Professor Ken Ife, an economist, has warned that the concentration of Nigeria’s stock market in a small number of companies and sectors could expose the equities market to systemic risks and trigger investor exits if dominant sectors come under pressure.
Speaking during an interview on ARISE News monitored by The News Chronicle on Wednesday, Ife acknowledged the strong performance of the Nigerian Exchange Limited (NGX) but said the structure of the market required urgent attention.
“I think we have to congratulate the NGX because they’ve done well and even ranked number one in the world in what they’ve done.
“But there are systemic risks that we have to consider. And there’s also macroeconomic misalignment that we need to consider as well,” he said.
Ife said Nigeria’s stock market was less diversified than those of South Africa and Egypt, noting significant differences in the number of listed companies and sectors represented.
He said Nigeria had about 148 to 150 listed companies, compared with between 200 and 430 in South Africa and about 250 in Egypt.
“The challenge that we have is that when you have the preponderance of your stock market being the top tier with these companies, then first of all, they don’t reflect the GDP of our country. It’s only about 10 to 15 percent of the sectors that are actually being represented,” he said.
According to Ife, the concentration creates systemic risks because a shock affecting dominant sectors could have a wider impact on the market.
He cited the 2008 global financial crisis, when the US subprime mortgage crisis triggered a meltdown in the banking sector, noting that Nigerian banks also came under pressure during the period.
“So that over-concentration could cause problems. And then you can actually force people to start exiting our markets simply because of that fear of contagion. But if you are balanced, then you have a better chance of dealing with this. So that’s part of the challenge,” he said.
Ife also raised concerns over the limited proportion of shares made available to the public by some domestic conglomerates, saying the situation could influence the behaviour of foreign portfolio investors.
“But there’s also one issue too, because if you look at those domestic conglomerates, it’s only a small proportion of their shares that they bring out to the market. Foreign portfolio investment go for those. Now what happens? Then one thing could trigger their exit,” he said.
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He added that the concentration could make it difficult to obtain a broad assessment of the value of Nigeria’s equities market.
“Secondly, in terms of valuation of shares, you don’t get a good view of the valuation because it is top-heavy and it’s concentrated and it’s only a small proportion of their listings. So you’ve always got that challenge,” he said.
Ife called for policies that would encourage investment across more sectors of the economy, arguing that broader diversification would reduce the risks associated with market concentration.
“There are quite some things that bother me on the macroeconomic fronts that we need to make sure we incentivise investment to move across the sector. So those are some of my views on this,” he said.
