‘Removal of price cap ‘ll expose dealers’

THE Managing Director of GTI Capital Limited Mr Tunde Oyekunle, has said the removal of price ceiling of quoted companies, among other things, is appropriate, as it will expose the strength of every dealing houses’ risk management structure.

It will also task dealers and brokers or officers when it comes to making investment decisions.

Oyekunle, who spoke with The Nation, explained that clients can instruct their brokers not to buy or sell beyond a particular percentage. If there are no investment guidelines, a broker can go to the market and buy at a percentage that might not be affordable.

In valuing stocks, he said a broker should be able to know his exit price. The risk management element will instruct the dealer when to exit the market. “A very good company, which wants to hedge against this risk, must have a very good policy that will tell you that don’t buy a stock above a certain limit or sell below a certain limit,” he added.

He said the risk management comes in because it involves a lot of uncertainties. The market can swing either way on a particular day – for example, either lose or gain 20 per cent in a day, adding: “If you give a certain figure, the broker makes sure it doesn’t get to that limit before he sells,” he said.

On the possibility of making a kill where you gain as much as over five per cent per day, he said, this can happen when the market is on the upward shift.

He explained that when a stock previously bought, is gaining about 25 per cent, “it is a kill when it is sold,” saying this is so because an institution like a bank will not give you such interest in a year, and you are getting it in a day at the stock market.

Oyekunle said a very good broker that is well calculated, smart and fortunate about market movement can make a kill. For every initiative, he said there are positive and negative sides. The initiative, he added, will create more profit taking and short term positioning, which in his opinion, is not good for the market in the long-run.

“It is a game theory, because as some are gaining, others are losing. It is likely to increase volatility in the market and not just that, we are likely to have more profit takers in the market on a daily bases trying to maximise their profit. There will be more short term positioning rather than long terms. That is one of the implication and we cannot rule that out in the removal of ceiling,” he said.

The GTI boss said the market needs more of long term investors. “To me the volatility or the short term positioning which is a major disadvantage to this initiative is the same thing with the experience in America.

“In America, where there is no ceiling, if there is a particular problem with a company. The price of that company can fall from 100 per cent to as low as 20 per cent within few days. Right now, we don’t have that in Nigeria. The removal increases the volatility.

“Here we have more of certainty and in my own opinion, our market has not developed to that point, where we will be able to remove the price cap. I don’t think we are ripe enough to cope with the different implications of the removal, but over there, their market is developed and they can remove the price cap,” he said.

“The investor might not be strong enough to absorb the shock of the losses that might be incurred. The interest you will get in some banks in a year can be lost in a day. Even though it is good, you have to weigh the pros and cons.

The President of the Chartered Institute of Stockbrokers (CIS), Mr Mike Itegboje, said he cannot pre-empt what the effect of the removal will have on the market.

He said the issue is regaining investor’confidence in the market. “The removal or non-removal of the five per cent will not necessarily change the confidence of investors in the market immediately.

Recently, NSE said the market is picking up only for it to fall back. Does that not erode confidence,” he asked?

He said the regulators and operators need to reassure the public that their investments are secured, while developing products that will deepen the market, saying only after that can the removal be considered. “If the ban is removed, it should not be wholesale,” he advised.

Another broker, who does not want his name mentioned, called on NSE to be careful and remain focused.

He said what he can see is that the regulators are more interested in just churning out policies and imposing ideas of developed countries without really examining them whether they will work in our environment.

He further said they are driven by the desire to prove they can do something better than their predecessors, rather than being genuinely concerned about how the market can regain confidence from the public to return it to profitability.

“Our market became attractive to foreign investors because they can manage and plan their investments. The market, with its peculiarity, has given room to foreigners to bring in their funds because they can pre-empt their loses and gains with the price ceiling the market has,” he said.

Source : The Nation