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Published On: Thu, Feb 22nd, 2018

Market Crash: Don’t give up on stocks yet!

Spooked by market declines investors have started heading for the door. With the Nigerian Stock Exchange (NSE) All Shares INDEX (ASI) dropping by 4.5per cent over the last two weeks traders have started panicking as they off load shares with the speed of amateur sailors bailing water from a leaky boat. Insurance shares in particular have toppled over like humpty dumpty. ‘If you had Insurance shares and you thought you had problems now your nightmare has really begun’ says David Adonri, chief executive officer (CEO) of trading house Highcap Securities Limited.

The Nigerian Stock Exchange

The ASI has dropped from a lofty year to date yield of 16 per cent in January to a sober 10.27 per cent by the middle of February, ‘if this is the beginning of a crash it is one not many investors want to be a part of’ notes Segun Atere a onetime portfolio analyst at Apel Assets and Trust. According to Atere although the market is yet to break through what technical traders call a ‘support range’, he insists that, ‘a person who has been bitten by a snake is not too comfortable with the presence of a curled rope in the dark.’

May be so, but analysts note that investors still need to organize their thoughts into four main analytical boxes and take a cue from which box would justify bailing out of the market in a hurry. According to Rotimi Ayanwale of Temple Capital, an investment advisory firm, ‘a few market dips can be expected from time to time even in a bullish run; jumping out of a sailing boat whenever a wave hits its hull is not the safest survival strategy for a sea lover’. Ayanwale argues that, ‘the time to dive into the deep and swim like hell is when a tsunami wave looms in the horizon with a school of hammerhead sharks; so far that has not happened, so investors should sensibly stay cool and wait for the markets fresh uptick’.

The four primary action boxes for investors to consider are first when the market goes up a lot, then when the market goes up a little, or if the market goes down a lot or if it goes down a little. If markets go up a lot investors should stay in stocks until momentum cools and a reversal can be reasonably expected. If the market falls a lot a defensive move would be expected to get ahead off the selloff.  If the market goes up or down a little the best ploy would be to stay in snooze mode. There would be no benefits from trying to time the markets short term ups and downs.

In such markets, according to analysts, it would seem sensible for investors to stay the course by simply holding onto shares and perhaps picking up a few more on the way down if the companies in question have brawny underlying earnings.  Take Access Bank Plc, for example; the company has a strong management culture with a recently crafted five year strategic plan (admittedly not particularly disruptive) and a clear vision of leveraging technology to streamline costs and speed up quality and timeliness of service delivery, this could be pivotal in improving the banks bottom line for the year. With a one year forward earnings per share (eps) forecast of N2.84 and a recent price earnings (p/e) multiple of 5 the stock could advance to a lower limit of N14.20. But if the market p/e generally rises a few stair steps ahead and Access bank’s p/e climbs to a more robust figure of 8, then the bank may attain a potential price of N22.72 by year’s end.  ‘The bank does, on the face of it, have strong upward draft and robust hidden value opportunity’, concedes Temple’s Ayanwale.

GT Bank also looks like a winning pitch. The banks price of N46.50 does appear slightly intimidating (compared to N25 as recently as February 2016) but its relatively modest p/e of 9.67 suggests that on a one year forward earnings projection for 2017 of N5.53, the bank can still pack a tidy punch. ‘If GT were a car it would be a Cadillac but at recent market values it would be selling at a huge discount,’ believes Chuks Nwajei of Premium Capital, ‘the bank has decent forward earnings potential, even though its finances does appear to have hit a mature end of the industry business cycle with slim competitive maneuverability and low pricing advantages’, he says.

The fast moving consumer goods industry (FMCG’s), on the other hand, still suffers from market drag as a good number of companies in the sector remain plagued by overpriced stocks as corporate p/e’s tilt above 30. Nestle foods for example, trades at a recent prices of N1, 400 on an earnings per share (eps) of N38.38 and p/e of 35. Even if forward earnings per share forecast for 2017 settles at N44.14 the company would still advertise a p/e of 31.72. In a fiscally active year like 2018 consumer spending may rise significantly to shore up sales revenues but the rise in revenues may not justify sky high p/e’s that seem to be a fixed characteristic of FMCG’s.  Unilever Nigeria Plc for instance trades at a recent price of N49.00 and a p/e of 30.18. While it is true that wriggling out of recession suggests that sales of detergents, mouthwash and margarine would grow a bit more, such growth would still remain tepid as consumers still face an environment of high domestic unemployment with unemployment rising from 14 per cent in 2016 to 18 per cent in 2017. Not even fiscal stimulus in 2018 is likely to change this pattern very much.

The building materials sector, however, may do a lot better than FMCG’s going into the year as higher infrastructural spending by state and federal governments will lead to higher sales of products such as cement. For companies such as Dangote Cement and Lafarge Africa this is a boon. Dangote Cement currently sells for N259.90 per share at a price earnings multiple (p/e) of 17. On future earnings per share (eps) forecast of N15.6 for 2017 the concrete builders forward p/e is closer to 16 which is fairly reasonable by most investors perspective of the company’s financials.

With investors in growing numbers kicking down exit doors on their portfolio positions as the All Shares Index takes a sloppy slide, incredible nuggets of opportunity are emerging to give patient dogs more than just fat bones, but also a handsome chunk of beef to throw in a bit of animal protein.  Staying in the market and gritting their teeth as the trading board wheels round into a bullish trading channel seems to be 2018’s best market play.



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