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Another warning about capital market crash

By Dele Sobowale
Every professional economist has been enjoined by one of the founding fathers of our profession – economics – to always be involved in the aims and objectives of mankind when it to disposal of scarce financial resources. As an economist, I have for the last twenty nine years, since 1987 in fact, in the media, attempted to contribute to the macro-economic issues of every era. Capital market crises don’t occur frequently, unlike matters of employment and inflation. But, when turbulence occurs in the Nigerian Stock Exchange, NSE, it leaves a lasting impact. Millions of investors are devastated; trillions of naira are lost and some investors never recover for the rest of their lives.

Nigerian Stock Exchange

On two previous occasions when a market crash appeared imminent to me, I had made predictions well in advance of the financial downturn at a time when the market was still on the upward escalator; when stock prices are rising as though the sky is not even the limit.

“A prophet who predicts a flood should be the first to climb a tree.”

Stephen Crane, 1871-1900, in THE RED BADGE OF COURAGE.

Noah did better than climb a tree when the great flood came; he built a boat and packed his family and loads of food in it. Such pre-emptive steps are always required by some forecasting doom in the capital market. I am also an investor in the market, but with a difference based on one sound principle. Never wait until the market has reached its peak and is about to turn downward before taking your leave. A true story is necessary to illustrate the point.

In August of 2008, when share prices were still escalating, Oceanic Bank shares bought at N9.50 were ordered sold at N23. The stockbroker advised against it saying the price will continue to go up. His advice was rejected. Prices actually continued to go up reaching close to N30 and the stockbroker was always in touch to tell me “I told you so.”

Then in September, the first reversal occurred and it continued until Oceanic Bank was liquidated. Shares of First Bank and Intercontinental were also sold during the selling spree – all at huge profit. A former colleague was also in the market. He rejected the advice to sell instead accepted the offer of some of the banks to lend investors money to buy their own shares. When in November the free fall continued, he was indebted to the banks to the tune of N200 million and the shares were virtually worthless because the banks were in distress.

What made the difference? One word can answer that question – economics. Nigerian universities might not teach students about business cycle; but it is a concept which has important implications for capital market investors especially in an economy like ours which depends heavily on government spending and the flow of Foreign Direct Investment, FDI, — particularly portfolio investment. Each time actual government spending had failed to match budgets and expectations, the capital market will be the ultimate victim. Portfolio investment, which can only be described as a “fly by night” intervention is the opposite of investment in fixed assets. Portfolio investment enters easily and quickly when the market is good; pumps up the prices and departs when trouble is brewing with its profits – leaving the amateur local investor with the losses.

The market crashes of 1997-8 and 2008 which were predicted had followed the same trend. Government spending sags; the momentum built up on account of heavy spending in the past attracts the portfolio managers who send prices skyrocketing. Then, the music stops. The portfolio managers start to go home and the share prices tumble for months until they reach a bottom.

The NSE is in such a cycle now. Since three months ago when I first predicted another market crash, market capitalisation had collapsed by close to 18 per cent. Bad as that is, the end is not in sight yet. The reason for that statement is simple.

“Politics is war by other means.” Chinese proverb.

Bad politics always drives out good money. Nigeria is now in the season of atrocious politics – perhaps the worst we have ever experienced. Over 96 political “parties” and countless political adventurers and threat of “war on Warsaw” by someone presumed to be sane have become the daily menu in Nigerian media. The mainline media offerings are scary enough; social media offerings send chills down the spines of everybody – especially funds managers. Capital is a coward and would move out of territories threatened with violence to safer havens until the palaver is over.

Even a child knows that the Nigerian political war is just starting. All the carpet crossing going on represents the preparations for taking positions for the battle of the politicians’ lives and ours to begin in earnest. The last battle will not occur until Election Day 2019. That is at least 130 days away. But, if a week is a long time in politics, it is an eternity in the capital market if the news filtering in is sufficiently disturbing. And, 130 days is more than enough to wipe out a lot of investors.

Unfortunately for the capital market, Nigeria has the worst bunch of selfish and unpatriotic politicians walking the earth. None of them gives a damn about the damage they are doing to the economy for which the capital market stands as proxy. People invest in the market for their future security in the belief that there will be a country called Nigeria after 2019 elections. Everybody will jump out the minute that future is not assured. The painful lesson of what happened to Igbo bank depositors after the Civil war should serve as a reminder and warning to all of us.

The Nigerian Stock Exchange has become a captive and victim of politics.

 


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Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.