Whenever the word investment is mentioned, the first thing that comes to mind is the stock market. Stocks simply refer to ownership stake in a company expressed in units known as shares. In ideal situation, it is the choice destination for capital meant for investment. There are three major ways through which people earn in shares. They are dividends, capital appreciation and short selling. If you've been putting down your money in the Nigerian stock market, you'd agree with me that the stock market (in the Nigerian context) is a legalized casino. Yes, thats what it is! Here are my reasons for giving the Nigerian stock market a casino tag:
Moribund economy
Everyone can agree with me that the Nigerian economy has been on a consistent downward spiral over the years. Economically, things has been going from bad to worse in the past two decades. The stock market mirrors the economy. Whenever you see a thriving stock market in the midst of a cascading economy, be rest assured that a bubble is building, and sooner than later, a catastrophic burst is on its way. That was exactly what happened in the 2007/2008 market crash. The stock market is as resilient as the economy. So a comatose macroeconomic environment must birth a comatose stock market.
Hot money from foreign portfolio investors
Stocks rely heavily on foreign portfolio investors to drive demand up. Since former CBN Governor, Sanusi Lamido Sanusi allowed foreign investors to repatriate any portfolio investment into the country without restrictions, stocks have become heavily reliant on hot money to keep valuations high. Thus, when foreign investors exit, stocks suffer. They create a bubble when they enter our markets and leave bears to dominate when they exit, until they are ready to get back in again.
Recurring currency devaluation
Our economy is inextricably tied to oil exports. Consequently, the fluctuations in international oil price sends the Nigerian economy to a rollercoaster. What I mean here is that whenever the international oil price is high, there tend to be an upsurge in economic activity owing to the increase in fx revenue. But whenever oil price falls to an all time low, economic activity grinds to a halt. Due to forex scarcity to pay for our ever increasing imports, the CBN usually comes up with some drastic policies some of which includes currency devaluation. Once this happens, the market capitalization of all companies drop (in real value).
Liquidity crisis
Simply put, liquidity refers to the presence of so many buyers and sellers with varieties of products in a market. This situation guarantees the buyer of a product that there's an available market whenever there's need to sell the product. In the stock market, this situation encourages many people to participate. The Nigerian stock market is far from being liquid. We have relatively few participants in our capital market. (The market capitalization of the entire Nigerian stock market is less than 10% of the market capitalization of Apple Inc). This situation has made it very difficult to sell a stock profitably. Moreover, the availability of financial products is grossly inadequate. Though there's been promises to introduce financial derivatives into the market, it has remained promises till now. Short selling of shares is practically impossible at the moment.
Absence of corporate governance
A considerable number of quoted companies in Nigeria lack the culture of corporate governance. Some of them engage in insider trading of their shares and other unscrupulous activities. Moreover they're poorly regulated. Some of the sharp practices that contributed to the market crash in 2008 has been swept under the carpet. Nobody was held accountable.
Conclusion
These are some of the reasons why the Nigerian stock market cannot be considered as a viable investment. However, there are possibilities of these situations improving as time goes on. But for now, the Nigerian stock market is not so different from a grand casino.
0 comments:
Post a Comment