No One Wants to Be a Nigerian Stock Trader as Volumes Plunge

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Stockbrokers are out of fashion in Nigeria.

Not a single company registered to become a dealer on the West African country’s stock exchange in 2019, according to Nigeria’s Securities and Exchange Commission. That’s a comedown from the record 19 brokerages accredited in 2006, before upheaval in the banking industry and the global financial crisis caused domestic equities to tumble from all-time highs.

It’s also the first time that’s happened in 19 years.

“There’s a lot of brokers that are finding it very difficult to make a living,” Temi Popoola, the chief executive officer of Renaissance Capital’s Nigerian business, said by phone from Lagos. “Revenue that brokerage companies earn has a strong correlation with the volume of trade.”

Shares changing hands on Nigeria’s benchmark index last year fell to the lowest level since at least 2009, according to data compiled by Bloomberg. Investors also have less equities to choose from, with the number of listings down to a 15-year low, as the economy struggles to recover from a drop in oil prices.

An early respite this year — which has seen a spike in average trading volumes and a world-beating stock-market rally — won’t last, said Wale Olusi, head of research at United Capital Plc. Besides, it’s not enough to prevent brokers from shutting down, he said.

Moreover, the central bank on Friday unexpectedly raised the amount of money lenders need to park with the regulator. The measure is aimed at reducing the supply of cash in the financial system, which if left untamed could spur inflation. Excess liquidity built up after the central bank late last year banned individuals and non-banking institutions from buying high-yielding government debt, pushing funds to the equity market.

‘Be Careful’
“We have to be careful in the equity market because it is not driven by any fundamentals,” said Bismarck Rewane, the chief executive officer of Financial Derivatives Co. “Earnings of companies have not increased so stock prices shouldn’t be increasing at a rate faster than their earnings.”

An investment in local bonds would’ve returned almost three times more than one in the Nigerian benchmark equity index over the past seven years, including dividend payouts to shareholders, according to data compiled by Bloomberg.

“Almost every person from our older generation has some cautionary tale on how much they’ve lost at one point or another in the Nigerian Stock Exchange,” said Akabogu Chukwudalu, an investment manager at Lagos-based Platform Capital. “The equity market is ordinarily supposed to return way more than the fixed-income market to compensate for risk, but this hasn’t been the case.”

An investment in local-currency Nigerian bonds has far outperformed equities
Nigeria is not alone. Macquarie Group Ltd., Arqaam Capital Ltd., Deutsche Bank AG and Credit Suisse Group AG have either pared back their operations or closed down some businesses in South Africa, where trading activity is also down. The number of listings in Johannesburg hasn’t been this low in 16 years as Africa’s two largest economies both struggle to get growth going.

Smaller Nigerian brokers focused on retail investors are being hit especially hard. Larger institutions can rely on pension funds and money managers for deals or diversify across asset classes, like commodities, currencies and fixed income. They can furthermore depend on affiliates in other countries to push trades their way.

The lack of opportunities at home is also prompting individuals to look abroad. This is allowing dominant brokers — like Renaissance Capital, Chapel Hill Denham Securities Group, Asset & Resource Management Holding Co. and Stanbic IBTC Holdings Plc — to stretch their lead by offering investors shares in blue-chip foreign companies or exchange traded funds.

New Skills

The Association of Securities Dealing Houses of Nigeria is trying to aid ailing members by training them in other asset classes, said Chairman Onyenwechukwu Ezeagu. It last year helped set up the Lagos Commodities and Futures Exchange, which the industry body expects will gain more traction from President Muhammadu Buhari push to diversify from oil by encouraging investments in agriculture and minerals.

The brokers are also in talks to handle retail fixed-income transactions through the FMDQ Securities Exchange in a bid to broaden their opportunities. That will give its members the right to handle trades of less than 100 million naira ($276,000), which are too small for banks, he said.

“The market has not been bullish so that reduces the number of houses,” said United Capital’s Olusi. “You need less brokers because technology can do some of these things we are doing.”

— Bloomberg

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