NSE: Correction is pure response to market mechanism
The Nigerian capital market which had its bullish runs recently responded to market principles recently and relapsed into bears, but the development was too cold for comfort for speculative investors who feared that the global melt down has doomed the local market and therefore resorted to panic selling of their shares. The trend was however reversed last week as the bulls bounced back to reckoning.
The managing Director of Crane Securities Limited, Mr. Mike Eze who spoke to Daily Champion on market self adjusting principles and its effects on the Nigerian market, said that though the return of the bulls in the market may not be separated from the global positive market reactions that greeted the election of Barrack Obama as the 44th President of America, the market was keeping to self adjusting mechanisms.
“Their own market bottomed out and what we are experiencing here is a spill over of what has happened in their own market so the moment their own went to the opposite direction, our own followed in the same direction.
“The prices are very attractive now because most of the stocks are selling below par. What I mean by par is that a good number of them came out for public offer. For instance Bank PHB came out at N17.00 and it’s now selling for N10.00. Ordinary investors who are not even keen about the market rule will know that for this stock to be selling at N10.00 is a good buy. First Bank came out at N33.00 and it sold for below N19.00 the other day. Those are the factors that contributed positively to the turn around in the market.”
He said, “I know that before now the price movements was pegged to five percent upward and one percent downward, that was when we were expecting that government will bring out intervention fund and when they didn’t, the only logical thing to do is to remove the pegging so that prices will take their normal course of movement”.
Eze also said that the market has self adjusting mechanisms which control its price movements which tilt to the opposite sides, adding that market correction was brought to bear by the new rule on price movement which allows for five percent upward and down ward price movements. “This was brought to bear on the market when the one percent pegging on down ward price movement was lifted to five percent. According to him, the heavy fall in share prices immediately after the price movement was re-adjusted was a healthy development which also corrected itself.
The market has self adjusting mechanism, when it gets to certain price level it will automatically rebound.
You know that America has a way of effecting global economies and we are okay that the market has turned around again with that euphoria alone.
He said whole sale buyers like the pension funds managers, institutional investors and the foreign investors and some of the foreign investors left as a result of the downturn in the market, “but they still have their interest here. They left on speculative grounds because the fundamentals of the market were more than sound. And you know that foreign investors will have to do their analysis very well before they move into any market. So they knew that there was nothing mechanically wrong with our market.”
Eze further said: “leaving was a kind of relieve for them since there own market is melting down and they wouldn’t open their eyes and watch their investments in foreign countries also melt down. Because they have their agents around, there is the possibility that hey must have instructed their agents to that effect.
“What we experienced in the last couple of months was a colossal decline in the prices of stocks .the December affect on shares is even not as drastic as what we have experienced. Definitely people have to sell during the festive period. Even between yesterday and today people were offloading because they have held the stock for a very long time. So the logical thing is that since the market have started moving, let me sell and hold some cash.”
He said though the market will experience greater sales mandate in December, it does not mean that the market is going to return to what it was during the protracted bearish trading.
Victor Murinde of University of Birmingham in his abstract titled “Capital markets: Roles and Challenges,” said that even as capital market is largely influenced by fundamentals, Monetary policy also influence market behaviour.
Murinde said “a useful explanation of the impact of monetary policy on capital market performance is offered by the monetary portfolio hypothesis which predicts that a change in the money supply results into a change in the equilibrium position of money in relation to other assets”
He added “in the portfolio. Investors respond by adjusting the proportion of the asset portfolio held in money balances. However, because all money balances must be held, the system does not adjust until changes in the prices of various assets lead to a new equilibrium. The credit channel of monetary policy affects stock returns by influencing the credit position and investment level of the firm. Tight monetary policy increases interest rates, worsening the cash flow, net interest, and therefore the balance sheet position of the firm.
He said that as a result credit worthiness of the firm is reduced thereby creating credit constraint and reduction in investment. “Consequently, the value of the company goes down and stocks are no longer attractive whenever this happens to many companies, there is no doubt that the market under which the companies operate will be on the low side until the trend is reversed by the market self correcting mechanism.
“However, in order to tease out some causality issues, most empirical studies tend to investigate the impact of monetary policy on stock prices by specifying a simple equation consisting of the stock price index as well as expected and unexpected changes in monetary policy variables,” he pointed out, saying based on studies by Ngugi, Murinde and Green in 2005; there is an evidence of both unidirectional and bi-directional causality in both developed and emerging markets
Analysts told Daily Champion that one of the lessons to be learned from the recent depression in the Nigerian capital market is that investing takes discipline. A good strategy may take time to pay off. Noise, temporary aberrations, market reversals, fits of irrational exuberance followed by deep despair, and constant but irregular reversion to the mean are the norm. That could be defined as life on the capital markets, including the NSE. “Because we cannot force the market to meet our expectations, we must take the market on its terms and adjust to its trend. Over time each market should earn the appropriate returns according its risks,” he stressed.