Nipping In The Bud Perceived Bubble In The Nigerian Stock Market: Time For NGX To Recalibrate Daily Price Limit

The Nigerian stock market has been exceptionally bullish recently with share prices soaring since the start of 2024. Few believe that this momentum in stock price is correlated with the fundamentals of quoted companies. For instance, 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 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. Not 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%.

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? Apparently, 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.

In order 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%.

If the NGX finds reason to adopt this recommendation, it would not be the first to apply differentiated price limit as a market stabilization mechanism. In the 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.

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.
Uche Uwaleke is a Professor of Capital Market and the Director of the Institute of Capital Market Studies at the Nasarawa State University Keffi.