New NGSE Rules: Reducing Volatility, Enhancing Inactivity, Waiting For Smart Money

The Nigerian Stock Exchange (NSE), on the night of Thursday, October 10, 2019, introduced new share pricing rules that became effective effect the following morning.

The new pricing methodology was a welcome development, especially given the noble intention of the regulator wanting to create relative stability in the market, but at the expense of market volatility and price movements which remains the beauty of stock markets around the world as they seek to create and redistribute wealth in any market situation. This, however, depends on market fundamentals and considering the level of liquidity, which is a major factor here.

As traders and investors adjust to the latest NSE’s pricing methodology, 21 months after was introduced on January 29, 2018, resulting in the removal of the 50 kobo par value to allow equity prices to move as low as 1 kobo, where possible. We have seen the impact on the kobo stocks and activities on others that had stagnated for a long while, despite the potentials of the companies and the little amount needed to deal in these equities, but have not been attractive because prices in that insurance sector have remained relatively stable not been trendy meaning not moving up and down.

Looking at the sectorial indexes for the past 21 months, the insurance sector suffered the least decline, shedding just 3.95%, a situation that may be due to the ongoing recapitalization exercise, as well as the low activities in many of the stocks, with prices remaining unchanged for a long time.

Meanwhile, the Industrial and Consumer Goods sectors recorded the biggest losses, shedding 53.82% and 51.98% respectively, or more than half of their opening prices over the same period. They were followed by the Oil/Gas sector’s 38.32% slide; while the banking index closed 19.47% lower.

The import of the review is that, unlike in the past, where volume required to change stock prices were graduated, such that stocks selling at N100 and above per share required certain number of units to move up or down, just as those going for below N100 and, then, N5 each, investors now need a uniform 100,000 units to effect any price movement up or down on the NSE.

This may be temporary efforts to mitigate the persistent price decline that has seen many stocks trading at their five and 10-year lows and even more in recent times. This will slow down activities involving volume and price movements, especially now that liquidity in the market is low and the economy is struggling to find direction.

The high cap stocks that are trading above N100 at this point will not be attractive to traders, considering the volume and amount needed to move the price up or down. See the table below for clarification

Given the opening table above, the market now needs more money to remain active, considering the new NSE rule, because of the volume now needed to change the price. However, on the strength of liquidity level in the market and the economy at large, the market will likely become relatively stable and dull, with less volume and price movement.

This is because volatility is one of the beauties of equity investment, as it involves buying low and selling high.

From all indications, the volume traded has not been the problem of the market, unlike the lack of adequate liquidity to drive prices since smart money left the market.
Since 2008 and after the global financial meltdown, statistics show that the Nigerian stock market has been dominated by foreign investors, as a result of which any time they are in the market, stock prices rally, only for the market to struggle continuously and remain unattractive due to liquidity problem whenever they exit

.

This suggests that regulators should work on increasing market participation through more intensive investment education to improve liquidity in the market market-makers should be offered access to cheap funds, just like other critical sectors of the economy are enjoying today.

The NSE should also take the lead, by bring all financial market regulators- the Securities & Exchange Commission (SEC), Central Bank of Nigeria (CBN), National Insurance Commission (NAICOM) and National Pension Commission (PENCOM), to provide funds for the market by helping market makers access funds at low-interest rates.

This will significantly support share prices and attract the investment needed to drive economic activities.

As a result of the new price methodology, high cap stocks on the NSE are likely to remain inactive, while medium and low cap equities become the toast of traders, at least, until liquidity improves or smart money returns to the market.

Ambrose Omordion
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https://investdata.com.ng/2019/10/new-ngse-rules-reducing-volatility-enhancing-inactivity-waiting-for-smart-money/