South African telecommunications giant MTN Group, which operates in 21 African countries, makes its biggest operating profit in Nigeria. Yet the firm is not listed on the Nigeria Stock Exchange (NSE), so Nigerians contribute immensely to the company's wealth but have no say in how it's run.
Similarly, none of the International Oil Companies (IOCs) in Nigeria have listed their upstream businesses, the most profitable part of their operations.
The fundamental reason is that there are few investors to buy and sell their stocks.
According to Oscar Onyema, CEO of the NSE, there are 5 million investors on the bourse. Now, considering that over the past five years foreign investors have accounted for an average of 60% of daily transactions on the NSE, one can assume that at least 60% of the 5 million investors are foreigners.
This leaves only 2 million domestic investors in a country of over 160 million people - that's less than 2% of the population, compared to the U.S. where 54% of the population were stockmarket investors.
The NSE and the Securities and Exchange Commission (SEC) have commendably embarked on all kinds of reforms to encourage more equity listings on the NSE. What they haven't done is generate huge domestic investor interest in the market.
So who's going to buy and hold all the stocks when they list?
Foreign portfolio investors mostly hit and run, so the NSE can't depend on them for the long-term development of a highly liquid and sophisticated market. Domestic institutional investors, which form the bulk of domestic investors, are too few and too risk-averse to massively deepen the market.
Therefore, the NSE needs individual investors.
Here are three ways it could encourage more of them to enter the fray:
1. ONLINE STOCK BROKERAGE
I don't understand why you can't trade Nigerian stocks unless you go through an offline stockbroker.
Many of these stockbrokers do nothing but take buy and sell orders. At the extreme they hoard valuable insider information used as leverage in opaque dealings with unaware clients.
Stockbrokers who exist only to take transactional instructions offer no value. In fact, they are a dying breed across the world.
Most clients of stockbrokers already do the research behind their buy and sell decisions anyway, so why can't they have the option to directly transact online?
The NSE should compel stockbrokers to offer their clients an alternative online trading platform and should facilitate the provision of such platforms to overcome any technological barriers.
2. FOREIGN-INVESTED EXCHANGE TRADED FUNDS (ETFs)
At the moment there's huge interest from the international investment community in Nigeria's growth story. A few weeks ago, a new pure-play Nigeria ETF debuted on the New York Stock Exchange (NYSE).
Ironically, foreign investor interest in Nigeria has generated a reciprocal domestic investor interest in foreign equities.
Since foreign companies won't list on the NSE to give Nigerians direct access to their stocks, an alternative strategy that gives indirect access is NSE-listed ETFs that invest in foreign securities.
There's already a precedent somewhat with the December 2011 Absa Capital listing of the NewGold ETF - Vetiva Capital Management reportedly oversees the fund.
These foreign-invested ETFs could attract individual investors because they (investors or their stockbrokers) don't have to spend time and money to pick individual foreign stocks.
3. INDIVIDUAL INVESTMENT PROTECTION
In the U.S. the Securities Investor Protection Corporation (SIPC), a non-governmental non-profit founded and operated by broker-dealers, exists to protect small investors. The SIPC has been instrumental in encouraging individual investor participation in the U.S. stockmarket. Small investors know they can recover their cash and investments up to certain limits if a stockbroker goes bust.
Since individual investors mostly shun securities insurance offered by traditional insurance companies, the NSE could mandate its members to establish a SIPC-like protection for individual investors.
Obviously, protection limits have to be set to prevent a moral hazard of excessive risk taking by individual investors. Furthermore, individual investors could be required to post cash collaterals proportionate to their account values beyond protection limits.
CONCLUSION
There's just no way the Nigeria Stock Exchange (NSE) will grow if millions of individual investors don't invest in the stockmarket.
Nigeria's capital market regulators are making so much effort to attract equity listings to the NSE. However, the companies they're chasing know there are hardly any investors to buy and sell their stocks. Therefore, regulators should double-up on attracting more individual investors.
In any market, it's demand that drives supply, not vice-versa.
3 comments:
You aren't comparing apples to apples. Specifically, you are comparing investors to transactions. Most of the foreign transactions are high value transactions executed by fund managers. Even though 60% of the transactions may be foreign, it doesn't follow that 60% of the investors are.
That said, I agree with everything you have said otherwise.
Lanre
Lanre, you may be right. Transactions don't necessarily depict number of investors. That's why i made an "assumption".
Thanks for your contribution.
It is good to know that there are like-minded people out there with similar concerns about the slow pace of the NSE development.
Am a professional trader who have been trading the US and European derivatives with daily 4 out 5 profit taking in the last 12yrs.
Without VOLUME, VOLATILITY and DIRECT ACCESS to the market, you can never make money consistently and the NSE needs to address the dealer-broker intermediary bottleneck in order to advance the market to be at par with other developed markets.
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