An article published recently by the Guardian newspaper’s Helen Oji expressed concern about the future of the Nigerian stock market in the face of waning interest from millennials, who are increasingly turning to alternative investment options in micro-finance, fintech, and cryptocurrencies. Stakeholders are reportedly worried about losing market patronage on the exit of the older generation, who thus far form the largest segment of investors. This article piqued my interest and mirrored the outlook of millennial investors I had interacted with in the past, who laughed and sighed when I suggested the Nigerian Stock Exchange as a viable investment option. What I found most concerning was the stark contrast between young Nigerian investors and my colleagues from business school in the U.K., who have constantly badgered me to scout investment opportunities for them in Nigeria. This article examines the long-term potential of Nigerian equities and aims to predict patterns of growth by analysing policy, social trends and economic data.
A 2008 study investigated the connection between stock market performance and economic growth in Malaysia by using annual data on real GDP growth and the Kuala Lumpur composite index. Findings revealed that causality runs from the stock market to economic activity and not the other way around. Therefore, policymakers have a significant role in ensuring the smooth operations and growth of financial markets. In recent times, a large portion of global stock trading volumes has been driven by retail trade due to the democratisation of access to the markets by fintech applications. For example, Robin Hood, a fee-less trading app, recorded $350 billion worth of transactions in 2020 alone. Several mobile trading applications have been launched in Nigeria over the past few years, leading to an uptick in retail trading volumes on the Nigerian Stock Exchange (NSE).
One of the most significant events within the fintech space in recent times was the first issuance of a sub-broker license for digital platforms to Chaka (a retail trading application). In December 2020, the Securities and Exchange Commission (SEC) released a statement banning Chaka for operating “outside the regulatory purview of the Commission and without requisite registration, as stipulated by the Investment and Securities Act 2007.” This came on the heels of a draft publication released by the SEC in July 2020 containing proposed rules for collaboration between fintech operators and brokers. Chaka understandably did not realise the need to obtain the license, leading to its temporary ban. Subsequently, a successful dialogue between Chaka and the SEC led to a resolution, and Chaka became the first company to obtain a sub-broker license for digital platforms. According to TechCabal, Chaka’s CEO noted upon obtaining the license that, “We’ve built a great relationship with SEC that we think will be beneficial for the whole ecosystem moving forward.” This was a major victory for the fintech space, as there now exists a clear regulatory framework for innovators and investors to work within. The SEC has a major role in promoting the stock market’s development and expansion over the next few years; ensuring fluid communication with stakeholders will be a significant factor in the growth of investor confidence and the market as a whole.
The Nigerian Stock Exchange was founded in 1961 and has 161 listed companies across a number of sectors. Many of the companies are market leaders within the continent and they have expanded their operations significantly with Nigeria as a base. For example, Access Bank started in Nigeria and now has subsidiaries in the Democratic Republic of the Congo, Ghana, Kenya, Rwanda, Gambia, Sierra Leone, Zambia, and the United Kingdom. Many other companies on the NSE, such as Dangote cement, United Bank for Africa, and Oando have experienced similar growth and expansion. If this trend continues, it is fair to assume that Nigerian companies will possess a significant market share of the continent’s major industries. While many young Nigerians have shied away from the NSE, several foreign investors have realised Nigeria’s potential and placed a bet on its growth. Zenith Bank’s second, third, and fourth largest shareholders are Invesco Limited, Russel Invest Management Limited, and Mirae Global Asset Investments. These three companies are based in New York and London. Most of the blue-chip companies on the NSE have similar patterns in shareholding and in my opinion, this poses a large risk to country’s future growth. It could be argued that if foreign companies increase their dominance in the NSE, Nigeria will miss out on a large portion of dividends from major companies, as they would be repatriated to investors outside the country. A number of Nigerian companies such as GTBank and Seplat Petroleum Development Company have been able to secure dual listings on the NSE and the London Stock Exchange (LSE). These have enabled access to a far wider pool of investors who have acquired shares in large amounts and driven prices higher over the past few years. Seplat’s share price has risen from N200 per share in January 2016 to N700 as at June.
The global market crash of 2008 led to the Dow losing $1.2 trillion of value in a single day. At that point, investors sold their stocks in panic and left the market in droves. While this was the point of maximum loss, it was also the point of maximum opportunity, and the few who recognised this were able to capitalise and multiply their wealth over the following years. Warren Buffet was one of such investors; during the financial crisis he bought large amounts of shares in American companies, and these investments were primarily responsible for making him one of the wealthiest people in the world.
In 1979, India faced its worst recession to date due to drought, falling oil prices, and political instability. The BSE SENSEX is an index comprising of 30 major companies on the Bombay stock exchange. SENSEX has been one of the best performing indexes in the world, providing a compounded annual growth rate of 16.1 per cent from 1979 to 2019. While economic shocks at different points in this time period led to temporary weakness, an investment of ₹10,000 in 1979 would have provided a return of over ₹45,0000,000 by 2019. Macro-economic similarities and Nigeria’s current economic challenges lead me to believe that we stand at a similar crossroad as India was in 1979. While many of the companies on the NSE provide value and are growing rapidly, they are significantly undervalued. Investors who capitalise on low stock prices and accumulate shares in market-leading companies may face a similar fate as those who invested in India after its largest recession and in global equities, in the aftermath of the 2008 financial crisis.
One of my favorite indicators for analysing stocks is the price to book ratio. According to Investopedia, “Companies use the price-to-book ratio (P/B ratio) to compare a firm’s market capitalization to its book value. It’s calculated by dividing the company’s stock price per share by its book value per share (BVPS)”. Book value per share is derived by subtracting a company’s total liabilities from its total assets. If a company’s price to book ratio is one, its share capital is equal to its assets minus liabilities, and the company is reasonably valued. A stock with a price to book ratio of three or under is generally considered a good buy. However, the retail frenzy surrounding global stocks has driven companies to high price to book ratios in recent times. For instance, Tesla’s P/B ratio is currently at 26; this means that Tesla’s share capital is valued at 26 times its assets, minus liabilities. This leads me to believe that Tesla and many other similar companies are overvalued. On the other side of the coin lies Nigerian companies. The average P/B ratio for Nigerian banks currently stands at 0.4. As such, the average Nigerian bank is valued at 60 per cent less than its assets, minus liabilities.
While I agree with Ms. Oji’s observation on scant youth participation, I disagree that this lack of participation will lead to the loss of relevance and eventual extinction of the Nigerian stock market. Instead, I am led to believe that the country may lose out on dividends and control of Nigeria’s largest companies if the current patterns of shareholder demographics are maintained.
Fiyin Osinbajo is a technology entrepreneur, who graduated with an MSc in Management of Information Systems and Digital Innovation from the London School of Economics and a BA/QLD in Law and Business Studies from the University of Warwick, UK.
