Uche Uwaleke, a professor of Capital Market and the Director of the Institute of Capital Market Studies at the Nasarawa State University, Keffi, has urged the Nigerian Exchange Limited (NGX) to designate banking stocks as Systemically Important Stocks (SIS).
In a statement, Professor Uwaleke said this became necessary to make the stock market more resilient, curb the current speculative frenzy and dampen any extraordinary volatility swings on the share prices of banking stocks in particular.
He, therefore, called on NGX to proceed to narrow their daily price limit from ten percent to five percent in the meantime, while the price limit for other regular stocks is left at 10 percent.
”To make the stock market more resilient, curb the current speculative frenzy and dampen any extraordinary volatility swings on the share prices of banking stocks in particular, the NGX is advised to designate banking stocks as Systemically Important Stocks (SIS) and then proceed to narrow their daily price limit from 10 per cent to 5 per cent in the meantime, while the price limit for other regular stocks is left at 10 per cent,” he said.
Uwaleke said if the NGX finds a reason to adopt this recommendation, it would not be the first to apply differentiated price limits as a market stabilization mechanism.
He noted that China’s Shenzhen Stock Exchange (SZSE), for example, set its limit to 10 percent for regular stocks and five percent for stocks designated as special treatment (ST) stocks, noting that studies have shown that by constraining prices, wild intraday price swings are prevented from occurring, which, in turn, translates to lower market volatility.
He stated that against the backdrop of the likelihood of limited forex gains on the part of quoted banks, following exchange rates unification as well as downside surprises in the stock market in 2024, investors will be well advised to follow the time-honoured cautious path of diversification, hedging, and long-term (DHL) approach to investments.
The professor noted that the Nigerian stock market has been exceptionally bullish recently with share prices soaring since the start of 2024.
According to him, few believe that this momentum in stock price is correlated with the fundamentals of quoted companies.
Uwaleke noted that like a tide that lifts all boats, the bounce in banking stocks may be pushing the share price of many listed companies beyond their intrinsic values.
“Against this backdrop, the question that comes to mind is: are banking stocks in particular currently overvalued? The news of banking recapitalisation offers a theme to build investors’ hopes and dreams thereby creating a platform for a stock bubble. But reality often differs from dreams.
“There is an old saying on Wall Street that ‘no one rings a bell at the top’ which means that only in retrospect does it become obvious for most market players that the market has peaked.
“Much as there may be no bell at the top, discerning investors recognize that while the promised benefits of banking sector recapitalisation may ultimately arrive, they tend to take a lot longer than a bullish market would suggest,” he said.
