Nigerian Stock Exchange as a Laggard

On the day the market capitalisation of Apple reached a record $2 trillion (19 August 2020), the market capitalization of all the shares listed on the Nigerian Stock Exchange was a mere $34.65 billion (at N379 to 1$). Technology companies listed on US stock exchanges have had an incredible run on the back of increased demand following coronavirus induced lockdowns. Meanwhile, the All Share Index of the Nigerian Stock Exchange is down 6% for the year, as at 31 August 2020.

The Nigerian Stock Exchange (NSE) All Share Index, which measures market performance by comparing current prices with past prices, closed at 25,327 on 31 August 2020, that is 61.8% lower than the record level of 66,371 reached on 5 March 2008. At the peak, on 5 March 2008, the market capitalisation was $108 billion, which is still 68% higher than the market capitalisation as at 31 August 2020. This is despite the listing of Dangote Cement (2010), MTN (2019) and Airtel (2019), which currently account for 46% of the market capitalisation. The lacklustre performance has consequently made the NSE not very attractive even to Nigerian Pension Fund Administrators (PFAs). For example, at the end of 2017, PFAs had 8.9% of their portfolios invested in firms listed on the NSE. By June 2020, investment in listed equities has dropped to 4.73%.

So, what are the reasons for the poor performance by listed firms in the last 13 years? The most important reason is the weak economic performance in the last five years. Real Gross Domestic Product (GDP) has grown by only an annual average of 1.24% between 2015 and 2019 compared to 6.73% between 1999 and 2014. Even though share prices could deviate from fundamentals and general economic performance in the short-term, in the long-term, there is a positive correlation between the performance of the larger economy and performance of firms listed on a stock exchange. Therefore, given the poor performance of the economy, it is not surprising that listed firms are struggling.

The second reason is that only a few firms are listed, leaving potential investors with limited choice, which serves as disincentive. Furthermore, there is a lack of variety as the market capitalization is heavily tilted towards banks, Dangote Cement, MTN and Airtel, as they make up 66.3% of market capitalisation at the end of August 2020. Consequently, after a short while, most investors find their interest waning as there are few firms left to discover, if any, that can make a difference to their fortunes.

The third reason is corporate governance. NSE, under a new leadership, has improved transparency, quality and timeliness of reporting, since the market collapse in 2009. Nevertheless, investors are still wary, as quality of financial statements and disclosures still vary considerably amongst listed firms. The trust damaged by the insider abuses prior to the market collapse is yet to be fully restored.

The fourth reason is lack of financial sophistication amongst individual investors. For example, despite some stocks offering dividend yields much higher than what Bonds and Treasury Bills offer, individual investors still ignore the market. This lack of interest then feeds back into low share prices creating a negative loop. The lack of interest is partly due to limited financial awareness and sophistication by individual investors, which hinders their ability to appreciate the value on offer.

Lastly and importantly, per capita income has declined by 31% in the last five years. Nigerians are thus poorer and have less to save or invest in the NSE.

Therefore, the key to revival of trading on NSE and improvement of performance of listed firms is robust economic growth. As long as economic growth continues to be sluggish and below population growth, Nigerians will have less disposable income to invest in firms listed on the NSE.

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