Customs Street Advisors is a full service investor relations firm based in Lagos, Nigeria.

Fear and Loathing on the NSE: A Savage Journey to the Heart of the Nigerian Investor’s Dream

The past year has not been kind to investors on the Nigerian Stock Exchange. From the euphoria of 2007, the market has plumbed previously unimaginable lows. Typical of such U-turns of fate, everyone has denied responsibility for the roles they played in the descent to hell. For companies and investors, claiming to the victim numbs the pain. This week in NEXT, I use the extreme metaphor of the drug addict to show how investors allowed themselves to be seduced by the market highs and why companies, who arranged these fixes, encouraged the habit.

If the three Rs, namely reading, writing and ‘rithmetic are the foundation of basic learning in elementary school, for investors on the Nigerian Stock Exchange (NSE), the apposite Rs would be rancor, recrimination and regret. For them, intemperate, even if misconstrued, statements by the Central Bank governor, whatever the genuine intent, have only rubbed insult to injury. Today, blame and bitterness are their trademark sentiments. This is a tragic tale of an acid trip gone awry.

Four years of stellar returns on the bourse underpinned by high oil prices, economic reforms, a stable currency, foreign debts clearance and banking sector consolidation convinced many that the good times were here to stay. When the evil day arrived, it came with a ferociousness few could have foretold. Not even the doomsayers could have foreseen the fury of the dizzying reversal of fortune.

What followed was not a mere price correction to align domestic valuations with those in comparative sectors in other frontier and emerging markets as anticipated by analysts like Andrew Cuffe of JP Morgan in his May 2008 report announcing the initiation of coverage of Nigerian banks, but an aggressive repricing of risk that could scarcely have been foreseen by any local adherents of the Black Swan hypothesis. To call it a casual clipping of PE ratios would be a euphemism. It was the scraping and scalping of a lifetime. Bald for good.

In a July 2007 interview with the Financial Times, celebrated bear, Bismarck Rewane, the economist, cautioned that “the most conservative people that I know are saying ‘unload my entire portfolio, I want to go into the equity market.’ My sister-in-law does not know the difference between a stock and a bond, yet now she’s sold property to go into it. [Very soon] she is going to start crying.”

A week later, Yinka Idowu, head, corporate affairs at the NSE proudly announced that ‘for the first time in the Exchange’s history, aggregate turnover hit N1 trillion on Monday, July 23, 2007, while the All Share Index has exceeded the 51,000 mark.’ Juxtaposed with Rewane’s supposed spoilsport views, the NSE spokesperson’s voice was the more enticing one.

One voice warned, ‘you will lose money in future but I can’t say when with certainty’. Another voice whispered, ‘you have always made money in the past with certainty.’ Experience won the day. How else could it be? Why place bets against history?

Less than a year after, the public wailing on Customs Street, the stock exchange’s address, began. One investor asks ‘why did I not get out earlier?’ Another asks ‘why did I get in in the first place?’ Seed funds for a family house, savings for the children’s education, set-asides for a wedding, plans for a leisurely retirement, put-aways for the launch of an entrepreneurial venture and much more were all washed down the drain. Real people. Vanished hopes.

In all the years when companies were encouraging traditionally long-term investors to turn into stock price groupies they never stopped to ask what would happen when the tide turned. All that mattered was to feed the beast. Once hooked, these portfolio gluttons could never get enough. Like party-hungry sixteen-year olds in the prime of youth, they wanted in on every initial public offering, every secondary offering and every private placement. The wise guy exchange between two characters in Scarface, the movie, was written for them: ‘don’t underestimate the other guy’s greed.’ As the market index rose, these junkies kept getting higher. Another market close up, another fix. They forgot the Player’s Code: if you play the market, one day the market will play you too.

Does anyone recall the projections in the prospectuses? Can anyone remember the estimates for EPS and dividends in those documents? Not the companies anyway. They only paid lip service to those figures because they knew investors were too busy looking at the big board to study the small print. For better, for worse, companies succeeded in shifting the attention of investors from the performance of the business to the movement of the market. Capital gains were the new recreational drug and bonus shares the newfound shootup liquid. In the frantic search for veins to inject, very few paused to ask how much free cash these companies were actually generating. The syringe jab blurs your thinking.

It was all well and good to advertise public offerings with slides of the jagged share price trajectory pointing north-easterly. The fallacy was exposed when reality showed that there was no necessary and causal relationship between buying a stock and its price going up. The price movement is dependent on a wider set of relationships than simple supply-demand dynamics. Then bang! The market crashed. Forced to go cold turkey, the ex-addicts have checked into rehab picking up the broken pieces of their investments.

Those companies that did not involve themselves in these sinister habits still share some of the guilt because even when they knew that their share prices were frothy they refused to manage-down expectations. They too are passive collaborators.

The moral of the story is not for the investors. It’s for the companies. When the market picks up again, companies should resist the urge to get high on their own supply. They should stop obsessing about their share price and focus on the inputs used in valuation models. Take care of the business and the market would take care of itself. Now the years of indulgence have come to haunt them. Investors bought into the make-believe world that share prices would always go up. Right now it’s back to basics with a vengeance. Let’s make the Nigerian Stock Exchange a drug-free zone. Say no to drugs.

The original article can be read here on the NEXT website.

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