As of late, the Nigerian All Share Index that seems to be on a “sugar high” could be heading for a noteworthy retreat as signs for a pull back become apparent. I am not suggesting turmoil in its capital markets but rather a sobering recoil that could mute leveraging in the interim. Nigeria recorded an extraordinary return for investors prior to the financial crisis that rocked the international capital markets in 2008. The All share index had an impressive surge of 74 percent in 2007 from the previous year. It reached a historical value of 57,990 points during that period.
The market experienced a solemn correction in the wake of the crisis, shedding almost two third of its value in the fall of 2009. The index, however, appears to be on a surge as investors recently and guardedly return to the market. The index 30 day moving average has been hovering around the 26,000 points range.
The Nigerian stock market has outperformed most emerging markets this year with a gain of 30 percent. The fact that the market could be heading towards a tipping point, calls for investors to monitor their asset positions closely. The looming precariousness this time around, lies in the on going euro zone debt crisis that has foreign investors taking defensive positions in their asset allocation. This is evident as Hedge Funds and Mutual Funds are squeezed with their fund placements making it challenging to invest beyond their borders. The ones that are invested outside their precincts are liquidating as they become protective of their investments.
No doubt, the risk of another financial crisis in the industrialized and developing countries is back on the table. Over leveraging on some of the country’s balance sheets and the awaiting failure to service such debt is creating uneasiness and sending panic. These balance sheets issues are causing countries distress which in turn has incited financial institutions that have exposure to them to reign in loans. The impending outcome is a tightening of money accessibility in the international markets as financing dries up and the spreads widen, making it more challenging and costly to raise capital. Global markets, including the emerging ones like Nigeria, will be impacted. The country is not immune. Nigeria is already a part of the global village and will endure some grief as a result.
Nonetheless, though downside risk persists, any shock experienced should be absorbed more effectively when compared to last years near collapse of its capital markets. This hinges on macro economic reforms that are in progress and investors’ taking the necessary steps to diversify and efficiently manage their portfolio. Last years breakdown was as a result of over-leveraging, exploitation of margin loan facilities and companies’ doctoring of balance sheets that rocked its banking sector.
Spain, late last week, lost its triple A credit grade to double A + at Fitch Ratings agency as Europe battles its debt crisis.The downgrade comes with a “stable” outlook. The country has held the top rating at Fitch for almost seven years. This follows Standard & Poor’s downgrade to double A on April 28.
Greece and Portugal has suffered from the same fate as their sovereign debt rating was lowered last month. United Kingdom is a concern for investors as the new coalition government (Conservative and Liberal Democrat Partners) undertake to rebalance and revive their economy by cutting the deficit and open up its markets. Last weekend saw the resignation of David Laws as chief secretary to the Treasury. This development, no doubt has cast shadows on the survival of the coalition as there are signs of internal policy disputes already. A dispute that could turn the complex spending negotiations on budget deficit on its head. Investors get stressed when there is uncertainty in government and undoubtedly this is not going to help the situation in the markets.
Chinese growth continues to be a problem for investors as they try to slow the pace of their economic expansion and inflation. This is as a result of increase house prices, inflationary wage increases and a continuing surge in money supply.
Past monetary policy measures introduced in the last month to cool the situation has so far proved unsuccessful. The growing inflationary strain has increased pressure in the country for further monetary measures that could pilot a sluggish global growth, as demand wanes and investors take a recess.
With these scenarios investors become cautious. International financiers under margin call pressure at home, coupled with their nervousness of Nigerian stock market over extending itself may choose to liquidate their equity positions. The outcome is an obvious cavity on its markets as they (investors) take a defensive position and vacate. This could send shock waves through its financial markets that is recovering as the ripple effect take its toll. The end result is a deleveraging of asset classes as they are marked down.
They have to be “marked to market.” The term “mark to market” (fair value) accounting assigns a value to a financial instrument that reflects the current fair market price for the instrument, or a similar instrument. This means that companies must value the assets on their books based on the latest market price those assets could be sold for at the given time.
International credit agencies are already monitoring Nigeria’s credit risks following last years market mayhem in its capital markets and are begging for transparency especially in the area of valuations. Lack of detail and pitiable accounting within the banking industry, restricted investor’s ability to make informed decisions on investment alternatives in the last years’ fallout. This weakened investors’ confidence and deterred them from participating and as a result markets were distressed.
Thus, the degree of the recent upward trend needs to be put in check to avoid another chaos that could create unnecessary headaches for a market that is already convalescing. Regulators and other market observers must carefully monitor global developments; especially the euro zone to make sure the situation does not get out of hand and contaminate its capital markets.
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