The state of the (Nigerian) stock market

Nigerians are used to 100% annual returns from the stock market and 300-400% returns from new issue stocks. With the stock market currently be-calmed with stocks at best not falling in value, Nigerians are seeing a different side to the market and they don’t like it.

We are definitely not in a bear market, but at present, the Nigerian red-hot stockmarket has cooled. Any market is always going to go through cyclical phases of hot and not so hot and the rhyme and reason is most likely unknown, but here is a theory I have picked up while talking to in-house colleagues.

The CBN, worried about the amount of margin trading going on (lending to buy stocks) have put restrictions on the banks as to how much they could lend out. An example is a friend who approached me a few months ago with a bank offer to borrow to buy stocks with a 25% bank loan. Obviously not a good idea considering how the stock market has performed recently. A lot of the non deposit taking financial institutions such as stock broking firms were also borrowing heavily to invest in the stock market. In addition to this, the banks year end by which time books have to balanced has been moved en-mass to the end of December. The net effect of this is a considerable withdrawal of liquidity from the stock market to meet CBN directives on margin trading and also we are starting to see the banks starting early to shore up their balance sheets towards year end. Hence the fall in stock values.

My colleague further posited the theory that the way to play the capital markets at present was to rotate out of stocks and into interest bearing securities e.g. fixed term deposits that would mature just after year end. Banks are looking for capital to shore up their balance sheets for the year end and will be willing to pay high rates of interest (circa 17%+) to gain this capital. Conversely, the stock market is set to splutter at least through the year end. After the December year end, banks will offload their balance sheets hence increased liquidity. A lot of this cash will find its way back into the stock market which will take off, trying to catch up for lost time.

A nice arbitrage play there for you.