Activities in the stock market are still up beat and the indicators are consistently tending upwards. This has been a good development as profit taking investors harness huge returns through capital gains. But there seem to be serious concerns among some investors on the sustainability of the bubbling market.
The questions agitating their minds border on the sustainability of the soaring tempo, and for how long this can be sustained?
A review of movement of market indices shows that aggregate turnover at the Nigerian Stock Exchange (NSE) closed at N1.0 trillion on Monday July 23, 2007. This is historic, more so given the fact that this volume of trading was recorded in just seven months beginning from January 2007. This shows a leap of 99.7 percent compared to a turnover of N470 billion recorded in the full trading year of 2006.
The growth in turnover value has also rubbed off on the market capitalisation and the NSE all-shares index, which have exceeded N8.0 trillion and 51,000 mark respectively. This is as against a market capitalization of N5.12 trillion and index of 33, 189.30 basis points recorded at the beginning of the year.
Similarly, market liquidity or tradability of stocks as measured by turnover ratio, has shown appreciable growth in the seven months period standing at 15.6 percent as against 6.72 percent in 2006 and 6.59 percent in 2005.
By August 30, 2007, the market capitalisation plunged to N7.7 trillion just as the index depreciated to 49, 761.65 basis points. It however resumed an upward movement the following day and closed at N8.155 trillion for market capitalisation and 52, 452.85 points for the index on as at September 5. The market grew to a high of N8.336 trillion while the index closed at 52, 452. 49.
But some market observers believe that the growth is fictitious and simply has the character of a bubble that is waiting to bust any moment.
Their contention is that there are no tangible fundamentals that should drive the kind of growth we see in the market.
Brown Edobor, a stock broker Equity Capital Research Limited, said "Expectation, performance, and market awareness are some of the factors that have fuelled the growth in the market. These according to him are issues of market sentiments that may give a direction when related to issues of fundamental analysis."
To this he noted that the market for now is no more than "a river fed by heavy flood and will eventually find its actual level when the flood subsides."
Sunny Nwosu, of Independent Shareholders Solidarity Association of Nigeria (ISSAN) said the price movement in the Nigerian stock market is somewhat a mystery. "The price of the stocks move in a manner you cannot understand. They go up when you probably expect a downward movement and vice versa. And this increases the uncertainty you have as an investor about what happens to the market. So the best you do under the circumstance is to trade cautiously."
The consensus held by some others is that the stock market seems to have ignored major fundamentals after hitting several highs since the beginning of the year. The only moderation was witnessed about two weeks ago even as the market has continued to exhibit a measure of resilience in the past two weeks.
However, analysts are still saying that the market has not really moved in line with the fundamentals of some of the quoted companies.
They observed that fundamentally strong companies in fundamentally strong sectors should continue to do well compared to the rest of the market. These stocks would not be entirely immune to volatility. But they will hurt less in market downturns and be the first ones to bounce back.
Nelson Ine, stockbroker with Nigerian Stockbrokers Limited says the market has followed a particular trend and not ‘fundamentals’ because some of the stocks whose prices have been going up may not be able to sustain such prices in terms of performance. He noted that a lot of investors may have had their fingers burnt in the market because they used the fundamentals of the companies to make investment decisions.
Some analysts have been shocked at the rate the share price of Dangote Sugar refinery plc has been going down after an impressive performance in the half year and the company’s commitment to paying interim dividends (40kobo per share) twice this year. The stock which reached a high of N56.00 this year closed at N39.99 on Monday. First bank is also seen in this equation especially with its track record in terms of dividends and bonus issues.
According to Ine, some investors have taken to buying shares mainly on market hear-say and in the process create liquidity for such shares since other investors were bound to move in as soon as they notice the volume of transactions in that sector.
Indeed, the growth in demand for insurance stocks is said to have been prompted by expectations that the insurers would replicate what some of the banks have been able to do post-consolidation. On Tuesday, a total of 205 million shares worth N614 million were traded at the NSE.
Now let’s look at the analyst ratings and how they work. If there are 20 analysts following a stock and all 20 rate the stock as a "buy," what can they do from here? Can they upgrade it? Not really. If all 20 rate it a "buy," the odds of an upgrade are very small. On the other hand, the odds of a downgrade are much greater since the whole group ranks the stock as a "buy."
When you combine the sentiment with technical analysis, what you are looking for is an uptrending stock that has a lot of pessimism or a declining stock that has a lot of optimism. If the stock is moving higher, but the pessimists continue to doubt the stock, the trend is likely to continue as the bears shift to the bullish camp. The same goes for the downward trending stock that everyone loves. The trend is likely to continue as long as the bulls switch to the bearish camp. They will drive the price lower until there isn’t any optimism left.
Once everyone has joined the bullish camp, it is hard for the upward trend to continue. Likewise, if everyone is in the bearish camp, it is tough for the stock to keep going down.
This is how some people use sentiment to determine whether or not to enter a trade.
The other is the stock market, which until recently was being plumped up with easy credit and a wave of IPOs.
At least there’s a bit of realism to the expectation that these companies (and assets) can pull in the earnings to justify their inflated prices.
The believe among other observers is that even when the market seem to be over bloated, we are not going to experience a drastic crash situation as witnessed in the classical case of Enron or any other of such.
Okwor Emordi, a Stock broker said, "with the way the market is going, it is not unlikely that there may be a down turn, but certainly do not expect the kind of dip that happens in the more advanced markets."
He note that "what we may have is an isolated case of one or two stocks, blue chips possibly, but not a whole market. It may be in the manner of what we saw in the case of Cadbury." But even at that, the stocks in the market have shownS strong tendency for a rebound in the shortest time, he added.
But Aliyu Momoh, a senior official at the Strategy and Derivatives unit of the Nigerian Stock Exchange (NSE) said most of the companies have shown good performance that will sustain their performance in the stock market. This he added to a large extent rules out any fear of a down turn based on the results they the companies turn in.
Safiu Abubakar, an Abuja based investment analyst said "the bullish trend in the market is a function of strong buy orders generated by increased awareness towards the stock market.
"People are putting their funds in the market, and most of them do so not because of the immediate returns but because they have found that to be a better investment option than just having your money in the bank. So this increased awareness has become a peer-pressure kind of development. A situation like that comes without consideration to fundamental issues in the market."
He therefore believe that there may not be a crash as the stock market is still largely under invested and as more people push to go in, an upward trend will be triggered, based on the principle of demand and supply and not necessarily on considerations of market fundamentals.
Whatever situation that plays out at the end of the day, there is a need for the regulatory authorities to closely monitor the market to guard against any situation that will jeopardise the interest of investors and the market in general.