The dramatic turnaround of the secondary market for equities from third quarter of 2020, can be leveraged upon to achieve greater economic development for Nigeria in 2021.
Assuming inflation does not bastardize the economy, the low Interest rate environment which has worked for the benefit of equities secondary market can also revamp the primary market.
Since the global meltdown of 2008, Nigeria’s primary equities market has practically been inactive. Until recently, investors’ interest in equities had not risen to the point of emboldening Issuers to access the Market with offers for subscription.
Before 2008, the primary market for equities was an important hub of activities. Persistent offering of new issues kept the tempo of market expansion and capital formation for the economy. While the Capital Market was widening and deepening, investors had a field day grabbing opportunities both in the primary and secondary markets.
At the height of Market prosperity in 2008, The NSE formed N2.6trn new capital via equities for the real economy while, value of shares traded in the secondary market was N2.4trn. Up till 2010, activities in both primary and secondary markets were balanced. However, in recent times, the equities market has been standing on one leg. For instance in 2018, value of new equities issued was a paltry N32bn whereas, value of shares traded in the secondary market was N1.2trn.
Several factors combined to dampen Issuer’s and investor’s confidence in the primary market for equities. First and foremost was the high Interest rate regime in the economy post 2008 global meltdown. It crowded funds away from equities to debt.
Secondly, since past ten years, most stocks have been priced below their book values in the secondary market. This served as disincentive to Issuers who normally issue stocks at discount to Market.
Recent huge gains in the Market has changed that scenario. The meteoric rise in price of several stocks recently may have placed them above their book values. Therefore, stocks can now be issued at discount to attract investors.
If this unexpected transformation in the equities secondary market is not used as tonic to revamp the primary market, no useful gain would have been achieved by the economy. The primary market is essence of the Capital Market. It forms equity capital which the Nigerian economy direly needs to create wealth and generate productive employment for the teeming youths.
The Nigerian economy is bedeviled by massive mismatch in financing. Several long-term projects which require equities have been financed with debt. They need urgent refinancing to survive. In the first instance, inactivity of the primary market caused several enterprises into this misadventure.
A vibrant equities primary market can serve as avenue for privatization of public enterprises through offers for sale. Previous government administration missed the glorious opportunity to privatize the electric power industry through the Capital Market. However, the equities market is now very conducive for those privatised enterprises to raise their development capital.
Focusing attention on the primary market for equities has become overdue. It is the principal avenue for direct investment in the economy which is vital for sustainable development.
However, present opportunity should not be treated like in the past. The new equities capital formation drive should be more strategic. It should be carefully planned and executed to impact heavily on the strategic infrastructure Nigeria needs to make the economy self reliant.
As leader of Nigeria’s economic Council, Vice President Yemi Osinbajo needs to set up a national Committee, comprising of Ministers of Finance, Investment, Solid Minerals, Steel, Science & Technology, Education, Health and Transportation together with DG SEC, CEO The NSE, CEO FMDQ, CBN Governor, Dangote Group, BUA Group and Innoson Motors, to workout the modalities for raising equity capital to finance the country’s engineering infrastructure, transportation infrastructure, Chemical industry infrastructure, education infrastructure and healthcare infrastructure.
Unlike in the past, when every Tom, Dick and Harry besieged the equities market, the new initiative for capital formation should only be reserved for financing critical infrastructure. In meantime, no Stock Exchange should approve any primary issue of equities until the critical infrastructure issues penciled by the proposed Professor Osinbajo’s critical infrastructure committee are completed.
If monetary policy stance remain accommodative in 2021 and the economy successfully withstand inflationary pressures, the equities market can serve as veritable source of capital formation to strengthen the foundation of the Nigerian economy. The equities primary market is a far better alternative to foreign loans as source of capital for infrastructure development to avoid future suffocation by debt.
DAVID ADONRI
Vice Chairman Highcap Securities
