The stock market “yo yo” season (2)

For those who are afraid to invest because they think another 2009 Stock Market is here, they should be reminded that the circumstances are very different. The market has better regulation and the banks are clean to a large extent. And more importantly, there are now local institutional investors in our Pension Companies and a growing number of private equity companies, insurance companies with large balance sheets that have appetite for risk and the resources to underwrite profitable positions. These local institutions are there to take up the vacuum left by foreign investors who are very sensitive to currency devaluation.

Devaluation blues… right for the economy but came a bit late…

Devaluation seriously affects returns for foreign investors. What they gain in capital appreciation will vanish in a devaluation of the of the naira. That is why they are very sensitive to devaluation. Those investors, who are in naira have nothing to worry about, make as much naira as you can, when the market and the economy recover, there will be plenty of profits to use to adjust your portfolio against currency devaluation.

I personally feel devaluation at this time is a good thing, but a bit late. Chukuemeka Soludo, then governor of the Central Bank of Nigeria, during the last crisis of the stock market, also made the same mistake. We ended up having a massive devaluation, which dislocated the markets and the economy. He delayed in taking action to devalue when the effect would have been minimal.

The market will have to be monitored more closely. The CBN should set up a monitoring group to advise it on any stock market sign of weakness, and once we think the bearishness will have legs, we should immediately devalue the naira to preserve its value. It is better to have a series of minor adjustments to our exchange rates than the massive one-time action that tends to dislocate the markets.

Gradual adjustments will create good trading opportunities that may in future make the naira an international trading currency. We have the demographics to support it. We just need to push for the development of our infrastructure to move the economy to realise its full potentials.

The railways are the next revolution waiting to happen in Nigeria…

Unless we fix our railways, we will not be able to really reach our potential. Railways through out the country will move people around and integrate the people of this country. Ask all those who did their National Youth Service outside of their areas. All that is required to make it work like our telecom industry did, is to privatise it. Break up the businesses and create several regional units to be sold to investors/technical partners. It will create jobs with incredible economic activity in the country.
Can you imagine the opportunity for a Maiduguri resident to put his goods on a train and go to another region of the country to sell for better prices. The train can bring him to Lagos to sell and return the next day in comfort and shorter time. That will make labour mobility through out the country possible, labour mobility is always a good thing, not to talk of the tourism potentials and all that comes with it. This will be a hugh step in creating linkage opportunities in the economy.

The government should put its railway modernisation plans for bids for different routes and require bidders to have at least one international technical partner with a good track record. The revolution will be twice more impactful for Nigerians. The funding gap to develop our railways to achieve its goals is too wide for government to think that it can do it by itself. There is plenty of private money to fund it.

Make present Nigerian Railways, the regulator, and let them develop a very robust regulatory framework to grow the industry, and sell all its assets to private investors and use the proceeds to reinvest and de-risk the sector, to attract investors. The benefits will show immediately.

We all talk about the lack of interest in developing the solid minerals sector, people forget that no matter what you have in the ground, if you can not get it out and and get it to where it is needed, it is not valuable. This was the observation made by my good friend, Kunle Elebute of KPMG, at the recently concluded Capital Market Committee Retreat. The economy is waiting to be unleashed, once the right moves happen.

The market will be there to take those investors with faith, to the promised land. It is for these reasons that we think the stock market represents the best value right now.