The Capital Market has lubricated the economy

By Emmanuel Agwoje The performance of the Capital market since the consolidation of the banking industry has accelerated the growth of the Nigerian economy. The re-capitalisation in the insurance Industry has also helped. Emmanuel Agwoje, chief executive officer, Equator Capital ltd, in this interview with Maduka Nweke explains the unfolding issues in the market.

Performance of the market in 2007 It has been an exciting year; we saw a point when the market witnessed rallying prices when prices go to their peak. We also a period when prices dropped sharply, the bearish period when prices got to almost what I can call the teething point. We are witnessing what I can call, market readjusting, when the prices of the market are readjusting to realities surrounding the companies listed on the Exchange. So we are expecting that the development within this period will probably occur between three to four months a quarter before we begin to see vibrant activities in the market. But the market in 2007 has been extremely exciting. There have been a lot of lessons to learn with some developments in the market. We saw a market that was much more profession, was much more responsive, that was based on the basic, on the fundamentals of stock market operations. So, in terms of reevaluation of 2007, the year has been characterized by market fundamentals. I have also seen a lot of issues, new issues, re-issues coming to the market, so it has been a vibrant year.

Possibility of market bubble bursting I do not share the sentiments. However, it is natural for people to think that way, it is normal for people to feel how far this Bull Run could hold. It is natural in every market. The fundamental question is whether the market is moving in line with the development of the economy if there is a strong correlation between the economic growth, economic fundamental and market fundamentals. If the economic fundamentals are right, then you dont expect that there would be a crash. We saw what happened in America. There was a time when people thought the market was going to burst. People thought that with the way the market was going, there was going to be a collapse. But we have not witnessed market collapse in the New York Stock Exchange. Well, once in a time, you find market gyration. The market gyrates; but it does not collapse. That does not lead to total collapse. It is only when there are fundamental economic shift that, economic variables that you find that kind of situation. Right now, we are not there, rather the Nigeria economy is moving very well. There is more discipline in the way the economy is managed and reserves are increasing. Companies are going up; the new companies are doing well. There are the fundamentals that would create enabling environments that will enable industries to operate effectively. So if we have these kinds of things go on, we do not expect that there would be crash in the market; rather you would expect that the market would experience the normal gyration and continue to move in line with economic

activities., Yes there might be some market exuberances, some irrational exuberances by dealers, it happened in the New York Stock Exchange, NYSE, where Alan Greesspan had to lambaste the dealers for exhibiting irrational exuberance. We have some of them here, but we cannot say because of that, the bubbles in the market will burst. The market is moving in line with economic activities and I think that is the way it should move globally.

Collusion of Banks and Stock Brokers to raise share prices I call that idle market talk. I think the issue is the underlying fundamentals of these banks. We need to know the relationship existing between these fundamentals and there market values. When we begin to understand things, we then begin to understand the issues surrounding price movements of bank stocks. But it is for me nonsensical to think about collusion between the banks and stock brokers. These are really idle market talks. The real issue should be whether the fundamentals to banks stocks reflect the fundamentals. Today, in the Nigerian Capital Market, banks are profitably the most capitalized stocks in the market in terms of capitalization, in terms of profitability, in terms of activity within the economy. So you expect that sector of the stock market will witness more activity in the market than any other sector. It happens in other stock markets of the world where there is major activity going on in a particular sector of the economy; you would find out that stocks within that sector will elicit more response. The issue is that if banks and stock brokers are colluding, you will definitely come to a point when the market will no longer accept it. It is a free market; it is not a market where things are overtly controlled by some players. It is a free market where people buy and sell things. So if there is issue of collusion like that, the market has a way of somehow correcting itself. And I think that is what we have seen. I am not saying you may not have a situation where some stocks are over priced, or under priced as the case may be. It happens in every market but at the end of the day, what you find out is that the market corrects itself because it is free market.

Share Price Manipulation As a professional, I would not like to talk about this but again, you find out there is no market that is perfect, whether it is a developed market or emerging market. You cannot rule out a possibility of manipulation by players within the market. We have seen cases like that happen in advanced Capital market but in the Nigerian market, the market has been so well managed. We can say to a large degree of certainty that the market has improved over the years in terms of professionalism. And we expect that as we continue to grow as a country and as the market continues to grow and become more developed, there would be greater professionalism in the way we do business and the way we conduct ourselves as market operators.

The Fundamentals that drive share prices

The Nigeria Capital Market is one of the most capitalized capital markets in Africa; one of the largest markets in Africa. And if you are sure that Africa is an emerging market, then it means it ranks very high in the emerging market environment. So what we should be talking about may be what is happening in the market? Whether it is reflective of what we expect of a typical market. In my own opinion, I think yes. What is in the Capital Market is clearly a demonstration of what the country can achieve or what the people can achieve if they consciously make up their mind to drive their economy. What is happening today all started with the bank capitalization. We saw how the banks all came to the market. That time there were a lot of skeptics because a lot of people believed that market did not have the capacity to deal with those issues that were coming. But we found out that the market has developed beyond more than expectation. The market today has been wide enough to accommodate all the issues. And there are a whole lot of issues that are coming in. The market has been able to rekindle interest in investment in stocks. So the determinants of the market includes, the state of development of the economy, the performance e of the companies themselves and the individuals perception which you can manipulate, individual perception of the stocks and the sector. I dont call that manipulation; I call them individual perception of the stock in which they want to invest their fund in.

Decentralizing Trading Floor on the NSE It is a good development and would make a whole lot of sense. We are in information driven age. There are a lot of things that happens in IT. As professionals, we should constantly open our minds to on gongs in the system, if you decentralize the stock trading in such a way that you have transactions taking place different locations, it is just perfect and something that is in tandem with global development. It is not something that is new. So if we should have various trading floors, which of course we have presently making them real trading floor, it will be good. We have trading floors in Benin, Onitsha, Kaduna, Maiduguri, Ibadan, Yola, Port Harcourt and a whole lot of other places. I think with time and development, more and more trading floors will spring up. So if you decentralize trading, there is nothing wrong, rather what you are doing is helping to accelerate the deepening of the market. I think it is in tandem with global development, global best practices. I think it is good for the market.

Increasing Capital Base of Stock Broking firms I think that issue is a very touchy one. It is difficult for me as a practitioner to make a categorical statement on such matter. However, I understand presently there are some colleagues of mine who are pursuing that goal, trying to see if there could be reduction from the present 1 billion to something lesser, say N500 million. If you look at the various arguments that are going on, you find out that for and against, have their own points. I think that the increase in capitalization will make us much more professionals, make the market stronger, make practitioners committed to their profession; then I am 100 percent in support of it. But we need to be careful so we do not do things just for the sake of doing it. The stock broking business is quite different from banking. They are all financial businesses alright, but let us not fall into the same trap because we increased the capitalization of banks.

There must also be the increase of capitalization of Stock broking companies. What they do manage assets and funds. But it is not capitalisation of stock broking firms. We need to increase the capitalization of stock broking firms no doubt. We need to have stronger companies operating financial services within the system. Banks are the custodians of peoples money; they need to be properly capitalized so that they can be stronger. Stock broking companies dont. What they do is manage assets and manage funds. But it is not to say you must have weaker companies that are not properly capitalized as stock broking firms. So it is neither here nor there. But whichever way it goes, for me, the important thing is that at the end of the day we have strong companies that are providing financial services in the country.

Culled from Nigeria's BuisnessDay, Sunday December 30, 2007