The 166 stocks listed on the Nigerian Stock Market had a market capitalization of about N12.9 trillion as at the end of September 2019. Market capitalization is basically the combined value of all stocks listed on the exchange at any period.
Stock markets the world over consider market capitalization as an indication of how well funded and valuable the economy is, at least from the point of view of companies who employ the majority of their citizens and contribute immensely to tax revenues and dividend payment to shareholders. Thus, it is not surprising that most analysts like to relate their stock market size to the size of the economy (GDP).
Take, for example, the United Kingdom, which is just 6 hours away from Nigeria by air. The country Kingdom has a market cap to GDP of over 100%. The United States likewise has over 130% as its market cap to GDP. Nigeria’s African neighbours, South Africa reports an even higher market cap to GDP ratio of about 260%. World Bank data places market cap to GDP ratio at over 90%.
World-famous investor, Warren Buffet once remarked that whenever the ratio of market cap to GDP is over 100% it could indicate that the stock market is overvalued signaling a possible market downturn. Thus, investors track this metric religiously.
Nigeria’s market cap to GDP: Using the market capitalization of N12.9 trillion as of September 2019 and nominal value GDP of N129 trillion as of December 2018, Nigeria has a market cap to GDP percentage of 10%. Nigeria’s market capitalization to GDP is one of the lowest in the world.
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In fact, about 6 Nigerian companies listed post about 6.5% of GDP indicative of the relatively low valuation of most of the stocks listed on the exchange. The companies are as follows;
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What this means: A low market cap to GDP implies several issues that you should expect should be a major concern to investors and managers of the economy. Here are some examples;
- It suggests that Nigeria is basically dominated by smaller informal businesses. Data from the NBS buttresses this view as over 45% of the GDP is made up of the informal segment of the economy.
- Most large companies won’t list on the exchange for several reasons. MTN which just listed was coerced to list after its several skirmishes with the Nigerian Government.
- Startups and small businesses don’t consider the Nigerian Stock Exchange as a plausible exit for early investors. Since the banking consolidation of 2005/6 which saw many privately-owned Nigerian Banks list, we have not seen a repeat.
- There is also a considerable lack of interest in the stock market by retail investors. Nigerian stock market is largely patronized by institutional investors. However, retail investors typically provided huge source of capital and liquidity for the exchange.
- It also indicates that the stock market is not reliable for raising capital. As such, companies that need capital will rather list on foreign exchanges than in Nigeria.
- Another potential impact is that with a shallow stock market there are fewer investment options for Nigerians to invest their money.