The current Nigerian stock market rising equity prices have surprised many and drawn some negative comments, including those who think the prices are being manipulated. This view is completely wrong. There is a difference between deliberate manipulation of prices and distortions resulting from 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 in the market, so manipulating prices will hardly work. Distorting events may make prices rise. This isn’t the same as manipulation.
The distorting events currently present in the market are real economic realities and they cannot be created by anyone in particular. Even at that, prices are constantly correcting themselves as reactions to these distorting events are being interpreted, and are reflected in market prices daily. Stock market equity pricing is so imprecise that stockbrokers are in the market daily to reprice stocks as their opinions and events in the marketplace change. The recent rising prices of equities can be attributed to distortions in demand and supply factors obeying economic laws that no one can easily influence.
Nigeria’s inflationary environment, which has seen inflation at 28 per cent and the massive devaluation of the naira, are economic distortions that cannot be ignored. Investment in the stock market is one of the best ways to beat inflation. So naturally, investors flock to the market to take advantage and this 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 latecomers 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 per cent exchange rate appreciation to the dollar against the naira. That also means equity prices must rise to catch up. Devaluation is a reality that pushes the value of all assets down. The stock market is the first place to see reactions to the revaluation 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. AccessCorp plc, for instance, has added in the last 12 months more assets, more branches, and making more money. It will be unnatural for the price of its shares to stay the same.
Another natural reaction of investors to 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, and the black market rates which are the real rates. During devaluation and rates alignments, investors see no reason to hold on to their FX holdings which no longer attract higher arbitrage rates; their first port of call is usually the stock market because of the ease of investing there.
Uncertainty, political instability, insecurity, rising inflation, and the terrorising regulatory environment all make investment decisions very difficult. Also, outlets for investment in the economy are smaller. Investors with resources, who cannot find an outlet, see the stock market as the most probable place to put their money, even temporarily to watch things settle down. A good example of this kind of investor is Mr Femi Otedola. He has resources but no credible outlet that can take his money, especially given the very uncertain economic environment in Nigeria today.
After exiting his investment in his oil marketing business, Forte Oil Plc (formerly AP), he was left with plenty of cash. His exit from this business in late 2021/2022 can also be traced to the election year circle that was coming in 2023, which usually creates uncertainty in the economic environment. Businesses delay major decisions; some exit their long positions, as Mr Otedola did. The unusual economic environment brings in 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 Nigeria’s stock market currently. His foray into buying big into First Bank, Transcorp and lately, Dangote Cement, has literally doubled and tripled the stock market valuation of these stocks, and in the case of Transcorp, where he threatened a takeover, the share price has gone up by a factor of eight.
His actions suddenly woke up investors to the potential value in Transcorp, which has attracted investors and threatened the major shareholder to put up a defence by buying out Mr Otedola, at a premium and buying more shares to keep his majority shareholding. Whether the current price justifies the current market valuation will be seen very shortly.
These activities are normal and the market has only responded to the law of supply and demand. There are many investors buying into very few good stocks in the market and prices have risen as expected. While the events making this possible are distortions in the economy, it is not a manipulation. There are too many players with different agenda in the market that manipulation is far more difficult than people think.
A 46 per cent rise in the NGX index in 2023, and 11 per cent start in 2024 may seem like the NGX is outperforming other markets until you take into consideration a 28 per cent inflation rate in 2023 and a near 50 per cent devaluation of the naira against the dollar in the same year.
The recent low yield in the Fixed Income market in Nigeria which cannot produce real returns against current inflation, has also driven investors into the equity market, especially the institutional investor funds, like the pension funds, who have suddenly moved into the stock market, to make up for the low yields in the Fixed Income market, where they have traditionally earned strong returns in these last few years. Everything is currently up in the Nigerian stock market. Capitalisation is up, total deals are up, traded shares have also gone up. All are indications of the current environment. There is nothing unusual or manipulative about the market.
- Ogiemwonyi, a retired investment banker, writes from Ikoyi, Lagos