No more bulls on the Nigerian capital market. The bears are having a field day. It is not surprising after a series of missteps from the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE). It is now becoming obvious that both regulatory organizations are clueless on tackling the bearish stalemate in the market.
In fact the initial attempt that led to the ill advised one percent downward fix of price movement on stocks can largely be blamed for the current state of the market. This fix artificially stopped the market from bottoming out and led to a loss of confidence in the market that is becoming difficult to restore.
The Exchange fortunately after much criticism saw the folly of the fix and removed it. This saw the market plunge, and then rise. But the rise was short lived as the bears have returned seemingly stronger. Â Â In the last one week, we have seen the bears take complete hold of the market once more as less as less stocks appear on the gainers chart.
It has been the opposite when it comes to stocks losing ground however. Despite the fix of one percent drop, several stocks are on the losing side. Most stocks are currently on offer on the floor of the Exchange. Hard strapped investors are waiting for weeks and months to be able to make a sale. Even stocks like First Bank Plc that were as good as money in the market, now take weeks to sell and even then in little lots.
The question on the lip of investors is how we turn around this market? Several players in the market are calling for a bail out considering this is the trend in leading global markets experiencing similar market meltdown. What has not been agreed on is how to achieve this bail out in the Nigerian stock market. The NSE has been in the forefront of a plan to make listed banks put down a N100 billion each in a bid to raise about N600 billion to save the market.
This plan has many loop holes. First the market has lost over three trillion naira in the current melt down and so a N600 billion lifeline will just be a drop in the ocean. Besides it will be highly risky to expose 40 to 50 percent of the bank's capital base to a highly volatile capital market. A market meltdown subsequently could send these institutions down just the same way it is happening in America right now.
There are better ways to restore confidence in the market. Â The government can then intervene in the market in a market friendly way. This can be done by floating a "reverse bond". It is called a reverse bond because instead of the usual bond where the government pays interest on the bonds and borrow money from individuals and financial institutions, Individuals holding the government reverse bond will have to pay interest to the government instead.
This is how it will work. The government issues these reverse bonds with tenure of not less than three years to individuals only. Institutional investors should be exempted. The reverse bond should attract the usual commercial interest rate say an average of 15 to 20 percent depending on the tenure.
Individuals with margin facilities from banks can now exchange their short term bank loans for the long term government bonds, paying the same interest rate to the government that they were paying to the banks. The impact is that it will reduce the immense pressure placed on retail investors to sell their shares in a bid to cut their losses and pay off their loans. The sell side pressure on the exchange will almost be eliminated with this initiative.
Then to boost the buy side of the market, the reverse bond should also be made available to all retail investors interested in buying shares. That is the government can buy three year bonds from the banks for onward sale to retail investors willing to invest in the capital market.
This will automatically make available long term funds for investors in the market at commercial rates. With this strategy, the government will make money while restoring liquidity and confidence in the market without taking out the element of risk which is a key part of any functional and efficient capital market in any part of the world.
It will also help to reposition the market as a place for long term investments and set long term yield curves for capital market investment. The bonds will mature in three years or more during which, hopefully full confidence would have been restored in the market. Investors holding the government bonds can now redeem the bonds from the government.Â
In fact the initial attempt that led to the ill advised one percent downward fix of price movement on stocks can largely be blamed for the current state of the market. This fix artificially stopped the market from bottoming out and led to a loss of confidence in the market that is becoming difficult to restore.
The Exchange fortunately after much criticism saw the folly of the fix and removed it. This saw the market plunge, and then rise. But the rise was short lived as the bears have returned seemingly stronger. Â Â In the last one week, we have seen the bears take complete hold of the market once more as less as less stocks appear on the gainers chart.
It has been the opposite when it comes to stocks losing ground however. Despite the fix of one percent drop, several stocks are on the losing side. Most stocks are currently on offer on the floor of the Exchange. Hard strapped investors are waiting for weeks and months to be able to make a sale. Even stocks like First Bank Plc that were as good as money in the market, now take weeks to sell and even then in little lots.
The question on the lip of investors is how we turn around this market? Several players in the market are calling for a bail out considering this is the trend in leading global markets experiencing similar market meltdown. What has not been agreed on is how to achieve this bail out in the Nigerian stock market. The NSE has been in the forefront of a plan to make listed banks put down a N100 billion each in a bid to raise about N600 billion to save the market.
This plan has many loop holes. First the market has lost over three trillion naira in the current melt down and so a N600 billion lifeline will just be a drop in the ocean. Besides it will be highly risky to expose 40 to 50 percent of the bank's capital base to a highly volatile capital market. A market meltdown subsequently could send these institutions down just the same way it is happening in America right now.
There are better ways to restore confidence in the market. Â The government can then intervene in the market in a market friendly way. This can be done by floating a "reverse bond". It is called a reverse bond because instead of the usual bond where the government pays interest on the bonds and borrow money from individuals and financial institutions, Individuals holding the government reverse bond will have to pay interest to the government instead.
This is how it will work. The government issues these reverse bonds with tenure of not less than three years to individuals only. Institutional investors should be exempted. The reverse bond should attract the usual commercial interest rate say an average of 15 to 20 percent depending on the tenure.
Individuals with margin facilities from banks can now exchange their short term bank loans for the long term government bonds, paying the same interest rate to the government that they were paying to the banks. The impact is that it will reduce the immense pressure placed on retail investors to sell their shares in a bid to cut their losses and pay off their loans. The sell side pressure on the exchange will almost be eliminated with this initiative.
Then to boost the buy side of the market, the reverse bond should also be made available to all retail investors interested in buying shares. That is the government can buy three year bonds from the banks for onward sale to retail investors willing to invest in the capital market.
This will automatically make available long term funds for investors in the market at commercial rates. With this strategy, the government will make money while restoring liquidity and confidence in the market without taking out the element of risk which is a key part of any functional and efficient capital market in any part of the world.
It will also help to reposition the market as a place for long term investments and set long term yield curves for capital market investment. The bonds will mature in three years or more during which, hopefully full confidence would have been restored in the market. Investors holding the government bonds can now redeem the bonds from the government.Â
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