The market has been on its knees, but darkness ends now – Kayode Okunola

Kayode Okunola takes his stocking broking knowledge seriously, no more so than in these times of crippling recession when listed companies seem to be dropping market values like nine pins. Nevertheless, despite last week’s 3 per cent fall in the once towering Nigerian All Shares Index (ASI) Okunola remains unfazed. A stockbroker with a keen interest in market trends, especially price chart movements and broad macroeconomic indicators, he is an avid believer in mild stock market resurgence in months ahead. He started his stock trading activities over a decade ago in 2005. Okunola is a chartered accountant and a chartered stockbroker; he was formerly head of stock broking at Capital Bancorp Limited and EDC Securities, but currently serves as an accounting software advisor at Broadview Advisory Partners Limited. Against his broad professional background he gives a brief insight into his interpretation of unfolding market developments.

How has the fall in oil prices affected the Stock Market?
A: The slide in oil prices has had severe and perhaps long lasting effects on prices of stocks trading on the floor of the Nigerian Stock Exchange (NSE), in the sense that foreign investors have dusted off their feet and made for the exit as far back as the last quarter of 2014. A second bogey bear for transnational investors has been the uncertainty around the external value of the naira. The to-ing and fro-ing of central bank policy over the last few months has built uncertainty into the financial system creating a situation in which foreign investors require a much higher risk premium than the market currently offers. Outside investors have taken the long term view that even if corporations declare attractive dividends and appreciable capital gains, by the time investment returns are converted to dollars, or any other foreign currency for that matter, investor’s could end up making negative returns. Nigerian foreign reserve, presently, hovers around $30 billion, and since the oil industry is the mainstay of the economy and international oil prices do not seem to be going anywhere above USD$56 per barrel any time soon (indeed it could actually dip by about 500 basis points given the threat of shale oil sales in America and Canada), there is little wiggle room to build up external reserves and strengthen the naira on a more sustainable basis. With the weak outlook for oil in months ahead foreign investors can be expected to remain fickle and wary. Indeed they may look at their books and decide to hop to safety by selling Nigerian stocks and repatriate the funds back home. This, in the main, seems to explain the high offer –to-bid ratios noticed on the stock exchange in past weeks and the bearish orientation of the market in the first six months or so.

Volatility in exchange rate has created a lot of uncertainty in the economy. How does it affect the Stock market?
If the stock market was a pure play local investor market, I would say that exchange rate volatility would have had minimal effect on it, except of course in respect of hurting companies that buy raw materials abroad, this could flatten their gross margins and squash net earnings. As it is, we have more foreign investors in our stock market than local investors. While foreign investors are doing about 60% of trades in the market, local investors are doing roughly 40%. So, if foreigners have that sizable share of market transactions, it means that the funds they bring in are dollar denominated, which are first converted to Naira before investment. As long as they see the threat of depreciation of the Naira, they will be jittery and avoid a wipe-out of whatever returns or gains made from their investment. They do not want to find themselves gaining on the trading part and losing on the currency conversion side as a result of Naira depreciation. As the Naira continues to slide, they will have an incentive to get their funds out to avoid currency losses. So, exchange rate volatility has had an enormous effect on the Stock market.

The cashless policy employed by Central Bank of Nigeria (CBN) is ostensibly a welcome development. What is your take on solving the teething problems that have accompanied the policy? Has it recorded any milestone achievement?
A: It has recorded a milestone achievement especially as a result of the way people transact business these days. It has, in my opinion, increased the volume of financial transactions as it has endeared people to cashless platforms. This is not to say that more cannot be done. It is the right policy and it was very good at the time it was introduced. But regulators should find a way of beefing up security around it because cashless policy has invited more fraudsters who are devising creative but devious means of beating the system. Therefore, the security part of the business must be improved upon so to sustain confidence in its use. What you find is that a lot of people are skeptical about cashless payment and settlement platforms as a result of their bad experiences in the past. If the security challenge is addressed, more people will embrace the cashless policy.
Even in advanced economies, you find people defrauding cashless platforms. However, the number of transactions they generate and the enormous benefits accruing from it compensates for fraud which is considered minimal when compared to the benefits. This is an area financial regulators should look at. Although, they may not be able to eradicate the incidence of fraud but it could be sensible to minimize it by introducing improved encryption algorithms that protect users of electronic transaction platforms.
Secondly, there is need to educate more people on the use of ATM Machines especially in the informal sector, where many are unable to operate the machines. Educating the public on the use of ATMs will go a long way in making the cashless policy a success.

Stock Market price correction strategies do not seem to bode well for the market. Hitherto, a stock is not expected to gain or lose more than 5% in daily transactions. Now, a stock is seen to drop or gain about 10% of its stock price in a day. Can you throw more light on this anomaly?
There is no free fall in the market. The structure of the market was adjusted to cater for these structural price adjustments on a daily basis. At pre-open, if a stock gains or loses the maximum 5%, that stock is allowed to do another 5% gain or loss when the market resumes proper. To buttress it further, at pre-open when the stocks are not merged, it can lose or gain a maximum of 5% and when the market opens proper, a new band would have been created and gain or lose 5%, thereby making the maximum 10% on a stock in a day. Thus, the traditional 5% is still there and so, it is a normal trading practice.

 A final message for investors?
My message to investors is not to stay too far from the market. I encourage investors to dive in and recover some of their book losses over the short to medium term. The thrust of my message is pretty simple; presently, a lot of stocks are trading well below their book values (Book Value means if the company is liquidated today, it is the value every shareholder will get as regards to the company’s net worth, meaning its assets less its liabilities). It means there is still a lot of hidden value in several listed companies and the various issues impacting adversely on the market can be expected to fade over the next three quarters. Issues like, depreciation of the Naira and falling oil prices will soon clear up and companies will be able to do more business and improve their return on equity (ROE) as sales figure increase and cost of goods sold slide with the strengthening of the naira.
Secondly, investors should move away from the usual bandwagon effect where they want to buy when everyone is buying or sell when everyone is selling. They should move to value investing and change their horizon from short term to long term. It is in long term that investors make money through dividend, scrip and capital appreciation. In my candid opinion, if I have money, I will continue to buy because I will not get the current stock prices again in a very long time. The low valuation of these stocks is an opportunity to buy.