By OKEY ONYENWEAKU
For those who invest in equities, there is always a right time to pull your resources from other investment options and quickly take a position on stocks that promise higher returns.
Whereas the decision to invest in equities is entirely that of the investor – given the advice from his financial adviser – timing is also of paramount importance.
Though no one can predict the market with every sense of accuracy, one of the sure-fire investment tips promoted by one of the greatest investors in the world, Mr Warren Buffet, is that discerning investors should hedge their bets and take the plunge when other investors are jumping out of the sinking boat of falling equity prices out of fear.
Although some other market pundits may differ from the investment legend, he insists that investing when others are scared to venture has always paid off for him because that is usually when stocks are crashing to their lowest values (prices), and probably during crisis times like the COVID 19 epoch that the world is enmeshed in now.
According to him, the investor should then prepare to cash out when the market appears to normalize and now becomes safe and attractive again to many others.
That time to jump in the investment boat appears to be here. Equities prices have fallen to their (Lowest ebb)resistance level. And those who are good students of Warren Buffet will be jumping into the market arena to select their potentially promising stocks for the future. This is because, according to experts, the only option left for the stocks which are already at their lowest value is to appreciate. They also think that it will be difficult to get so cheap again.
Already, the market capitalization, which measures the total value of equities which had peaked at N15.303 trillion with the Allshare Index at 29,710.56 points as at January 20, 2020, has dropped to N12.582 trillion as at May 6, 2020. Though it is on a recovery path now, the market had dropped as low as N10 trillion a few weeks back before closing at N11.747trillion by March 17, 2020.
The year to date performance of the sectors show that virtually all of them have lost some vigour. For instance, the NSE 30 Index has dropped -11%, Banking Index-20.1%, Insurance Index -2.6 %, Consumer Goods Index -32.8%, Oil &Gas Index -13.4%, Islamic Index -5.9% and Industry Index -0.94%.
More recently though, the Month-to-Date gain increased to 3.4% even as Year-to-Date losses had moderated to -11.3% as of May 5, 2020.
Analysed by sectors here, the performance was positive as all sector indices gained save for the Insurance (-0.3%) index that lost. The Banking (+2.4%) and Consumer Goods (+2.4%) indices led the gains, followed by the Industrial Goods (+1.6%) and Oil and Gas (+0.7%) indices.
So this is a good time for long term investors to take positions in the market.
However, a Lagos based analyst who does not want his name mentioned in print told Business Hallmark that given the recent sharp decline in equity markets, it is natural for us to extrapolate this trend to the near future. ‘’Add to it, the concerns regarding the safety of our families, continuing lockdowns, high likelihood of a slowdown in global economic growth,’ he avers.
In this worrisome backdrop, investing in equities at this juncture is not something that makes us comfortable. Most of us would want to wait till there is some clarity or evidence on how the Coronavirus will be contained, before deciding to invest.
While the above thought process makes intuitive sense, there are a few not-so-obvious perspectives which bring out the difficulty in ‘catching the bottom’.
In his comments, Managing Director of High Cap Securities Limited, Mr David Adonri reckons that the way for long term investors is that they should take positions in the stocks of their interest now that the market has reached its resistance point.
‘’Such long term investors can invest now and wait for the market to recover’’, he said.
Also, Fred Nwaogazi, an investor, reckons that:
‘’The takeaway for us is that if we wait to invest only after the earnings/economy recovers or news turns positive, it might be too late. The markets usually recover much ahead of the actual earnings or economic recovery”.
Indeed, the capital market is yet to fully recover from the sharp fall in oil prices that shook African economies in 2014. The Chief Executive Officer of the Nigerian Stock Exchange, Mr Oscar Onyema has always said that the ‘capital market is the barometer to measure any economy’. Therefore, its weak performance in the last few years indicate that the necessary support that should come from a strong economy may still be lacking.
However, in the immediate, the world capital markets have not been favoured by the twin problems of the crash of oil price from the giddy height of about $70.00 bpd a few months ago to about $26 bpd today and the corrosive effect of the Coronavirus (Covid-19) pandemic which has presently killed over 300,000 people all over the world. This double tragedy, so to say, has devastated the world economy and equities market, Nigeria not excluded. As those who have the financial muscle to invest now are looking for where to put in their money, research reveals that the capital market offers the best option.
In his view, Ayodele Akinwunmi, Head, FSDH Merchant Bank, attributed the recent hint of a market resurgence to policy pronouncements by different central banks on plans to reflate their economies after the COVID-19 era.
Putting some context to the discussion, he notes that the Central Bank of Nigeria (CBN) had in March announced that it will inject N1trillion across all critical sectors of the country’s economy. The CBN had also disclosed that it will be floating an infrastructure bank to help address the continuing huge infrastructural deficit in Nigeria, which would help the country’s economic diversification drive.
“Another reason for the resurgence of the equity market is that investors are cashing in on the significant drop in the values of many stocks. They are thinking that, though the stocks had fallen from a year high to a year low, they may not drop to year low again,” Akinwunmi noted.
The fixed income market, he equally moted, which is another investment outlet is weak with yields on the benchmark bond, compressing by 0.09 per cent on the average on Thursday as supply remained inadequate to match demand.
Akinwunmi also reasoned that investors have chosen to stay with the equity market which has a high return potential when compared with the fixed income market, which currently has a return below the country’s February inflation rate of 12.2 per cent.
Before now, market analysts have attributed the weak performance of the market to the prevalent macroeconomic challenges in Nigeria. While some of them fingered lack of economic direction of the President Buhari administration as one of the strong reasons, others have hinged it on tight regulation of both the fiscal and monetary authorities. Yet a third group has sadly pointed at the shrinking revenues of the nation, caused by the volatility in crude price, lack of productivity and increased funding for security, in addition to low disposable income in the hands of consumers. These, market observers believe have also been responsible for the near weak performance of other sectors of the economy. Nigerian economic growth stood languidly at 2.55 per cent at the end of 2019.
These have dealt a heavy blow on business operations as many firms seem to be struggling to survive.
Whereas those who are investing now may have to remain patient for some time since there is no certainty as to when the market would rebound fully, some investors think that this is overall a rare period for long term position-taking given the current low prices of equities.
Some international commentaries equally underscore the present and continuing challenge:
“In addition, the sharp tightening of global financial conditions reduces investment flows to the region and hampers its ability to finance spending needs to deal with the health crisis and support growth. This may result in a cut in government spending, a buildup in arrears, or an increase in government borrowing in local markets, with attendant consequences on domestic credit and growth. For frontier economies, the sudden stop of capital out-flows are exerting exchange rate pressures and can result in a large current account adjustment through domestic demand compression and further balance sheets pressures in countries with large foreign exchange mismatches.”, noted the International Monetary Fund (IMF) in its Regional Economic Outlook for Sub-Sahara Africa, titled COVID-19: An Unprecedented Threat to Development.
And the IMF is not alone in this, with one other respected voice aiding its cautionary note:
“Amid this positive, investors are advised to adopt portfolio diversification when investing in the capital market to manage risks across asset classes and smooth out the returns of the investment portfolio as a whole,’’ said Bloomberg.
Now would this fluidity be the reason why even the ‘wizard of Omaha’ is presently bailing out of some currently hot potato portfolios in the market, including most notably, the heavily beleaguered aviation sector? Can Nigerian investors really be more Catholic than the Pope? Or are we in one of those rare red herring situations where the local could ultimately trump the global? We wait.
