By Victor Ogiemwonyi
The current rise in equity prices on the Nigerian stock market has surprised many, drawing some negative comments, including from those who suspect that the prices are being manipulated. This view is completely wrong.
There is a difference between deliberate manipulation of prices and distortions resulting from a string of unusual events that impact the market. One of the best features of the Stock Market is its tendency towards efficient pricing. There are too many players with diverse backgrounds, orientations and aspirations in the market today. As such, manipulating prices will hardly work. Distorting events may make prices rise, and these are not the same as manipulation.
The distorting events currently present in the market are real economic realities that cannot be created by any one in Particular. But even at that, prices are constantly correcting themselves, as reactions to these distorting events are being interpreted by investors and traders and the outcomes reflect in market prices daily.
Equity pricing are so imprecise that stockbrokers are in the market daily attempting to reprice them as their opinion/judgments and events in the market place change.
Specifically, the recent rising prices of equities can be attributed to distortions in demand and supply factors obeying economic laws which no one can easily influence.
Inflation and Naira Devaluation
The Nigerian inflationary environment that has seen inflation at 28%, following the massive devaluation of the Naira over the past several months, especially in the aftermath of the May 29, 2023 presidential inauguration broadcast are economic distortions that cannot be ignored.
Investment in the stock market is one of the best ways to beat inflation. As such it is natural that investors flock the market to take advantage, which has resulted in pushing up prices. The more prices go up, the more people come into the market to be part of the action. This is why, late comers to the market take a beating when prices correct themselves suddenly as it does by nature.
Apart from inflation being a part of the upward driver of prices in the market, the recent devaluation of the Naira has seen an almost 50% exchange rate depreciation to the US Dollar, which then means equity prices must rise to catch up. Devaluation is a reality that pushes the value of all assets down and the stock market is the first place to see reactions from investors by way of revaluation, otherwise known as repricing of assets, with equity prices reflecting underlying assets of companies listed on the market, by rising to catch up with the actual valuation, of these assets.
Access Holdings (AccessCorp) Plc, for instance, has added in the last 12 months, more Assets, more branches, and is making more money. It will be unnatural for the price of its shares to stay the same.
Another natural reaction of investors to the Naira devaluation is the movement of those saving in Foreign currencies and taking advantage of the arbitrage in the pricing of their FX holdings, between the Official rates, which are usually low, compared to the black market rates which are the real rates, when devaluation comes, and rates are aligned. Investors see no reason to hold on to their FX holdings which no longer attracts higher arbitrage rates, their first port of call is usually the stock market because of the ease of investing there (entry and exit).
As these investors flood the stock market with new money, they naturally drive prices up.
When There Are Very Few Outlets To Invest in Nigeria
The current economic environment in Nigeria makes investing very difficult, especially with so much uncertainty and political instability, insecurity, rising inflation, and the terrorizing regulatory environment, all contribute to make investment decisions very difficult, making outlets for investing in the economy smaller.
The investor with resources who can not find an outlet see the stock market as the most probable place to put his/her money, even if temporarily to watch things settle down. A good example of this kind of investor is billionaire Mr. Femi Otedola who has resources but no seemingly credible outlet, that can take his money, especially giving the very uncertain economic environment in Nigeria today.
After exiting his investment in the oil marketing business- Fort Oil Plc ( former African Petroleum Plc), he was left with plenty of cash. His exit from that business in late 2021/2022 can also be traced to the country’s election year circle that was to hold in 2023, which usually creates uncertainty in the economic environment, causes delay in major businesses decisions, with some investors exiting their long-term positions, as Mr. Otedola did. Such unusual economic environment attracts temporary investors to the stock market where there is quick entry and quick exit, when required.
Mr. Otedola has been the prime mover of prices in the Nigeria Stock Market currently. His foray into buying big into First Bank, Transcorp Plc and lately, Dangote Cement has literally doubled and tripled the market valuations of these stocks and in the case of Transcorp, where he threatened a takeover , the share price has gone up 8x.
His actions suddenly awakened investors to the potential value in Transcorp which has attracted other investors, and in the process threatened the major shareholder who has had to put up a defense by buying out, Mr Otedola at a premium, while buying more shares to keep his majority shareholding. Whether the current price justifies the today’s market valuation will be seen very shortly.
These activities are normal and the market has only responded to the law of supply and demand, because there are many investors buying into very few good stocks in the market resulting in an expected rise in prices.
While the events making these possible are distortions in the economy, there is no price manipulation. There are too many players with different agendas in the market that manipulation is far more difficult today than people think.
A 46% rise in the NGX index in 2023 and 11% start in the new year 2024 may seem like the NGX is outperforming other markets until you take into consideration, a 28% inflation rate in 2023 and a near 50% devaluation of the Naira against the Dollar in the same year.
The recent low yield in the Fixed Income market that cannot produce real returns against current inflation in Nigeria, has also driven many investors into the equity space. This is especially true of institutional investors like the Pension Funds who have suddenly moved into the Stock market to make up for the low yields in Fixed Income instruments where they have traditionally earned strong returns in these last few years.
Everything is currently up in the Nigerian stock market. Capitalization is up, total number of deals is up, transaction volume has also gone up. All these are indications of the current environment.
There is nothing unusual or manipulative about the market.
- Ogiemwonyi, a retired Investment Banker, and former Council member of the Nigeria Stock Exchange (Now NGX ) writes from Ikoyi , Lagos.