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THE Special Assistant on Investment to the Minister of State for Trade and Investment and expert in capital market operations, Mr Tavershima Adyorough, in this interview with select journalits,
gives his view on the Nigerian Capital Market and stocks trading generally, stating, among others, that for the capital market to be revived, losses incurred by retail investors have to be refunded to them by the government. Excerpts:
Your 20 years experience on Wall Street in New York, USA, makes you an expert in capital market operations, which is really your forte. The Nigerian Capital Market is currently in crisis and near collapse, what do you think is responsible for the mess and what are the appropriate steps to be taken to clean up the market to reclaim the lost investors’' confidence?
First, Nigeria's capital market actually collapsed several years ago and is yet to be revived. Domestic and foreign investors that left the market have not returned yet. The new investors that have an opportunity to come in on the ground floor to scoop up quality equity shares at real bargain prices are still sitting on the sidelines and waiting for a new market structure.
Second, to understand the mess in Nigeria's stock market and really appreciate the measures that must be taken to restore investors’ confidence, you'll have to be a sophisticated market analyst or an experienced and well-trained stockbroker or financial analyst. For example, back in 2008, my U.S. brokerage firm asked me to look at equity investment opportunities in Nigeria for a new international mutual fund (an equity mutual fund pools money from investors whose objective is to invest in good companies overseas at a reduced risk in the sense that one share of the fund represents several companies from many countries). I spent over six months in Nigeria and afterwards wrote a report in June 2009 that apparently killed the investment zeal of my portfolio managers. At that time, I said that Nigeria's vibrant and exciting stock market lacked breadth and depth for a sustainable bull market in the next decade. That was true then, and is true today. Only a well trained and experienced stockbroker would make that observation at the best time of the market.
Furthermore, I said that Nigeria's capital market was structurally weak and shallow and was hugely viewed internationally as a boutique for trading government securities. Even as a trading post for government bonds, it was viewed with skepticism due to its insulation from domestic monetary policies and largely global financial trends and or shocks. I said this because for nearly a decade, the Central Bank of Nigeria's (CBN)’s monetary policies very rarely had any impact on the market movements and capital flight in the economy. At the time of the stock market collapse, the stock exchange had fewer than 250 listed companies and fewer than 50 traded on a daily basis as liquid stocks. That is still valid today.
On the weight of one sector of the market (banking and financial services), the All Share Index rose more than 1000 basis points between January 2006 and December 2008. The increased demand pressure on the limited supply of liquid stocks pushed equity prices through the roof. Investors became accustomed to the unending price appreciation of the few liquid stocks. Rouge market operators and their agents (Stockbrokers) took advantage of equity price increases and presented stock investment opportunities to the unsuspecting new individual investors as profit-guaranteed short-term investment. As we have witnessed, the bubble busted and many investors were burned in the inferno. The burned investors felt betrayed by market regulators. Others have complained of churning (unauthorized frequent trades in their accounts by their agents) and sophisticated price manipulations (tape painting) by market operators. These are serious allegations that must be investigated by regulators and those found wanting, punished or sanctioned. Investors that lost their savings and retirement incomes are still waiting for remedy.
Finally, the market has several actors in it; namely: the operators or brokers, regulators, and investors. The investors group is the most important. If this group does not feel protected by regulators in a market place, where the bulls and bears are constantly fighting for supremacy, the operators and their agents can sell away their services (act as a broker and or a dealer without disclosing their side of the market) for personal gains at the expense of investors. It is the activities of investors that drive share prices up or down. The mess in the market can be cleaned up by competent regulators.
Would you say the Nigerian economy is endangered by the development in the nation's capital or stock market?
Not really! The stock market is vital in the economic development of a nation, but in an economy like Nigeria's where fewer than 250 companies are listed on the stock exchange and less than 20 are of national interest (employ only a small percentage of the workforce, contribute very little to the gross domestic product (GDP), and have little or no foreign operations), a short-term instability in the capital market will not have a catastrophic effect on the economy. Nigeria's capital market is not quite representative of the economy where its collapse would threaten the overall economy. The reasons are simple. First, the economy is dominated by the public sector that employs and consumes more than the private sector. Second, most of the small and medium sized companies that employ Nigerians in the real sector have absolutely nothing to do with the stock market. Third, the banks, insurance, and other financial services companies that largely overwhelm the stock market's index have little trickle down impact on the real sector of the economy. I am confident that President Goodluck Jonathan's transformation agenda will change this in the near future as the economy's invisible hand is able to create new efficient private enterprises and destroy old and unproductive concerns.
Recently, the Group Managing Director and Chief Executive Officer, FirstBank of Nigeria (FBN) Plc, Mr Bisi Onasanya, frowned at what he described as "lack of an intervention fund" for the nation's capital market sector, a measure he said would enable the sector recover fully. Do you agree with him?
Hmm! That's a very interesting view from the Group Managing Director of FBN. I do agree with Mr Bisi Onasanya on a lot of things he has said about Nigeria's stock market and the need to bring new and exciting products such as derivatives, mutual funds, real estate investment trusts (REITs), Collateralised Mortgage Obligations (CMOs), and unit trusts to the market. I do not agree with him, however, that an intervention fund is a critical solution to the capital market's revival. The notion of forbearance and an intervention fund is preposterous. How can the government reward the greedy market operators who ran the stock market aground? Yes, the government regulators slept behind the switch by overlooking excesses that went on in the market, like over-leveraged margin lending; churning of customer's account without detection, and price manipulations. But, the market operators are the ones that benefited from the crash. They make commissions on sell and buy orders from clients; the investors suffered irreparable losses. A great idea would be for the government to compensate or refund a significant percentage of investors' losses so as to enable them come back to the market on a clean slate. The individual investors have been hurt more than the market operators. The investors have just refused to pump in new money in the market. In fact, many are selling off and closing their accounts at stock-broking houses. These investors must feel protected and have a strong belief that market regulators are equipped to police, arrest, prosecute, and sanction violators before they will return in large numbers.
Sometimes, the activities of brokers in the Nigerian Stock Market are seen in the bad light. If you agree with this, how best can their activities be checked?
Excuse me! Stockbrokers are some of the best trained professionals you can find in any industry in the world. In other parts of the world, like the New York Stock Exchange (Wall Street) where I worked, the industry is one of the most regulated establishments in the country. Your word is your bond in the industry and so trust is a sacred word.The Chartered Institute of Stockbrokers (CIS) has a very good programme to train Nigeria's professional investment brokers and it is not fair to question their professionalism and integrity without substantiating the allegations with specifics. Having said that I must admit that in any profession, there are some bad eggs and the securities industry is not an exception. There are some brokers that in an effort to make commissions, do pressure investors into investing in products that are not suitable for their investment portfolio objective. Yes, it is true that other stockbrokers do shamelessly guaranteed profits to their equity investors in a stock market hype. If such investors are properly educated, they can report to the Securities and Exchange Commission.The Nigerian Stock Exchange (NSE) as an independent private Self Regulatory Organization (SRO), must be tougher in regulating members than the SEC. The New York Stock Exchange (NYSE) has tougher margin requirements, short interest call rates, derivatives investment requirements, and randomly inspects broker or dealers' accounts more frequently than the SEC. If the NSE could step up its surveillance activities and collaborate with the SEC in policing and enforcement, the market operators and their agents will think twice before doing silly things that can put them in trouble with the securities laws.