 2014), the Nigerian equity market capitalization had surpassed the pre-2008 high of N12.6 trillion ($77.4 billion), with investments gaining more than N4.25 trillion ($26.1 billion), the highest returns in any African market, trumping the usual frontrunners such as Kenya and South Africa.

Reaching this milestone was the direct result of an increase in investor confidence, driven by a relatively stable macroeconomic environment with interest rates stabilizing at 12 percent and the naira relatively stable against the dollar, strong corporate earnings by blue chip companies such as banks and manufacturers of fast moving consumer goods (FMCG), greater inflow of capital and portfolio investments, and a tighter regulatory oversight by the Security and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE).

However, in spite of the many gains recorded during this period, the issue of foreign domination would go unaddressed. This has proven extremely costly over the course of 2015.

At the peak of the global financial crisis in 2008, the Nigerian capital market experienced a massive exodus as investors, particularly local players, looked to recoup whatever value was left in the market. This left stock prices flat and value in the market substantially low, subsequently paving the way for foreign investors who saw an ideal window to enter the market. As at 2010, foreign investors constituted over 70% of total participation in the market. Even in 2014, when the market had significantly gained the confidence of local investors, participation remained 60:40 in favor of foreign players. What this meant was that though the market remained a bullish prospect to profit-seeking investors, it remained extremely vulnerable to external economic activities which could easily sway investor sentiments.

And so it proved in 2015. First, there was the global oil crisis which gathered momentum in 2015 following a rapid slide in oil prices and left Nigeria scrambling to defend the Naira, shore up external reserves and sustain a decent level of revenue inflow. The general elections also brought heightened tension across the country as many feared for a bloody election process. These factors, complemented by policies on forex employed by the CBN to defend the Naira, colluded to fend off interest in the Nigerian capital market and forced foreign investors to initiate a massive sell-off of their stock holdings. This has erased all gains made by the capital market after it shed over N4.5 trillion in market capitalization during 2015.

Sure, such a situation will fail to attract any positives, even from the most optimistic of analysts, but it opens a window for local investors to regain their dominance and further shield the market from profit-seeking foreign players, whose prominent participation will ensure the bourse remains vulnerable to external activities.

Many may argue that it is a far-fetched silver lining, but it is worth exploring if Nigeria is keen to avoid a repeat of the catastrophic 2015.