NSE X-alert Initiative a booster for market efficiency?

Transcription

1 March 07, 2014 NSE X-alert Initiative a booster for market efficiency? 1

2 The NSE X-alert Initiative a booster for market efficiency? Market efficiency is somehow partly linked to transaction costs. Transaction cost on stocks trading is a major component that impacts on the level of net returns accruable to an investor. Analysis of the cost of buying and selling shares on the Nigerian bourse when compared with other bourses in Africa, developed and emerging markets save for Ghana shows a significant disparity. However, in a bid to further reform the capital market for increased participation, management of the Nigerian Stock Exchange most recently introduced a new product X-alert and consequently reviewed downward the transactions alert cost from 0.063% of the value of every transaction to a flat rate of NGN4 per transaction. This is expected to come as a relief to wide spectrum of investors, especially institutional and High-Networth-Investors (HNIs). Nevertheless the lowering of charge on SMS alert, total entire costs of transaction in Nigeria still remains high and un-competitive when compared with other peer markets in Africa as well as developed markets. While we welcome this new development from the Nigerian Stock Exchange, we are convinced that majority of investors will appreciate implementation of Federal Government announcement of abolishment of value added tax (VAT) and stamp duties on equities transactions as soon as possible to complement this initiative. Analysis of Transaction cost on Nigerian Equities Market The transaction costs on the local bourse are summed up to 4.04%, made up of broker s commission and statutory fees as depicted below. BUY SELL BROKERAGE (1.35%) 1.350% 1.350% VAT ON BROKERAGE 0.068% 0.068% CSCS FEE % VAT ON CSCS % TRANSACTION ALERT 0.060% 0.060% VAT ON TRANSACTION ALERT 0.003% 0.003% NSE FEE % VAT ON NSE FEE % SEC FEE 0.300% 0.000% STAMP DUTIES 0.075% 0.075% TOTAL 1.856% 2.185% SUB-TOTAL 4.04% Source: NSE 2

3 We conduct a scenario analysis of the effects that transaction cost would have on NGN1million investment spent on purchasing 130,859 units of ACCESSBANK, currently trading at NGN7.50 and assuming the stock appreciated by 20% before exit. This scenario would result in NGN18, 555 in fees being charged for the buy transaction, whilst NGN23, 594 in fees for selling the stocks. The net value of the investment would be NGN1.06mn (NGN55,995 profit, representing 6% gain as against 10% before deducting transaction costs), with charges totaling NGN42, 149 (42.95% of total profit). A further analysis shows that the brokerage fees on both buy and sell sides (NGN13, 500 and NGN14, 574 respectively) took the biggest share of total costs, followed by SEC fee (NGN3, 000) on the buy side, and the CSCS transaction fee and NSE fee on the sell side (NGN3, 239 each). Additionally, for both transactions (buy and sell), there is a further VAT charge of 5% on each summing up to NGN1, 790 which further shrank investor returns. BREAKDOWN OF 2013 TRANSACTION FEES BUY SIDE (NGN) SELL SIDE (NGN) Broker's Commission (+5% VAT) 13, , % VAT on Broker's Commission CSCS Transaction Fee , % VAT on CSCS Transaction Fee CSCS Trade Alert % VAT on CSCS Trade Alert NSE Fee , % VAT on NSE Fee SEC Fee 3, Stamp Duties TOTAL 18, , SUB-TOTAL (NGN) 42, Source: Meristem Research Transactions on the Nigerian Bourse Costly Compared With Peers The relatively high costs of transactions on the Nigerian Stock Exchange calls for concern to investors particularly at the retail segment of the market with such charges as the stamp duty still being charged on every transaction, which takes place on an electronic platform. 3

4 We embark on a comparative look at the cost of transaction across markets in Africa and establish that Nigeria s statutory fees (exclusive of brokerage commission) remain the highest not only in Africa but also across major emerging markets across the globe (save for Ghana which is almost at same level with Nigeria at 0.7%). Transaction cost for Nigeria and other African peers 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Equities Transaction of Nigerian and other global Markets 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Ghana Nig Mauritius Kenya SA Morroco Egypt Source: ConvergEx Group In the light of this, on reviewing transaction costs across global markets, we note that transaction cost appears highest in Ghana, followed by Nigeria, while the US has the least transaction cost with no charges on stock trades. Hence, lower cost of transaction appears consistent with the level of market development and by implication, market efficiency, as costs are lower in U.S, China, India and South Africa which are more developed compared with the Nigerian and Ghanaian markets. On the back of this finding, we think the current initiative of the NSE s management should improve 4

5 agency cost, increase market participation and enhance the overall efficiency of the Nigeria equities market. Lower Transaction Cost Is Consistent With Market Efficiency Following the introduction of the X-alert system which took effect March 1, 2014, the question investors may want to ask is, could there be any possible impact of this initiative on the performance of the Nigerian bourse? Studies have linked reduction in transaction costs to direct cost savings, and other indirect benefits such as improved agency cost and creation of a more efficient market. Besides, lower transaction costs often times mean expected higher returns. Hence, reduction in cost is expected to induce better equities market participation, as investors will be generally encouraged to play the market more in expectation of better and quicker returns on investment. Impact of Transaction Costs on Market Activity Retail investors, whose participation in the market has been improving in recent times, more often than not are at the receiving end of higher transaction costs as they usually do not have the required bargaining power to negotiate lower brokerage fees. Statistics from the Nigerian Stock Exchange reveals that retail domestic investments constituted about 25% of total transactions on the local bourse as at December with only about 3% of Nigerian population estimated to be participants in the market. This possibly indicates that high transaction costs may be a deterrent to retail investors participation. Whilst the introduction of the new x-alert system at a cost of NGN4 per transaction is expected to improve transparency in stock trading and ease of getting information on transaction details; nonetheless, it is an additional cost to investors across board. Institutional and foreign participants on the other hand are better positioned, due to the larger volumes of trade they execute, to bid for discounts. This is particularly discouraging to retail investors in bearish markets (as is currently being experienced with YtD return at -5.97%) as they consider the possibility that gains can be eroded in form of fees from buying and selling securities. Foreign investors most times take into consideration those risks relating to transaction costs in making investment decisions as to which country to allocate their funds. Thus, the higher the transaction costs, the higher the premium required for equity investments even after considering other risk factors such as exchange rate risk, political risk, amongst others. With a total transaction charge of 4.04% (for selling and buying); it implies a breakeven level for an investor in the local market and subsequently makes short term stock trading rather difficult in a bearish market. Hence, a downward review of transaction 5

6 charges will not only encourage more market participation, but also aid in reducing the risks investors undertake in equities investment. 6

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