NSE- Update. STOP!

Written by
Written by

Deolu Akinyemi

Some wonders are currently being performed on the Nigerian Stock Market, so the blood flow might be halted for a while, please read this before you take action! So you know the right time to exit. Particularly for speculators.

MARKET UPDATE- EMERGENCY GOVERNMENT INTERVENTION TO BOLSTER THE STOCK MARKET

At the meeting which the Federal Government, the CBN, SEC, NSE and bankers organized in order to restore investor confidence in the nation’s capital market, the following new proposals were agreed namely:

1. Share Price Limits: Daily price fall limited to 1%; Maximum price rise still 5%

Implication: Prices will fall at a slower rate now than before when stock prices could fall by a maximum of 5% in a day. Thus, a stock would have to fall by 5% over a week to have the same effect as before when a stock could fall by as much as 5% in a single trading day. In other words, a stock will have to fall by as much as 1% per day over 5 trading days before it can have the same effect as the previous rule whereby stocks could fall by as much as 5% in a single trading day. Hence, this new rule will bolster the value of share prices on the NSE, prevent severe share price and market declines.

2. Margin Facilities: All margin facilities with banks to be restructured for longer repayment period in order to prevent forced selling by banks which is the current cause of the downward slide in the market.

Implication: The banks are required not to carry out forced selling of margin portfolios. However, the banks will work out a repayment arrangement with the client in order to salvage the client’s portfolio from market losses if this proposal is adhered to by the bank, the existing forced sale driving the fall in share prices will cease,leading to a rebound in the stock market.

3. Share Buy-Back: Quoted companies will be allowed to buy back up to 20% of their stock.

Implication: Outstanding shares of quoted companies will reduce, leading to reduction in the supply of shares and upward movement in share prices.

4. Liquidity: CBN has started taking measures to improve the liquidity situation in the economy.

Implication: The improvement of the liquidity position in the economy will be a catalyst to drive business revenue and an expansion in the national economy. The release of N1.2 Trillion (US$10.2 billion) will exert pressure on interest rates, as
interest rates are bound to move lower thereby causing the cost of borrowing to be cheaper. With cheaper cost of funds, trading volumes on the capital market are bound to increase as money market yields become lower in comparison to stock market yields.

5. Transaction Fees: NSE, SEC and all capital market operators have all agreed to reduce their fees.

Implication: The reduction in transaction fees will drive more volume on the NSE which will inevitably lead to share prices moving upwards.

6. Government Intervention Fund: The Federal Government will set up an Intervention Fund to strategically intervene in the capital market when panics and crashes occur during times of crisis.

Implication: The market will rebound once the FG Intervention Fund is used to purchase a large amount of stocks in the stock market. The fund will also help restore investor confidence.

7. Market-Making: Rules on market-making to be rolled out; and modalities to be worked out with banks to fund market-makers

Implication: Market makers will be required to take up excess supply of stock in the market and they will also supply stocks during times of scarcity. The effect of this new proposal is that price equilibrium and stability will be created and investor confidence will be restored in such equities held by investors.

8. Curbing New Listings: The NSE and SEC to curb new listings on the stock market until the market stabilizes.

Implication: The liquidity squeeze in the market will stall as private placements and new offers will be kept on hold until the market has recovered and investor confidence has been restored, thereby preventing capital flight from the secondary market to the primary market for new listings. Thus, share prices will move upwardly rather than downwards as a result of this proposal.

In summary, net effect of the proposal is that market may rebound soon.

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