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Equity investors in the country heaved a sigh of relief as government’s intervention, like a bolt from the blue, appeared in the previous week to stem the tide of persistent drop in share prices.

But before the brace, some market watchers a la cynics have already pronounced doom on the trillions of investors’ money in the market. They are not to be blamed anyway. The reality on ground, which stared everybody in the face, offered a plank on which their doomsday prophesy rested.

For instance, the All Share Index, which measured the performance of the equities, declined by 31.4 per cent from a 66,121. 93 peak in March to 43,119.47 points on Tuesday, August 27. Its twin indicator, the market capitalization, which represents the total value of all the equities, shrank by 30 percent from N12.6 trillion to N8.8 trillion.
Various reasons were adduced for the slide. Some said it was as a result of the controversial CBN ban on margin loan.

To others, the introduction of common year-end for all the 24 banks in the country, as well as the increase in capital base for stockbroking firms brought down the market. But some stockbrokers believed that the decline was due to a combination of banks recalling margin facilities, investors selling shares to buy into a slew of private placements and the crashing of some shareprices which in some sectors looked fundamentally overvalued earlier in the year.

A school of thought, however, opined that the cancellation of the margin loans stemmed from the fact that banks had been using their money to push up their stock prices by engaging in risky lending to corporations and individuals who invested in the banks’ shares. “Now that the facility has been embargoed, the banking sector has been recording negative performance. It didn’t come as a surprise as the index moved in consonance with the sector.This sector constitutes about 50 per cent of total market capitalization and more often than not, the two move side-by-side,” an analyst said.

On what impact the cancellation had on the market, a stock analyst, Mr Jide Ogunleye said: “This issue had affected the market negatively because of how margin facility had become popular in financing share acquisitions in Nigeria. We are aware of several investors who had received margin calls from their brokers asking them to sell their shares at losses so that they (brokers) can recoup their investments. In the past, investors were at liberty to roll over their debt and its servicing. But with the new development, the banks do not have such patience any more.

This was more aggravated by the now suspended uniform financial year ends which was introduced to the banks. Because of this, most of them prefered recalling their funds.The Minister of Finance, Shamsudeen Usman, admitted this in his address at the quarterly meeting of Bank Directors Association of Nigeria (BDAN), recently, that there was a substantial increase in margin lending by banks, which invariably affected the dynamics of the capital market.

He observed that the result of banking consolidation was an increased involvement of banks in market operations to generate increasing returns to shareholders. Adding that, “at 18 per cent or about N2.5 trillion of depositors’ fund, with the banks, are used for margin trading, acting as a factor driving prices in the Nigerian stock market. In effect, most of the increase we had witnessed was as a result of a market which was awashed with cash.”

On the the effects of the (suspended) uniform year ends for banks, an analyst with Investment Centre Limited, a stockbroking outfit, said: “Although, the uniform fiscal year end (for banks) is expected to sanitize the banking industry but the time frame appeared too short and money from various sectors appeared to be going to the banks as they gave attractive rates in order to increase their deposits. This also had a negative effect on the secondary market as banks offered attractive rates and money trickled out. The bears were active as most stocks went southwards bound. Without the control measure implemented by the Exchange which does not allow for more than five per cent gain or loss in any stock traded, the decline would have been severe.”

In fact, a reduction in the five per cent maximum downward limit to one per cent and the retention of the five per cent upward movement was one of the newly introduced measures that eventually proved to be the magic wand that saved the market from the gale of the crashing prices.
Other measures put in place by the new presidential advisory team to stabilise the market and make it more attractive to local and foreign investors included 20 per cent buy-back of shares by companies; reduction of market operators’ fees and introduction of market makers. The rest were introduction of a capital market stabilisation fund; review of the country’s liquidity situation and review of trading rules.
Barely 24 hours after the Finance Minister, Shamsuddeen Usman, announced the measures, the market made a tremendous recovery, from 2.2 per cent loss on Tuesday, before the announcement was made, to 3.2 per cent rise thereafter. In monetary terms, this translated to a gain of N2.8 billion from over N3.7 billion loss of the previous day.

The pronouncement that the Central Bank of Nigeria would take appropriate measures to improve liquidity in the system, if needed, and that Nigerian banks would allow longer repayment periods for credit extended to licensed brokers and investors became a tonic that caused investors’ confidence to bounce back. Since then, it has been a boom time for the stocks with many pessimistic investors, who had made panic sales, biting their fingers.

Managing downturn
The greatest problem of most retail investors in the country is poor information and lack of deep understanding of the intricacies of the market. Most have found themselves in troubling circumstance because they take positions on stocks based on price movement. To worsen the situation, majority would neither seek expert’s advice nor consult their stockbrokers before giving sale order. According to Mr Tunde Jeariogbe, a stock market analyst, “investors are expected to build a very cordial relationship with their brokers so as to influence investment decisions at stipulated prices”.

He added: “In a down market, like the one we experienced recently, where most investors got stuck to the extent that they could not even decide where to invest and make a reasonable profit, technical analysis becomes a very efficient tool in predicting market direction. It is interesting to realise that technical tools proffer solution to profitable short term investment. Although most of these tools demand a fast buying and selling decision, absence of this may lead to losses.”

The greatest components of these technical tool is information; first hand, factual and accurate information. “You can not invest without information, knowledge and skills in the market”, says Mr Godwin Obaseki, the Managing Director of Afrinvest, an investment firm. His deputy, Mr Ike Chioke, toed the same line when he said: “In the prevailing low price environment for stocks, investors should seek to manage their money through a fund manager that has the research platform and experience to pick the right stocks for their portfolio.”

That kind of fund manager must, as a matter of fact, have both its ears and eyes on the market; should be able to spend 24 hours every day looking at the market and possess the technicalities and skills to tell you which stock is going to do well in the market.
Giving insight into how a fund manger should go about this, particularly during market meltdown, Mr Olutola Mobolurin, the Managing Director of Capital Bancop, a stockbroking firm, said that a good fund manager should diversify his clients’ portfolio in such a way that he doesn’t choose companies that behave in the same manner.

He explained: “In managing anybody’s wealth, you first of all determine the objective of that person in terms of his needs. For instance, as an individual, we have various needs at various times of our lives. For a young man, he is anxious to create wealth. For an old man, he is interested in preserving wealth. The young man can take risks because if he loses money, he has a lot of time ahead, if he lives a normal life, to recover his losses. But an old man has little time to recover any losses. So, he is more careful. In investment, we would say he is more risk aversed. He is not interested in doubling his wealth as such, he is more interested in not losing his money. And he wants steady income because he cannot work and probably, he is not working any more or he is preparing for retirement or he is in retirement. So, he needs steady income. The young man may not care about income because he has a good job, he has his salary and has prospect of advancing further. He is only interested in saving something for the future. Even, among the corporate organisations, we have endowment or foundations.

“There are reasons they are founded: maybe they want to multiply a portion of their wealth because their programmes are futuristic, maybe they are geared towards providing regular income to undertake projects on yearly basis. For instance, in universities, if you do an endowment for a professorial chair, investment for that endowment must be able to pay the salary of a professor that you are sponsoring. Even for prize, you must have a regular income for it. So, when you determine the objective of the person whose funds you want to manage, you then scan the market to find the investments that meet those objectives. Of course, in scanning the environment, you just don’t pick one company or one instrument.You look at a range of instruments and companies that would meet the criteria that you set. You design a portfolio and you look for the instruments that would go into that portfolio.

The reason why you choose a range of instruments is that you also want to be sure that you don’t concentrate risks so that if something happens to the company, you don’t lose all your money.You diversify the risks. For those who are sophisticated in their approach, they would also ensure that even in diversification, you don’t choose companies that behave in the same manner. For instance, you don’t pick companies in the same industry.That is not diversification. If something happens and that industry goes down, all the companies go down as well. So you pick companies that may react in opposite manners so that if one industry goes down,you know that the other may not or may compensate for the reduction.

“Again, we live in an inflationary environment, while you want steady income, you should also hedge your money against inflation so that if you retire today at 50 years, 55 or 60, by the time you are 70, that money is not reduced to half in value . So, you will put some money in government bonds that can guarantee you steady income. You also put some in some equities that pay high dividends regularly. Then you put some in stocks that have shown ability to pay dividend as well as grow in value. If you choose companies that are steady, that are rock solid, have track record of performance in terms of growth and dividend growth as well, you can be assured that even over a long time ,you will be able to protect yourself against inflation.”

Mobolurin has a soul mate in a group of market analysts that described themselves simply as Smart Investors. According to them, investors should have a portfolio representing at least three or four different sectors. “Choose sectors with favourable prospects, e.g. banks and food and beverage sectors, which do well during economic expansion. Also, keep sufficient cash or fixed instruments in your portfolio so that you can react to opportunities.”

On investors taking maximum opportunities in bear market, they said : “bear market causes pain for a majority of investors and fund managers but to some it signals a profit opportunity. Though there are many definitions of a bear market (the opposite of a bull market) it is generally defined as a period of falling prices. Bear markets generally create lots of good quality but undervalued companies that discerning investors like to buy. Generally, however, living through a bear market is no fun as values drop over a prolonged period of time, resulting in the value of many portfolios ending up lower. At the outset of a bear market the individual investor is faced with a number of questions: How long will it last? The answer being no one can tell for sure. Should I sell my stocks? The answer to this is slightly more complex.

“As an individual investor, your holdings are normally small and you could exit the market quite easily, a luxury not enjoyed by the professionals. Selling at the beginning of a bear market and buying at the end would be great if we could tell exactly when the bear market will begin and end. In most cases we can’t. Our advice is in the first few weeks, sell early in the bear market your weakest holdings in terms of those stocks that are selling at a premium to fair market and those companies whose quality and long term prospects are most questionable. But we would only advise you to do this in the early stages. If the bear market is well advanced and you are already sitting on a significant decline, we would advise that you do not sell. You would have taken most of the losses and you run the risk of missing the recovery whose timing is also unpredictable.This is a classic error of buying high and selling low.
“We would advise that you hang onto your strongest holdings, excellent quality companies and companies still trading at a discount to fair value, as these will recover quickly at the end of the bear market.”

Should I be buying stocks in this environment?
This certainly is the time to plan which stocks you would like to buy and setting entry prices below which you buy them. Everyone wants to buy at the market’s absolute bottom, but in reality very few people can work it out.
Our advice is to follow one of two strategies: buy part of your stake, a third to a half, on the way down when your chosen stocks become cheap, and the rest on its way up. This way, you ensure that you don’t miss the buying opportunity but you have a cash hedge in case the price continues to decline. So, if the plan is to invest and hold your stocks for a long time, a bear market is a great time to buy because you are buying at rock bottom prices, and a bad time to sell unless you’ve sold very early in the down cycle.

We advocate that you stay clear of speculations as the stock market is for proper research- based investments. In the short-term, greed and fear move the market, but in the long term, prices are driven by value.
In a bear market, the quality of a company you invest in is key. It must have sufficient competitive advantage to be able to withstand any downturns and still be making money in the next 20 to 30 years. Many investors also favour the stocks of big companies during a bear market, because they are perceived to be better positioned to succeed in good times and bad.”

To Ogunleye, borrowing to invest is not the best strategy when the market has reached a peak and it is heading down. He explained: “In fact, we do normally recommend that investors above the age of 50 years should stay away from trading margins because of its attendant risks. As said earlier, several investors did receive margin calls from their brokers (during the downturn) to sell their shares at losses for them to recoup their investments . As you are aware, this margin facilities are usually made available by bank to stockbrokers, who in turn lend these out to investors. The amount of funds available for investment in the market per time is the most important market driver because stocks move in response to increased demand on them and that demand indirectly emanates from investors that are flush with cash.”

On how liquidity squeeze can cause investors to sell off their stocks, he said: “A liquidity squeeze occurs when a financial event sparks concerns among financial institutions (such as banks) regarding the short-term availability of money. These concerns may cause banks to be more reluctant to lend out money within the inter bank market. As a result, banks will often impose higher lending requirements in an effort to hold on to their cash reserves. This cash hoarding will cause the overnight borrowing rate to spike significantly above its benchmark rate and, as a result, the cost of borrowing will increase. In the face of higher interest rates, individual investors will often liquidate their holdings in stocks and other riskier investments.This mass liquidation of investments puts a further strain on the amount of cash available to financial institutions. If left unchecked, a liquidity squeeze could result in a scenario in which banks make it extremely difficult for all but individuals with the best credit scores to get a loan.

“I said that the amount of funds available for investment in the market per time is the most important market driver. For example, from January to February, when the market was tremendously upbeat, the total volume traded on the floor of the Exchange on a daily basis was in billions. But between March( and last Tuesday in August), this figure oscillated between six to seven hundred million. In order to spot the upcoming bullish session, I will advise investors to begin to watch out for that period when volumes will move back to the previous high in January and February, this is a good signal of the bearish reversal.
“I will like to add that liquidity position of a market comes round in cycles with one liquid season following an illiquid season.

When it comes to liquidity problems, there is little to what you and I can do, so patience is the key.The period of market downturn is not the time to panic at all, rather, we should buy more of the fundamentally strong equities in anticipation of when the market will become more liquid. Have you ever imagine how the market will react if investors unanimously decide not to sell any of their stocks for one week? Do not also forget that with institutional investors like J.P Morgan and T.Rowe rating our market better and planning to invest their funds, the sky remains the limit of what the market will fetch investors in the nearest future.”

Another analyst, Mr Emmanuel Abiola, sees accurate information as one of the factors to be considered when investing and managing one’s investments. According to him, it is imperative for whoever is buying into an entity to have first hand factual and accurate information about the company.
“What level of financial information do the investors in shares have? Oftentimes, the factor is neglected by small investors. People buy shares of companies, especially the publicly quoted ones, on the basis of indices on the Nigerian Stock Exchange (NSE). The small investors’ source of information will include the company’s financial statements, newspapers and analyses as provided by financial analysts in the electronic media, prospectuses and so on.We need to be able to identify how accurate, factual, correct and bias-free such information is.

The information contained in financial statements is statutorily required. The amount of information required by the owners of the business is not of primary consideration to the management when preparing their report. This is responsible for a situation where auditors issue their report only for it to show errors and misstatements even within the same period for which clean reports were issued. It is high time the shareholders at the annual general meetings of companies started considering specific disclosure requirements in the financial statements for companies based on their previous experience on the causes of misstatements or errors in financial statements in similar organisations within same industry. Prevention is better than cure.”

On how to make wise investment decisions, another expert in stock business, Mr Tunde Oladapo-Dixon said that investors should check the company’s fundamentals. “Keep your attention on subsequent earning reports to guide you. Check internal strategy; firms that will be approaching the market soon for another offering is a good buy. Check the rate of decline:for fresh investment, those equities that had fallen below the offer, rights, private placement or listed price would definitely resist further losses and recover gradually. However, I believe that decline in most of these stocks at this point in time is an opportunity to buy more, especially in the financial sector. As the banks turn in billions of naira as profit after tax, how much is yours, should be your concern now”.

On investors staking their money on stocks, Mobolurin has this advice: “If he doesn’t have a savings account, I would advise him to go and open savings account. And given his level of income or the level of emergency that he may run into, I would advise that he put some money in the savings account so that if something happens and he needs money urgently, he can go to the bank and withdraw the money to deal with that emergency. If you buy shares, you cannot wake up in the middle of night with an emergency and next morning, you go to your stockbroker and pay for hospital bill or whatever. Instead, you will have to call your broker first. He has to go and verify your shares and takes other steps. You know this is not the best way.”

To cap it all, analysts want the regulators to instill some discipline into the financial sector, which constitutes about 65-70 per cent of the market capitalization of the Stock Exchange. For instance, a report published in May by JPMorgan, an American financial-services company, stated that the top seven Nigerian banks, with a combined market value of almost $40 billion, are overvalued by as much as 56 per cent. There is also an accusation that the banks were using their own money to push up their stock prices by engaging in risky lending to corporations and individuals who invested in the banks’ own shares, which was one of the reasons blamed on the recent downturn in the market. According to Mr Fola Fagbule, a research analyst with Afrinvest. “There’s no resemblance between banks operating in Britain or America and the ones operating in Nigeria. It’s light years apart and it’s an issue the banks need to address”.

For Mr Lamido Sanusi, a risk-control officer who will take over next January as the Managing Director of First Bank, he was disappointed that regulators are not tougher in insisting on transparency and disclosure of information. Foreign investors demand open banking procedures, he says, yet banks are not now obliged to open their books to scrutiny. “Are these banks being properly managed? Are these assets being properly deployed?” asks Sanusi. “We don’t know the reality.” Market watchers opined that since the country is yet to realize its economic potential, it can’t do away with a robust banking sector that everyone can have confidence. “A crash of the sector can bring down the market”, they warned.