*Subsidy removal to challenge market profitability if ….
Retail investors are not likely to return if appropriate measures are not put in place to restore their confidence in the Capital Market.
This was revealed in an exclusive interview granted to The Business Intelligence Africa (TBI Africa)by Mr David Adonri, Vice Chairman of the board of HighCap Securities Limited, an active player on the trading floor of the NGX Exchange. He said investors need to be properly informed on the new approach to maximizing profit starting with the primary market, which has since transited to a wholesale market.
As a result of the book building process of public offering, he said retail investors need to be enlightened on how to key into the new process. This point, he said, is vital because most retail investors access the equities market usually through the primary market.
Explaining, he said lack of understanding of the new procedure can prevent them from taking the route they were hitherto conversant with, adding that retail investors also need to be enlightened on the e-Public Offering using the Portal of NGX through which they can process their public offering applications.
This, he said, is an innovative mechanism that offers end to end solution to the challenges when subscribing to new issues.
However, coming to the secondary market, he said several reforms have occurred over the years to forestall the reoccurrence of the near collapse of the Capital Market which ought to elicit investors’ confidence.
Hitherto, he said unregulated practices such as margin trading are now regulated. “Market Making is now in place to stabilize cash liquidity while Securities Lending has been instituted to stabilize stock liquidity. There is also a circuit breaker which can be applied to suspend trading if the market exceeds certain limits of volatility,” he said.
Above all, he said retail investors can now take their fate in their own hands by trading for themselves, real time and on line, using their hand held mobile devices from anywhere in the world.
With this trading power, he said retail investors can enter or exit their holdings in the equities market without third-party involvement, in which case, they can now react to any threat expeditiously.
Furthermore, he said the investment outlets in the Capital Market have been markedly increased. “Retail investors have greater latitude to diversifying into more asset classes so as to prevent the over concentration risk that wreaked havoc on many of them in the past” he said
With these positive changes in the Capital Market, it can be safely said that the Market is now safer and liquid enough to elicit the return of retail investors.
It will be recalled, in 1961 when the Nigerian Capital Market commenced operations, out of the 19 securities listed on the defunct Lagos Stock Exchange, only 3 were equities.
Then, institutional investors held sway in the Market as debt was their exclusive preserve. Following the indigenization exercises of 1970s, equities overtook debt and became the mainstay of the Nigerian Capital Market.
Equities continued to dominate from 1970s to 2000 as a result of inactivity of the debt primary market and increase in new equities issuance.
Although the primary market for debt was revived in 2000, the recapitalization programme of banks together with the so called margin loan boom to retail investors propelled the continued dominance of equities up to 2008 when the global meltdown damaged equities, forcing many retail investors into gasping for breath.
Nigerian retail investors have an affinity for equities. Very few of them understand debt. As a result of their concentration in equities, they were the driving force for the equities market for several years until the global meltdown set in.
While retail investors dominated the equities market, their aggregate investment sentiments directed movement of the market. Their financial contributions to the equities market were very significant. Their steady investment stabilized the market and enhanced its liquidity.
When they dominated the equities market, retail investors’ transactions smoothened volatility of the market. They contributed immensely to the success of public offerings, thereby keeping the primary market active and making the Capital Market attractive to Issuers.
Retail investors suffered calamitous losses in the equities market during the global meltdown in 2008 which forced their exit from the market. To date, a lot of them are yet to recover from that shock and even those who managed to recover, fear to return to the market.
As a result of their absence, institutional investors have ascended to dominance in the equities market, thus changing its dynamics. However, institutional investors’ impact on the market is not as momentous as those of retail investors when they held sway.
The void created by the exit of retail investors remains largely unfilled. The market continues to feel their absence and yearns for their return.
In spite of all the confidence boosting, Adonri said changes that have occurred in the Capital Market, retail investors are not likely to return if the market is not profitable. “Profitability of equities stem from appropriate monetary policies that gives higher yield to equities over debt and foreign exchange (forex).”
He added that fundamentals of the Capital Market, judged by profitability of listed companies which translates to profitable dividend payouts, is a crucial factor in attracting retail investors to the equities market. The performance of listed companies depends on several macroeconomic and social factors.
“Government policies and actions can influence these factors and hence shape the socioeconomic environment that makes businesses to flourish. Other than the challenges posed by pervasive insecurity, the excessive taxes and levies on businesses and Capital Market investments continue to serve as a disincentive to investments,” he said.
Conclusively, he said the profitability of listed companies could be challenged further this year if subsidy is removed without total deregulation of the Power and Energy industries.
Engineering infrastructure deficit is another challenge that must be surmounted to sustain the profitability of businesses.
The consolidation of government’s budget and discontinuation of excessive public borrowing which crowds out the production sector and equities can strengthen the fundamentals of the equities market, thereby making it attractive to retail investors, he added.
