By ODOALU DIALOKE
At the dawn of the 21st century, Nigeria, only recently restored to democratic rule, had a promising economic outlook for the ensuing decade. After several years of sanctions stemming from the political misadventures of the Abacha regime, the international business community was  ready to welcome her 150 million plus market back into the global economy.

Crude oil prices, a critical benchmark of her economy, were steadily inching up from the low of $10 recorded in the latter part of the 20th century’s last decade. International oil majors, previously barred from doing serious business with her, were getting ready to significantly expand their oil production capacities especially in the under-tapped offshore sector.

Ms. Arunma Oteh, DG, Securities and Exchange Commission and Prof. Ndi Okereke-Onyiuke, Ex-DG, NSE

Telecommunications, agriculture and power were also attracting substantial Foreign Direct Investment. Initial auction for GSM telecom licences in January 2001 raised over $850million. The influx of foreign capital helped stimulate considerable expansion of small and medium scale enterprises in the real sector. By 2006, Nigeria’s gross domestic product (GDP) stood at $150 billion, having grown by 6.90% that year.

About a decade earlier, in 1996, GDP stood at $33 billion, having grown by 4.9% that year. For the first time since independence, economic expansion was consistently outstripping population growth – resulting in real increases in per capita income ($1,200 in 2005 as against $329 in 1996).

With a little more cash on his hands, the average Nigerian could now sensibly extend his monthly savings and more and more people began to explore investment opportunities.

The immediate impact of the excess liquidity was increased demand for investment vehicles like equities, bonds, treasury bills and foreign exchange. But the lion share of new investments went to the Nigerian Stock Exchange (NSE) and, in 2007, the NSE All-Share Index (ASI) recorded an annual increase of 74.9% to close the year at a historic 54,678.83 points.

The total market capitalisation, which grew at a compounded annual rate of 66.5 per cent over the preceding five fiscal years, recorded an unprecedented increase of 126.2 %, from N4.2 trillion in 2006 to N9.6 trillion in 2007. Thus, the NSE easily became one of the best performing exchanges in the world.

With such apparently high demand for equities, banks and other organizations proceeded to raise capital via public offers, rights issues and private placements with over subscription for these stock offers being commonplace. There was a preponderance of investment in the so-called growth stocks that showed manifold share price appreciation.

However, herd behaviour and a naive disregard of tendency for regression towards the mean – cognitive biases that are the socionomic underpinnings of many economy bubbles were endemic.  A relatively unenlightened mass of common stock investors were ignorant of the fact that such levels of growth were unsustainable in the medium term. Many stocks, with relatively unproven fundamentals, would become over-priced by excessive speculation.

By 2008, the American economy found itself enmeshed in a grave financial crisis arising from liquidity shortage in her major banks. Soon, recession in the world’s largest economy had a knock-on effect on other G-8 countries and eventually the developed world was enmeshed in severe economic crisis.

As oil prices fell with markedly reduced demand in the industrialized world coupled with militant-activity induced shut-in of oil production in the Niger Delta, the Nigerian capital market began to feel the pinch. The All-Share Index embarked on a steady decline that became magnified into an uncontrolled downward spiral once loss aversion behaviour kicked in.

Panic selling by both individual and institutional investors forced down prices. Commercial banks and stock-broking firms hitherto involved in a margin lending frenzy with initial margin requirements as low as 30% were forced to liquidate collateralized equities in order to recoup losses.

Private companies seeking fresh capital injection also elected to do private placement of their shares at lower prices while they sought or intended to seek quotation of their shares at higher values on the Nigerian Stock Exchange, thus making such private placements very attractive. This lured investors to dump their shares in the secondary market, purchase the private placements and dispose of same immediately after their listing on the Stock Exchange at higher prices.

Thus, more and more liquidity was sucked from the capital market – further aggravating share price collapse. Chances of recovery in the short term became even more dismal as 2008 ended with foreign investors having pulled out N556.93 billion, culminating in a net outflow of about N406.8 billion. In the end, what could have been an undesirable but necessary slump geometrically multiplied into an unmitigated and disastrous crash. By the second week of January 2009, market capitalization had nose-dived from an all time high of N13.5 trillion in March 2008 to less than N4.6 trillion.

The ASI likewise plummeted from about 66,000 basis points to less than 22,000 points in the same period.
It is important to note that at every step along the downward spiral, there was a window of opportunity for the appropriate regulatory bodies to intervene. Market regulators in developed economies like the United States, the UK and several other European nations quickly stepped in to stymie the sell-off by imposing restrictions on short-selling and drastically increasing margin requirements.

The net effect of these interventions was to limit both the depth and duration of the market depression. By the end of 2009, stock markets around the world had rebounded substantially. The Russia-based RTS index led the pack to gain 128.62% while Brazil Stock Exchange‘s Bovespa Index gained 82.7%; India‘s BSE Sensex gained 81.03%, and the Shanghai‘s Composite Index gained 80%; the London FTSE gained 22% while the US Dow Jones Industrial Average gained 19%, and France‘s CAC-40 gained 22.32%. On the African continent, the JSE All-Share Index gained 28.6% while Egypt Stock Exchange gained 34.85%.

These are in sharp contrast with the 26.5% drop in market capitalization of the NSE from N9.56 trillion in 2008 to N7.03 trillion in 2009, with the ASI recording a 33.8% drop in the same year. It came as no surprise therefore that 2010 witnessed the sacking of the management of the NSE .

Regulatory intervention in free market mechanisms are often necessary when in-built self correcting mechanisms fail to auto-adjust critical inefficiencies that threaten to bring down the system. The responsibility of stock market managers therefore is to detect when these internal mechanisms are about to exceed a fail-safe point. What would be the prospects for such a market if the managers and regulators thereof are neck-deep in exploiting its inefficiencies for personal benefit?

The fundamentals of the Nigerian capital market, however, are still very strong – high earnings per share, high dividend yields, good bonuses and low price to earnings ratios. With the take off of the Asset Management Corporation of Nigeria (AMCON) and introduction of more stringent regulations, the modest recovery in share prices witnessed in 2010 makes 2011 promise to be a more rewarding year for investors in the capital market. All that remains is sufficient punishment be meted out to those entrusted in the immediate past with managing the economic fortunes of 150 million people, and who abused that trust.