Q: Kroll has seen a slight dampening of investor sentiment in the last six months due to the political backdrop – what are the macroeconomic factors that are influencing this do you think?
Oscar: The capital markets have struggled since July 2014 and in February 2015 we saw significant activity in the marketplace in terms of inflows and outflows. As the change of government materialised in May 2015 we saw what is now referred to as “the Buhari Bounce” when the stock market gained about 8% after dropping from over double digits over the six months previously.
Where are we today? We’re in a situation where there is uncertainty due to policy. The president has promised to name his cabinet so there has been much more volatility in the market as people take positions depending on how they view policy. This is happening against a backdrop of significantly lower crude oil prices – from over $100 a barrel to in the $40’s.
Recently, JP Morgan announced that it would be removing Nigeria from the emerging markets index for sovereign debt. I believe that will have very negative consequences for the capital markets as foreign investors that mark to the indices begin to rebalance their portfolios to mirror the index. That means that flows will be leaving the country to other places, both in the equity space and in the FX space.
Having said that, we believe that we have a very strong economy. It’s an economy that is now the largest and the most dynamic in Africa and we believe that with the good will the government has, as policy begins to take shape, as we begin to get certainty around the FX markets, you will see these flows come back and you will see a significant bounce in the market. So as far as we are concerned, it’s a circle that is driven by macro-economic shocks but if you look at the fundamentals of the economy and of the companies that are listed on the exchange, it continues to be strong and that is exhibited by the strong corporate results, especially in the banking sector.
Q: One of the things Kroll has seen in the last 12-24 months in our own client base is increasing demand from domestic Nigerian clients as against the longstanding history of work we’ve done for external investors coming into the country. Are you able to say a few words about whether the composition of the market is changing here in terms of local market listings and local market activity versus foreign participants?
Oscar: So let me give you some numbers, about 25% of the holdings in equities are held by foreigners and 75% are held by locals. But 60% of market activity is driven by foreigners. So you have a few people controlling the pricing in the securities and that is where you have the dislocation. The Nigerians tend to buy and hold and if you look at the split from the latest numbers, that is July 2015, it’s still about 60-40. We are trying to encourage the locals to take a portfolio view to the way they interact and engage with the market. If they did that and they had to rebalance and they had to benchmark to certain portfolios it would cause them to transact more and you would see more turnover and that helps liquidity.
Mark: I just wanted to pick up on a point that was made about the importance of the election here in Nigeria. There was no doubt that there was anxiety among the international investor community about what might happen around the election, but I think huge credit needs to go to Nigeria, the Nigerian political individuals but also to the Nigerian people, for delivering a peaceful election and a peaceful transfer of power, that has created a real exemplar for the rest of Africa. And I think that creates confidence in the international investor community, that investors, not just in the private equity space, but in the debt space, want to once again come and look at Nigeria.
The fundamentals for any successful economy are threefold:
- Democratic elections
- Good governance
- Creating economic stability to give business confidence to invest for the medium and long term
Oscar: Bringing together a pool of liquidity that is attractive to foreign investors outside of Africa because we do realise that as companies continue to go beyond borders there is a need to access them, as they are in regions which are not necessarily their home region. And so changes are made to the business models within Africa to support companies which are growing outside of their boundaries and then to support companies which are looking for international finance outside of the continent. We are also entering into partnership with the LSE to help these African companies which are looking for investment both in Lagos and in London.
Mark: To add – in the continued event that Nigerian companies investing both elsewhere in Africa and also elsewhere in the world, there is a significant role for Kroll to help Nigerian companies understand the markets that they’re entering, understanding the complexities of doing business in different legalistic environments, also doing due diligence of potential partners for Nigerian businesses. There is evidence that Nigerian businesses are not just investing in the traditional markets that they have done, like in the United Kingdom, but also in China, India, other parts of Asia, the United States and elsewhere in Europe. So I think Nigerian capital and entrepreneurial flair is becoming a global phenomenon, not just in this part of Africa.
Q: You mentioned the importance of good governance, and I think it’s becoming increasingly clear that the incoming administration would like to improve Nigeria’s operating environment in terms of integrity and corporate governance and transparency and I would invite you both to say a few words about how you see anti-bribery and anti-corruption trends and enforcement trends in the coming 12-24 months?
Oscar: The President is very positive and well received by both the local and international community. He is driving a fight against corruption and we believe that this fight needs to be institutionalised and needs to be sustainable. Using existing laws, creating new laws that would facilitate the drive to have higher standards in regards to corporate governance, with regards to anti-money laundering and the rest of it is critical. The exchange is also supporting the efforts of the government by creating a number of initiatives. The first one is the corporate governance rating system which is mandatory for all of our companies – it is a written system that really tries to gauge how well good corporate governance practices are embedded in the DNA of a corporate.
There are three key aspects to this rating system. The first one is a self-assessment by the company and the second one is really to engage their stakeholders – employees, vendors, regulators and other stakeholders to do independent assessments on the same metrics, and then we bring in an external stakeholder group to try to make sense of where the company has ranked itself versus where its ecosystem has ranked it. The next stage is a fiduciary awareness test which is a test that is administered to an entire board of directors, to make sure they understand their fiduciary responsibilities and that they understand the practices around good corporate governance as benchmarked against the security and exchange commission’s code of corporate governance and the listing standards of the Nigerian Stock Exchange.
So you bring all of that together and what you would like to see is that a firm has scored 70 and above – so if they do that then they’ve passed the corporate governance rating system.
We’ve also engaged with the United Nations in the sustainable stock exchange initiative, which is really an initiative that is designed because exchange is at the heart of capitalism, for us to positively affect the corporates, the investors, regulators and other stakeholders around us, in finding sustainable ways of doing business. Just this year we released our first CSR report and next year we will make it mandatory for all of our corporates to begin to provide reports on sustainability. We think it’s really important that every corporate lets people know what they are doing to drive sustainability in the continent, as viewed from an ESG perspective, so environment, government and social issues are becoming very critical on the continent.
Q: The final thing that we do to support good corporate governance practices is that we have really changed our rules, listing standards are benchmarked against global standards, the way we engage with our corporates is more seamless, we’ve introduced new technology such as platforms that allow corporates to report market moving information in a very secure manner. Finally we also make it very transparent as to what the compliance level of our corporates are. Are they filing their reports on time, are they meeting their listing standards, so transparency is also very critical in the way you judge whether good corporate standards are being maintained.
Mark: What Oscar has just described is hugely important and impressive because it creates an atmosphere here in Nigeria that will give confidence to the international investor community – not just to investors who invest in the Exchange, but also who invest in other corporate entities. The leadership comes from the top – both from the Stock Exchange but also from the new Nigerian president. Not just because tackling corruption is the right thing to do, but corruption of course hinders economic growth, it hinders job creation, it hinders alleviating poverty and therefore to try and change that could be a very significant driver for faster economic growth and economic development here in Nigeria.
I was very interested in your [Oscar] remarks about standards that corporates are going to have to reach and there are some straightforward things in addition to that which could be done. For example, unless a corporate reaches 70%, they shouldn’t be allowed to bid for procurement contracts from the government, therefore making sure that those corporates involved in services with the government are transparent and meet the criteria that you articulated earlier.
Q: What sort of themes do you think external investors should be thinking about if they contemplate moving into the Nigerian market?
Oscar: The feedback we get from investors is: they want liquidity, they want transparency, they want a marketplace that delivers a level playing field. They don’t want to be trading without all the necessary information – they want to be trading with the same information that everybody else has. So for us it is very important to make sure that we have very strong regulation that is investor friendly. It is important to have diversity of products, that market investors and participants can trade in and finally it is important that we have strong liquidity in these asset classes.
