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How to save the stock market

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At the inception of this administration,stocks soared as foreign investors looked to President Muhammadu Buhari to reverse decades of economic mismanagement and policy inertia. At that time, institutional investors brought in billions of dollars that shored up the nation’s foreign reserves and gave the stock market a new lease of life.

But it was a temporary relief for the economy, as every economic agent knows that such funds are treated by monetary authorities as hot money that can flow out at any sign of economic distress unlike direct investment flows. The money that flowed into stocks and bonds is now retreating as growth prospects diminish along with the fall in global crude oil and commodity prices.

It should be a matter for concern to this administration that soon after the initial euphoria, investors are becoming disillusioned. Nigeria’s stock exchange benchmark stock index has plunged 30 per cent since reaching a year-high on April 2nd 2015. The performance of the Nigerian Stock Exchange has been described as the third worst globally in the period, after those of Ukraine and Egypt.  The stock index had advanced 12.5 per cent in the two days after ex-President Jonathan conceded, before going into steady decline.

The drop could be even higher if the naira is further devalued. Currently, two major factors are affecting the equities market: the falling price of crude oil, which has about 80 per cent effect on the capital market, and the increasing political risks of not knowing the direction of public policy. Investors are not so sure that this administration will continue with privatisation. The lack of clear policy direction has made foreign investors develop negative sentiments towards the market.

Many are at a loss with the current monetary policy which has placed restrictions on access to foreign exchange. Nigeria cannot continue to depend on foreign portfolio investors to grow the stock market.

The federal government and capital market regulators must come out with a clear policy on how to develop the local stock market.

The Securities and Exchange Commission (SEC) working with the Nigerian Stock Exchange (NSE) must encourage retail investors to return to the market. Many Nigerian retail investors who lost huge amounts of   money during the global financial meltdown have not returned to the market. To get such retail investors back to the market, the regulators as well as market operators must embark on massive investor education to enable them understand their role, when to buy and when to sell shares.

They must be made aware of the speculative nature of the capital market. It is not dump life savings and expect windfalls like the so-called “miracle banks”. Above all the federal government must focus more on Foreign Direct Investment if it hopes to grow the economy and create jobs for the teeming unemployed Nigerian youth.

 

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