By Michael Eboh

The Nigeria equity market, represented by the Nigerian Stock Exchange, NSE, has been rated as unattractive and very expensive among its peers in Africa, South America, Eastern Europe and Southern Asia, ASEESA, according to a report by Dunn Loren Merrifield.

The report titled: ‘Nigerian Equities: A review of First Half 2011,’ prepared by Tola Odukoya, a research analyst in the company, blamed the development on recent shift of focus from the equity market to the fixed income markets, particularly in sovereign and sub-national bonds.

He warned that the expensive nature of the market is likely to hamper continuous inflow of funds into the country.

He said that a comparative analysis of selected frontier markets indicates that the Nigerian market is more expensive than others such as Ghana, Botswana, Venezuela, Serbia and Bulgaria.

According to Odukoya, in view of increasing globalisation, valuations of the Nigerian equity market appear unattractive especially when compared with other frontier markets given the All-share index, ASI’s, price to earnings, PE, ratio of 17x against other markets 2.4x average.

He said, “With a PE of 17.5x, the NSE ASI appears expensive when compared with other emerging/frontier markets across ASEESA.

Our argument therefore, is that with the increasing linkage amongst economies and globalisation of financial markets, the Nigerian market is in competition for capital with other financial markets that have similar characteristics and attract investors with the risk tolerance for frontier markets.”

Odukoya noted that the Nigerian capital market in 2008, after the meltdown, has been largely driven by foreign investors, a development, which he said, is threatened by the recent shift in focus which has made the market unattractive and expensive.

He said, “Following the equity market meltdown of 2008, subsequent trading activities on the NSE have been driven largely by foreign investors; a result of several factors which include the CBN banking reforms of 2009 that exposed a high level of banks’ exposure to the equity market via margin loans and share-purchase loans.

“Consequently, the CBN’s restrictions on banks’ exposure to the equity market meant funds hitherto available to fuel the equity bubble of 2006-2008 were no longer available.

“The resulting negative effect of these developments on the domestic investor universe left only foreign investors and pension funds as the critical investors with any significant capacity to drive the market.

“Therefore, we argue further that the Nigerian equity market is currently trading at realistic levels, contrary to general expectations for the market to surge to levels last recorded during the market bubble days of August 2006 to March 2008.

“In addition, the decline in Foreign Direct Investments, FDIs, to Nigeria in recent years further highlights our position as indicated by the moderate growth in capital flows to Nigeria. Between 2005 and 2009, Nigeria’s FDI inflow was 4.15 per cent compared to 30.6 per cent recorded between 2000 and 2005.”

Odukoya expressed hope of a sustainable growth and development in the market if efforts are made to improve liquidity in the market through the introduction of market making, adoption of the quote-driven system, improvement in the corporate governance culture of corporate organizations and capacity building of stakeholders in the capital market.

“We are neutral on Nigerian equities in the short to medium term,” he said, “our position is informed by the global emphasis on risk-based approach to investments which means the Nigerian market may not be as attractive as it once was given its major deficiencies such as lack of liquidit

“However, we remain keen observers with a positive outlook of the market given the inherent potential for growth in the broad economy and, therefore, the capital markets.”