Published On: Sun, Feb 25th, 2018

Beating the market slump


With year to date yields of stocks taking a bashing in the last two weeks a growing number of investors are toying with the idea of pulling out of equities in search of bumper returns elsewhere. That would be a mistake, or so analysts believe. Investment options have begun to thin down as the Nigeria fixed income market begins to see yields tumble as inflation rates drop and the fiscal authorities give a cold shoulder to the local debt market. But despite this, investors still seem to be able to work out decent cash returns.

The Nigerian Stock Exchange

The Nigerian Stock Exchange All Shares Index (ASI) has dipped to a recent year-to-date low of 10.24 per cent or a slump of 6 per cent from the sizzling 16 per cent yield in January. The drop in market yield reflects a broad global drop in stock market returns as different exchanges see stock prices shave off a few basis points.  The ups and downs of the market, according to analysts, still seem to be no reason for major exits as the overall All Shares Index is still bullish, at least for now.  ‘The recent market ping pong between bulls and bears indicates that investors are still a bit cranky, so taking long term decisions based on these ups and downs would be silly’, notes Bolaji Are, portfolio specialist at Fortuna Capital Limited, a Lagos-based investment company.

The market has generally nodded and bobbed around an upward slope in what market traders call a ‘bullish flag’. Meaning that the All Shares Index has stayed within certain support and resistance levels over a period of eight weeks but has never broken above certain trigger values (that occur when traders become fearful of over pricing) or fallen below certain bear values (that occur when traders get excessively pessimistic). According to Are, ‘for most of 2018 the market will stay on an upward trend, as global economies tilt forward as Asian and African economies build stronger trade ties in goods and services’. This would perhaps nudge the Nigerian economy to an annual gross domestic product growth of between 2.5 and 2.8 per cent. China is likely to grow by 6.4 per cent and India by 7.3 per cent by World Bank projections. Both countries have listed among Nigeria’s biggest trading partners in the last half decade.

An overview of global market returns shows that the Nigerian Stock Exchanges (NSE’s), All Shares remains one of the liveliest across the globe and has remained on average ahead of both the Asian and the Latin American markets. The Argentine Merval currently has a year to date yield of 12.6 per cent the Brazilian Sao Paulo Bovespa a yield of 9.9 per cent while the Hong Kong Hang Seng closed the previous week at 5.1 per cent. The Global Dow (World) stubbed its foot at a lowly 1.2 per cent. But Russia’s RTS Index closed at an impressive 11.8 per cent. In other words the Nigerian ASI lives within a cluster of strong international market performers for 2018 and is very well likely to continue with its upward strength right into the last quarter (Q4) of the year as increased fiscal spending (in the run up to the 2019 general elections) spurs increase in domestic consumption as fast moving consumer good items (FMCGs) fly off supermarket shelves.

An increase in politics-related spending should rub off nicely on the brewery, building materials, entertainment and food industries. Companies in these sectors should gradually see revenues grow slightly above their average rates for the last half decade. Admittedly the spike will not be a reflection of underlying economic strength but a knee-jerk response to political expediency. Nevertheless, this should push GDP up and improve corporate earnings for the year, meaning that several stocks particularly in the fast moving consumer goods (FMCG’s) sector, Food and Beverages sector and probably the Brewery sector should see values rise. ‘These sectors will be accidental beneficiaries of the fiscal taps being turned up’, says Tunde Layeni principal asset manager at Blaker Advisory. Layeni believes that pre-election cash windfalls will bump up the property market as well as consumer goods sector, he insists that the cyclical monetary expansion, is one of those predictable phenomenon that virtually occurs with the certainty of the sun rising in the east and setting in the west’, he says. Direct foreign investment inflows, however, have been less amenable to the forecaster’s tool kit.  Equity and direct foreign capital flows have been erratic.

Even though foreign capital inflows in the last 24 months have been majorly portfolio or equity-related, green field direct foreign commitments to the country have seen some growth. Between 2007 and 2010 the country saw green field inflows of about $1.2billion which has since grown to somewhere around $1.7 billion between 2011 and 2014, while estimates for these inflows between 2015 and 2018 is put at about $2.1billion. Going forward investment analysts believe that it would be reasonable to assume that equity interest of foreign investors will remain mainly bullish in the course of the year as returns match some of the finest across the continents. If intense political rivalry does not stump domestic economic stability direct foreign investment in 2018 should be cheery.

The stock markets various dips in the first quarter (Q1) of the year are not really that dangerous to investor portfolios and may actually give investors the opportunity to sniff on better bargains. Several stocks still sell at price earnings multiples (p/e’s) that suggest strong potential hidden values if market sentiments line up to their interim earnings figures which will be published in the course of the year.  Quite a few stocks (particularly in the banking sector) are selling at attractive p/e’s. The trouble for banks, however, is that the Central Bank of Nigeria’s (CBN’s) recent rules on dividend payouts may hurt total investor returns in the year ahead if these banks do not improve their capital adequacy ratios (CaR)  and non-performing loans (see related  story ‘Dividend scare: investors panic on CBN order’ by FELIX OLOYEDE in this edition).

Investors in banks in 2017 and 2018 may rely more heavily on price increases (capital appreciation) rather than dividend payments (dividend yields) as banks work out the kinks in their books. Fortunately building materials companies and FMCG corporations do not have these worries and could add heft to total portfolio returns for the old and new year. With the first quarter coming to an end and the financial results of a number of listed companies sneaking up in trickles (Nigerian Breweries and Total Oil Company for example), stock prices may soon see some stronger upward movement. Stocks with prospective strong 2017 earnings per share with growths of at least 15 per cent should see their share prices rise by a further 10 per cent at the very least over the next four weeks. Nigerian Breweries after tax earnings per share rose by 15.6 per cent for 2017 rising from N3.58kobo in 2016 to N4.13 the following year. This should give comfort to analysts that expect that sales growth in 2018 would provide the beer maker with stronger profits despite its expected flatter operating margins. Industry sources indicate that the company operates below optimal capacity in several brand segments, this means that breakeven margins have grown as cost of carry of inventories of finished products dig deep into revenues. But it is good to know that the company’s after tax profit margin grew from 9 per cent in 2016 to 9.5 per cent in 2017. If the trend continues in 2018, the brewer could trade for as high as N152 within the next 90 days, meaning it could give a potential holding period return of 17 per cent or 22 percent if annualized.


Beating an early market slump at the beginning of the year requires the simple character trait of patience. The All Shares Index (ASI) is most likely to breakthrough fresh heights by the end of June 2018 as stocks continue to show vigour spurred by significant earnings growth. Fiscal expansion with greater monetary tolerance will stimulate the economy into a faster-paced upward glide. With inflation at a 16 month low of 13.1 per cent and the Central Bank of Nigeria (CBN) insistent on a single digit rate, accommodation of fiscal expansion in the course of the year will be modest.

Already yields on treasury bills have slipped downwards from between 16 and 18 per cent in 2017 to just over 13 per cent in 2018. Lower treasury yields would likely see investors swinging back to equities as real yields (market yields adjusted for inflation) for fixed income assets begin to look less attractive.

The mythical wealth of Makanda from Marvels box office hit ‘Black Panther’ may not be in the offing for stock investors, but if they keep faith with the market by identifying a clutch of hidden value opportunities, the year should end on a fairly happy note, without the need for clever warrior skills and black spandex hero uniforms.

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