The job of a central bank does not include improving the stock market, and specifically the banking sector index. But if you study the policies of the central banks, traders can model how stocks will perform overtime.
When the Central Bank of Nigeria (CBN) published the guidelines for the new recapitalization of Nigerian banks, I noted that markets could become inefficient where capital is designed to have “tiers” based on originations. Adam Smith in his invisible hands theory cautioned against that. So, if you structure your recapitalization to prefer people in New York, London, etc to invest in Nigerian banks (they export USD to Nigeria, but have to convert to Naira, to buy the equities which are sold in Naira), you are creating a tiered system.
The zenith of any efficient market is when Naira from New York, London, Umuahia, Kano, Ife, Jos, Nairobi, Moscow, etc all have equal weights. But when fudge factors are introduced to rank capital based on source, you destroy a market.
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Since that CBN announcement, the banking index has been going down. Recall my warning: “Remember, you cannot afford to annoy those currently investing in the Nigerian stock exchange (NGX), even as you hope for the Londoners, New Yorkers, etc to come. I have spoken as a village boy; I yield to the wiser people!”
According to Premium Times, the bleeding continues: “Sell-offs in Tier-one banking stocks on Tuesday extended losses on the Nigerian Exchange Ltd. (NGX). Notably, investors lost N38 billion or 0.07 per cent, as the market capitalisation which opened at N56.069 trillion, closed at N56.031 trillion.” This is not unexpected as I noted in my original piece that many current investors would be diluted, and to avoid that, many will dump bank stocks.
Yet, post recapitalization, massive value will return as these banks will have more war chests for deals, and they will make money. “Uwa bu ahia’ [the world is a marketplace] and beating it is what we exist for! The best have alpha moments, and when they do, you address them as “unu abiala” [have you people come?] even though only one man is standing there. Yes, in this marketplace, when men and women hit alpha in big ways, you address them in plural as they have ascended beyond singular pronouns.
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