Professor Uche Uwaleke, Nigerian First Professor of Capital Market and the Director of the Institute of Capital Market Studies at the Nasarawa State University Keffi has urged the Nigerian Exchange Limited (NGX) to designate banking stocks as Systemically Important Stocks (SIS).
Uwaleke who stated this in a statement made available to Nairametrics said this became necessary to make the stock market more resilient, curb the current speculative frenzy, and dampen any extraordinary volatility swings on the share prices of banking stocks in particular.
Daily price limit from 10% to 5%
He called on NGX to proceed to narrow their daily price limit from 10% to 5% in the meantime while the price limit for other regular stocks is left at 10%.
- ” To make the stock market more resilient, curb the current speculative frenzy, and dampen any extraordinary volatility swings on the share prices of banking stocks in particular, the NGX is advised to designate banking stocks as Systemically Important Stocks (SIS) and then proceed to narrow their daily price limit from 10% to 5% in the meantime while the price limit for other regular stocks is left at 10%,” he said.
China’s Shenzhen Stock Exchange (SZSE) example:
Uwaleke said if the NGX finds a reason to adopt this recommendation, it would not be the first to apply differentiated price limits as a market stabilization mechanism.
- “In China’s Shenzhen Stock Exchange (SZSE) for example, this limit is set as 10% for regular stocks and 5% for stocks designated as special treatment (ST) stocks.
- Studies have shown that by constraining prices, wild intraday price swings are prevented from occurring, which, in turn, translates to lower market volatility,” he said.
He stated that against the backdrop of the likelihood of limited forex gains on the part of quoted banks following exchange rates unification as well as downside surprises in the stock market in 2024, investors will be well advised to follow the time-honoured cautious path of diversification, hedging, and long-term (DHL) approach to investments.
Exceptionally bullish NGX:
The Professor noted that the Nigerian stock market has been exceptionally bullish recently with share prices soaring since the start of 2024.
According to him, few believe that this momentum in stock price is correlated with the fundamentals of quoted companies.
For instance, he said in just one trading day on January 9, 2024, the benchmark NGX All-Share Index (ASI) soared 2,867.31 (3.57%) points to close at 83,191.84, representing a 1-week gain of 9.48%, and an overall year-to-date gain of 11.26%. FBN Holdings led the gainers with a 10% share price appreciation closing at NGN 28.60 per share.
- ” Indeed, Banking stocks, influenced by FOMO (fear of missing out) appear to be leading the charge not least because of the impending banking sector recapitalization announced by the CBN Governor.
- surprising, this sector has been invaded by Speculators resulting in all the tier-1 banks in Nigeria namely First Bank, UBA, GTBank, Access Bank, and Zenith (popularly referred to as FUGAZ) crossing the N1 trillion market capitalization mark. Just this year alone, as of January 9, Accesscorp had gained 28.3%, FBNH 21.4%. GTCO 19%, UBA 27.1% and Zenith 22.5%,” he said.
The bounce in banking stocks:
Uwaleke noted that like a tide that lifts all boats, the bounce in banking stocks may be pushing the share price of many listed companies beyond their intrinsic values.
- “Against this backdrop, the question that comes to mind is: are banking stocks in particular currently overvalued? The news of banking recapitalization offers a theme to build investors’ hopes and dreams thereby creating a platform for a stock bubble. But reality often differs from dreams.
- There is an old saying on Wall Street that ‘’no one rings a bell at the top’’ which means that only in retrospect does it become obvious for most market players that the market has peaked.
- Much as there may be no bell at the top, discerning investors recognize that while the promised benefits of banking sector recapitalization may ultimately arrive, they tend to take a lot longer than a bullish market would suggest,” he said.
What you should know
The NGX yesterday broke its six-day win streak as the NGX All-Share Index fell by 1.40% to settle at 82,024.38 points.
Losses in MTNN (-4.41%), ZENITHBANK (-9.93%), and GTCO (-8.71%) outweighed the gains in DANGCEM (+3.83%), BUAFOODS (+5.82%) and TRANSCOHOT (+7.24%) dragging down the market.
Consequently, the year-to-date (YTD) return decreased to +9.70%, while the market capitalization slipped by N638.85 billion to close at N44.89 trillion.
Analysis of the market activities showed trade turnover settled higher relative to the previous session, with the value of transactions up by 2.82%.
A total of 1.64 billion shares valued at N25.38 billion were exchanged in 20,223 deals. TRANSCORP (-9.94%) led the volume chart with 117.64 million units traded while GTCO (-8.71%) led the value chart with deals worth N3.28 billion.
