Last week, the continuous fall in stock price on the stock exchange was halted. In just few days, the stock market had gained over N500 over the value at the beginning of the week. The significant increase in the just few days came against the backdrop of a meeting between regulators and the federal government. More than anything, the meting was signal of the increasing stock of the exchange.
However, although the meeting has achieved the results that it desired, at least for now, it is obvious that some of the recommendation of the parley look very suspect, desperate and ad hoc, First, the new rule stipulates that the stock price of any company listed on the exchange is not allowed to fall below one percent of the previous trading day closing price. It is however, allowed to move up by five percent, before the meeting, the limit to the fall and rise of any share in a single day had been put at five percent.
Other directives that emanated form the parley include that firms can now buy back their own shares and a reduction in transactions cost by 50 percent. The global practice that firms can buy their own shares is over due. There is nothing wrong in a firm being able to buy its own share hen it is stragically beneficial for the firm to do so. This is usually the case when the firm thinks its shares are under priced on the exchange. Of course, the reduction in transaction cost cannot be argued against, as our stock market has one of the highest transaction costs of any stock market tin the globe.
However, the directive that the share price quoted company on the exchange is not allowed to fall below one percent on a single day is a desperate, misguided, erroneous, confused and manipulative measure. The impression that shares cannot fall, because in practical terms, they are not allowed to fall.
I am yet to see any fundamental imperative that suggest this measure will serve any good in the long run. Indeed, the exchange, by stipulating that a share cannot fall below a one percent limit one single day is alluding to the suggestion that, all along, the direction the direction of the value of the exchange has been driven, not by fundamentals, but by irrational exuberances, otherwise, are we saying the fundamentals of all the listed shares on the exchange will not call for more than one percent drop on a single day?
Future risk behaviour?
The appetite for investment in stocks in the NSE in the last few years has been driven by one main factor expectation of rapid increase of the share price itself, rather than the underlying expectation regarding the profitability of the companies listed, in my view, there are three major considerations for this.
First, is the presence of significant levels of liquidity in the financial system, something perhaps never seen before, Second, the sheer amount of retail investors betting on the stock market. Third, the clear absence of other channels for investment funds in the economy.
A lot of analysts have often labelled the behaviour we have seen in the stock market in the last few years as irrational exuberance. Perhaps that assessment is real to an extent, while it is actually possible to reconcile the short term expectation of their investments with the long term profitability expectation of the companies; the problem is that most of the investment has been conducted on the basis of short term rise in stock prices.
As millions of retail investors have invested their funds in the stock market, the recent meeting aimed at shoring up the value of stocks in the market will be welcome development. But one will also acknowledge that this is major sign of the immaturity of the exchange, As I expect strong development in the exchange over the next decade, I also expect an improvement in the composition and approach to stock market investment from man thousands of retail investor to hundreds institutional investors,
There are twin dimensions of retail investor that ensure a weakness in the system. Retail investor s has very little information about the companies they invest in. Second and directly related to the firs, retail investors lack basic necessary and required knowledge about the companies they invest in because they lack the capacity to conduct any serious research on the companies,
However, the greatest risk to the future of the exchange will be to think that we can have two different paths, for the exchange ht economy in the long run, The fundamentals of the economy such as consumption, investment, employment and international trade should drive the stock market, because they drive profitability of the companies on it, and not vie versa, Any pretext will be misleading., |
