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NSE freezes stock prices to halt slide

In a rare move, the Council of the Nigerian Stock Exchange on Monday imposed a freeze on the downward movement of stock prices that seemed to confirm regulators’ concerns about the consistent bearish trend in the market.

The significant price losses had been linked to the Central Bank of Nigeria’s directive to banks to suspend lending to support margin trading by stockbrokers and speculators.

Margin trading is the risky practice of using leverage or borrowed funds to invest in securities, which amplifies both gains and losses.

Unconfirmed estimates put the size of leverage in the stock market at 18 per cent or about N2.5tn, and this has been a significant factor in driving prices, especially in emerging markets.

It was learnt that the suspension, which resulted in the rather unusual scenario of 31 stocks gaining in price and none losing at the close of Monday’s trading, would be for one week in the first instance, while the NSE tries to persuade the CBN to rescind its decision.

It was also learnt that top officials of the CBN, NSE and the Securities and Exchange Commission were meeting over the matter, which was aimed at restoring confidence in the market.

Market capitalisation dropped by 13 per cent or N1.65tn on March 6, from N12.64tn to N10.98tn on Monday. The All Share Index also fell by 15 per cent or 9,963.40 points, from 66,371.20 on March 9 to 56,407.80 on Monday.

NSE officials could not be reached for comments on Monday, but stockbrokers said that all stocks that would have been marked down were to revert to the closing price as at June 6, 2008.

Spokesman of the Securities and Exchange Commission, Mr. Lanre Oloyi, said there was “nothing wrong” with the move without elaborating, when contacted on the telephone for comments on Monday.

A leading stockbroker, who did not want to be quoted, said the action was taken to prevent a free fall in the market, which had been under pressure since speculative activity was significantly checked by the dearth of borrowed funds being pumped in by highly optimistic speculators, relying on recent past performance..

“What they have done is not common, but it is aimed at turning around the market. The freeze is for one week, the market has been unnecessarily bearish and the NSE must intervene to an extent. The NSE should not allow the market to be undervalued,” he said.

The Assistant Managing Director, Apex Securities Limited, Mr. Amanze Olisaemeka, said the move was a deliberate attempt by the Exchange to halt the fall of stock prices.

He said, “You know investors have lost over N260bn in the past few days, and through administrative fiat, the exchange decided to checkmate further price losses. But what we should ask is: Does the factor of demand and supply no longer have a role in our market? Can the exchange wake up and freeze stock prices?”

However, the Chief Executive, Financial Derivatives Company, Mr. Bismark Rewane, said it was wrong for the NSE to attempt to rig the market, and described the move as “disorderly intervention in a chaotic market.”

Rewane, who said that while it was true that the market could be heading towards under-valuation, stressed that the decision to freeze prices could trigger a panic reaction from investors, who might want to exit the market once the freeze was lifted.

“What they have done is to introduce circuit breakers without any support,” he said, adding that the NSE and other regulators should have put in place a package to bail out some stocks, which were clearly undervalued to support prices and restore long-term confidence in the market.

He said that freezing the market now was a sign of panic by the regulators, which would make investors panic more.

He also blamed the scenario on the tendency of investors to “gamble” on the market. “If you borrow money at 22 per cent and invest in a market where dividend yield is two per cent, in the hope that prices will appreciate, that is tantamount to calling the stock market a casino, which it is not,” he said.

National Coordinator of the Independent Shareholders Association of Nigeria, Mr. Sunny Nwosu, supported the price freeze on the grounds that investors needed to be protected, while the regulators reviewed the policy on margin lending. This, he said, was aimed at checking the activities of speculators.

While advising investors not to panic, he said the market would continue to swing but would not bust, as Nigeria was still an emerging market with a lot of uncertainties as well as opportunities.

“The market is still growing and is largely speculative; there are a lot of uncertainties and the fundamentals may not really be there, but it will not bust. In fact, this is the time for people to buy at lower prices so that they can soothe some of the pains they are going through now.

“The market will bounce back, even if not up to the levels it was before margin trading was stopped,” Nwosu said.

He said the decision to stop lending for margin trading was taken to protect investors who relied on brokers for all their decisions but that it should be reviewed to allow for more liquidity in the market. - Punch

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