SUSTAINING STOCK MARKET RECOVERY VIA REFORMS
Upbeat in share prices witnessed at the Nigerian capital market since the new year, leaves the impression that the market has finally turned the corner after long circle of doom that destroyed colossal wealth of investors.
Heartwarming as the development is, capital market analysts insist, however, that addressing the contradictions that eroded investor confidence, rethinking strategies for stemming the tide of abuse, and redesigning capital formation away from service sector to real sector of the economy will mark the beginning of real market recovery.
Recording cumulative gains of about N449 billion in the first month of the year, analysts believe that the business in February may as well close on bumper returns as regulators and key stakeholders strategise for mopping up toxic assets in the system, a move expected to cause a spike in activity with anticipated upsurge in share prices.
This expectation is predicated on improving oil prices, improving liquidity, rising confidence in the financial system anchored on CBN reforms and much later in the first quarter of the year, supplementary budget implementation.
Upswing in share prices notwithstanding, the bullish bouts are largely driven by speculations. For analysts, sustaining the recovery streak largely depends how well issues of disclosure, transparency and accountability are addressed by market regulators. Will the new Director General of Securities and Exchange Commission (SEC), Ms Arunma Oteh execute her reform agenda to the letter if only to send right signals to the world about her corporate governance?
Her words: “Therefore, the SEC will request that all public companies disclose meaningful and relevant information to the public. Information technology will play a vital role in modernizing the disclosure system under the new regulatory framework and in promoting transparency, liquidity, and efficiency in our markets.
I also strongly believe that an effective disclosure system will only work if good accounting practices are in place and this is why it is crucial that we ensure that all firms adopt the International Financial Regulatory Standards (IFRS).
The objective behind the IFRS according to her is to create a common platform for better understanding of accounting, internationally, stating that the SEC will pay attention to making sure that listed companies are IFRS compliant, as compliance will fosters good corporate standards by improving transparency and disclosure.
She disclosed that even while conversion to IFRS remains a complex process, the standards have important and positive implications for organizations and individuals that adopt them, noting that for companies, it allows them to present their financial statements on the same basis as their foreign competitors.
“Making comparisons will be easier through the use of one consistent reporting standard. For investors, it offers better information for decision making, leading to broader investment opportunities. For regulatory bodies, it provides superior information for market participants in a disclosure-based system. In short, the adoption of IFRS will serve to improve transparency and disclosure standards in the market and we must all work hard to comply with these international standards,” she said.
Continuing she said: “We have a mandate for change. Therefore, we must build a new foundation for the capital market that is simpler and more effectively enforced, that protects the everyday investor, rewards correct behaviour and is able to adapt and evolve with changes in our growing economy. In short, it is time to prove ourselves. We can help restore the confidence that is so desperately needed for our capital market to flourish and develop. We need the support of all stakeholders, including the media, as we strive to promote and develop our capital market. Ultimately, if we work together, we can increase the scope and impact of our individual and collective successes.
SEC has always worked towards a vision which is 'to be Africa's leading capital market operator'. 2010 will be another year in which I expect the SEC to pursue this vision and take action through an ambitious reform agenda. As previously mentioned, we will work tirelessly towards ensuring good corporate governance and improving capacity in the market,” she said.
A cross section of stockbrokers who bared their minds on how to sustain market recovery it was high time the market introduced fresh innovations, especially, a shift of emphasis regarding capital formation towards real productive sector to finance growth of the economy.
Recently, SEC DG dropped hints about redirecting capital formation at the market during an interactive session with stockbrokers at the Nigerian Stock Exchange (NSE) where she emphasised the role of the capital market in the larger economy.
She said: “I do think that the capital market is extremely important to any economy, much more so to our own economy. Over the years we have been dependent on oil. And government has made extreme effort to have a more diversified economy. I do think that the capital market will help us do that because enterprenuers can raise funds capital in the market to foster innovations, sponsor innovations, and to create job. It is extremely important to our own economy”.
Before now, emphasis about capital formation through the capital market had been focused on capital formation for the services sector of the economy. According to the Managing Director of Lambeth Securities Limited, Mr. David Adonri, the financial markets intermediate in the process of capital formation.
He affirmed that since the inception of the capital market, focus had been on aggregating short-term capital for the service system to the detriment of real productive sector.
“And because the real sector has been starved of funds, service sector now has so much long term capital than they require. And because they don't have the culture of diverting capital to the real sector, they now transfer it to service the real sector abroad out of the country. That is why you now see exotic cars being imported into the country through trade finance, and all sorts of appliances that are manufactured outside the country”, said the stockbroker.
While drawing a line between two kinds of capital formation -short-term and long-term capital formation, Adonri said that while it is the duty of the money market to form short-term capital with which to finance short-term activities in the economy, it is the duty of the capital market to form long-term capital which is used in financing capital expenditure and development in general in the economy.
According to him, short-term capital mobilisation has been a dominant factor in capital intermediation, requesting the SEC DG to redirect the financing capacity of the market away from its service oriented financial aggregation into the real sector capital financing.
“It will now be better for the regulators to promote deliberately the financing of the productive real sector in strategic manner. The capital that will now be formed in the market will now be strategically positioned towards developing Nigeria's engineering infrastructure.
“The components of heavy industrial base is the metallic industry which comprises of ferrous and non-ferrous metal. Secondly, the power sector, thirdly the energy industry.
It is the underdevelopment of these three sectors of the economy that denied the country engineering industry that is required to drive light industrial sector in a sustainable manner and also other heavy activities. So the process of capital formation will become even more strategic gearing towards financing heavy engineering productive base”, Adonri stated.
Also commenting, the Managing Director, Compass Investments and Securities Ltd, Mr. Emeka Madubuike said that as a regulatory body, SEC has to ensure that renewed investor confidence is sustained by compelling market operators play according to the rules through proactive monitoring to call erring market operators to order.
Describing the proposed Assets Management Company (AMC) as veritable means to restore liquidity in the capital market, Madubuike argued that for the market to flourish and achieve its primary objective as a place where people come to raise money, investors must repose some level of confidence in it, stressing that if such confidence is lost there is bound to be liquidity crunch.
“AMC is not the only solution but a key solution to market recovery. Other economies have used it to take their economy on the road to recovery. The primary objective is for the AMC to buy up the toxic assets and add some liquidity in the banking system to free up those non-performing loans in the banks and the AMC will now manage these assets for some period,” he added.