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CBN Governor says Nigerian stock market may be in a bubble

Onome Ohwovoriole by Onome Ohwovoriole
July 26, 2017
in Markets, Stock Market
CBN Governor says Nigerian stock market may be in a bubble
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In comments that may scare the investing community, Central Bank Governor, Godwin Emefiele said as part of yesterday Monetary Policy Committee (MPC) meeting held in Abuja. The MPC is a decision making body of the CBN that fixes the interest rate, and various ratios for commercial banks. According to the Governor, “the Committee noted the seeming bubble in the capital market, and cautioned on utilization of capital inflows.”

Why the CBN is sounding a note of warning

A bubble in the stock market occurs when market participants drive stock prices above realistic valuations. The Nigerian stock market was last in a bubble in 2008, shortly after which it crashed, The stock market crash was one of the factors that led to a banking crisis as many investors had borrowed money to buy shares, which they were unable to pay back. Banks were thus left with huge holes in their balance sheets, forcing the CBN to bailout some of them.  Some stock prices have gone almost 100% from January till date.

2017 is different

The Nigerian Stock Exchange (NSE) All Share Index yesterday closed at an all time year high of 35,065.47 points, up 30.48%. While the market is currently one of the best performing on the African continent, and in the world, investors are merely repricing stocks due to the devaluation that occurred in 2016. Priced in dollar terms, stocks in Nigeria are trading at a much cheaper level. A stock market bubble usually precedes a financial crisis. Nigeria however, is on the verge of recovering from a recession. The CBN may have issued the warning to individuals from speculating.

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What investors should do

Investors should exercise caution when buying stocks. Buy into companies that have good fundamentals and  are  trading at a reasonable price to earnings (PE) ratio. PE ratio, is the figure you get after dividing the price of a stock by the amount the company has made in a year or period. The PE ratio gives an idea of how long it will take to recoup an investment in a stock from its earnings.

Tags: CBN NigeriaDeepdiveGodwin EmefieleNigerian Stocks
Onome Ohwovoriole

Onome Ohwovoriole

Onome Ohwovoriole has a degree in Economics and Statistics from the University of Benin and prior to joining Nairametrics in December 2016 as Lead Analyst had stints in Publishing, Automobile Services, Entertainment and Leadership Training. He covers companies in the Nigerian corporate space, especially those listed on the Nigerian Stock Exchange (NSE). He also has a keen interest in new frontiers like Cryptocurrencies and Fintech. In his spare time, he loves to read books on finance, fiction as well as keep up with happenings in the world of international diplomacy. You can contact him via onome.ohwovoriole@nairametrics.com

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Comments 2

  1. Solomon says:
    July 26, 2017 at 3:01 pm

    I wonder how long more before the crash. Inasmuch as the CBN was right to give warning, I’m sure this move would impact the stock market patronage a little bit at least.

    Reply
  2. Anodebenze says:
    July 28, 2017 at 2:35 pm

    Such crashing in 2008 could have been prevented.optimism happen because Nigeria have been compressed.But,with the advent of freedomi in1999,caution was thrown through the window,side-wayed. Growth,in 2004 in the economy did grew to 30 %.the best growth economic in Nigerian history.i.e something happened,that if the economy repeat this scenario in 2005 and 2006,the economy will have a sort of balancing.i.e it would have brought some factors/elemrnts that will balances at least the capital market,and the management of the nse and the regulating authority failure to takes correcting measures.
    Me thinks they saw this crashes but failed to act,they did not need to be a genius,an intial reaction is that the capital is still dry like crayfish,why not uses a dry stockfish,which is common sense,you must be prepared,you do not knows,when you creator will take your lifr when it is sweet or when it is the sweetest part of your life.
    Like jesus said the 10 foolish virgin or the wise virgin at the wedding.all that glitters is not gold

    Reply

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