'Fundamentals investors should look for as markets change' - THE NATION

November 02 2020

BY  Taofik Salako, Deputy Group Business Editor

 

NIGERIAN financial markets are trading on opposing sides, declining yields in the fixed-income market is fuelling a rebound in the equities market while the regulated currency market is moderating, undulated by the global macroeconomic dynamics. Benchmark index for Nigerian equities market appreciated by 6.39 per cent last week, driving the year-to-date return to 13.74 per cent.

Monetised, the 6.39 per cent average return by the benchmark index last week amounted to net capital gain of N959 billion. The All Share Index (ASI) – the value-based common index that tracks all share prices at the Nigerian Stock Exchange (NSE) crossed the 30,000 points to close weekend at 30,530.69 points as against its week’s opening index of 28,697.06 points. Aggregate market value of all quoted equities on the NSE also rose correspondingly from its week's opening value of N14.999 trillion to close at N15.958 trillion at the weekend.

Meanwhile, the latest, October 2020, Federal Government of Nigeria Savings Bond (FGNSB) carried coupon or interest rate of between two to 3.5 per cent. The two-year tenured FGNSB, with maturity in October 2022, carries a coupon of 2.453 per cent while the three-year FGNSB, with maturity in October 2023, carries a coupon of 3.453 per cent. At the primary market auction (PMA) conducted last Wednesday by the Central Bank of Nigeria (CBN), the marginal rate for the 364-day instrument dropped to 0.98 per cent while the 182-day and 91-day instruments also closed lower at 0.50 per cent and 0.34 per cent respectively. The instruments were however oversubscribed.

Crude oil price fell by 11 per cent to $37.4 bbl. While naira remained flat at the official CBN spot market and the Investors & Exporters (I & E) Window at N379.00 and N386.00 per dollar respectively, it depreciated at the parallel market by N2.0 to close weekend at N465.00 per dollar.

As corporate earnings troop in, foreign exchange (forex) modulates and crude oil price continues to fluctuate amid other variables, investors need to have clarity around many issues that will shape the finance and investment markets in the immediate to medium and long term.

Chief Executive Officer, United Capital Securities Limited, Mr. Bawo Oritsejafor, an astute financier and analyst, has provided well-researched guiding views on many issues around the financial markets and the macroeconomic environment.

According to him, one of the immediate things investors should look out for is the third quarter 2020 earnings being reported by the companies. Investors should keenly watch third quarter 2020 earnings performance as this would, to a large extent, be a good guide on what to expect in fourth quarter 2020 or full year 2020 and by extension guide expectation on final dividend declaration for next year.

Investors also need to understand the peculiarities of each asset or securities segment. For investors in fixed-income securities such as bonds and Treasury Bills (TBs), Bawo noted that the major advantage of investing in fixed income is the guaranteed steady return on investment for a specific period. From the onset, the investor is certain of what the return will be at the end, except such investor decided to withdraw the investment before maturity. Also, corporate bond holders are given priority of repayment in case of liquidation of the company they invest in. Sovereign bonds, like the bond issued by the Federal Government of Nigeria (FGN), are regarded as having zero risk because of the ways and means of the government while the use of Irrevocable Standing Payment Order (ISPO) by sub-national bonds and other public utilities provides greater assurance on redemption. However, one major downside to fixed income investment is that the return is low compared to equities. For investors in equities, the main advantage is the possibility of higher return, like we have seen in the last couple of months, though the inherent risk of investing in stocks is higher. With these, Bawo outlined that investment decision must take into consideration the investor's risk tolerance level, source and nature of capital, the time horizon -either short, medium or long-term and other peculiarities, especially when dealing with individual investors. Sometimes, understanding personal details like age, occupation, health, family status and social standing among others are necessary to determine appropriate investment portfolio.

But generally, Bawo said factors that will shape the market in the next few months include the current low yield environment in the fixed income market, buoyant system liquidity in third quarter 2020, Central Bank of Nigeria (CBN)'s policy stance on foreign exchange (forex) management, crude oil price performance, as well as earnings expectations. Beyond third quarter 2020, the outlook of the overall macroeconomic environment will, to a large extent, shape activity in the equities market.

"We are very optimistic about the prospect that lies ahead for the business in fourth quarter 2020. This is as we expect the current buying interest in the equity market to be sustained in fourth quarter 2020 amid the current low yield environment that is discouraging investment in the fixed income market. Also, on the back of the relaxation of lockdown measures within the country in third quarter2020 we expect a generally improved earnings performance in third quarter 2020. Furthermore, the frequent year-end portfolio rebalancing later in fourth quarter 2020 strengthens our optimistic stance for fourth quarter 2020," Bawo said.

But is the price recovery at the equities market sustainable? Bawo, a longstanding trader in equities and fixed-income securities, said investors must look beneath the price changes to discover the underlying reasons for the price changes.

"To determine if the stock market recovery is sustainable, we must first look at what is driving the recovery. First, improved macroeconomic outlook; although Nigeria is still likely to go into a recession in third quarter 2020, we believe that the worst is behind us and the risk of sell off sentiment of investors has generally dissipated. The second factor is the persistently low yield environment, worsened by the Monetary Policy Committee's decision to cut rate, and the real interest rate is now further down into the negative region. Naturally, investors are on a search for better returns which the equities market can provide. Lastly, there is a high level of financial system liquidity which is expected to remain till early 2021. These coupled with the limited number of investment outlets in the country are the contributing factors to the recent rally we have seen in the stock market," Bawo explained.

Given all the above, United Capital Securities' analyst view is that equities will remain attractive in the mid-term. Although the sharp increases seen in the past few weeks might not continue as stock prices become increasingly expensive and dividend yields decline, but the market will remain largely positive.

"However, the key to winning in the market is to always pick fundamentally sound stocks," Bawo said, underscoring the need for investors to seek professional advice and understanding of dynamics around stocks and sectors of the economy. In picking fundamentally sound stocks, one needs to consider not only the financials and operations of the company, but also external factors such as fiscal and monetary policies, specifically related to the sector and also the influence of such factors on the general macroeconomic environment. There are also global variables -such as commodities prices, international trade directions and diplomacies that traditionally impact investment flow, and thus contribute in determining the pricing system at the securities markets.

It is also important to monitor the forex situation. "The structure of the currency market and its liquidity often have a huge impact on the stock market. For instance, currency depreciation, devaluation or scarcity of foreign currency has a negative impact on listed companies' earnings, especially for those with heavy import needs and in turn weighs on profitability and returns to shareholders. Secondly, a depreciating or unstable currency is a red flag for foreign investors because currency depreciation will significantly impact the real returns on their investments. In summary, currency depreciation or foreign exchange scarcity has a negative impact on the equities market," Bawo said. This influence of this is noticeable in the foreign investment flows at the Nigerian market.

But technology has become a major enabler to the Nigerian capital market. Through the COVID-19 lockdowns and the protests, trading has continued on the Nigerian Stock Exchange (NSE) and other platforms.

"We think that technology has brought about the greatest development to the stock trading landscape in the recent years and the advantages have been enormous. Through online trading platforms like our own InvestNow, almost everyone with a smart phone has access to the equities market. What this translates to is that the market reacts faster to information because investors can act quickly, trade orders can be placed and executed promptly. Additionally, there is improved level of activity and liquidity in the stock market given that more people have access.

"More importantly, the use of online trading platforms reduces the cost of transaction and is expected to further reduce cost overtime. All these are of great advantage to the equities market as stated earlier. However, we must also note that it is important that retail investors are well informed about the risk inherent in equity market investments, before they embark on trading or investing activities so that they do not get their hands burnt," Bawo said.

It is undeniable that COVID-19 pandemic has significantly impacted the Nigerian economy and the impact will linger for the rest of the year, as United Capital Securities estimated that the country will enter a recession in third quarter 2020. Besides, inflation continues to increase and the developments at the forex market remains a core concern.

Bawo said notwithstanding some downsides, a peep into the performance of the economy by sector on the basis of the second quarter Gross Domestic Product (GDP) number supports the notion that many sectors still offer good opportunities for discerning investors. These sectors include financial services sector, especially the banks; telecommunications, agriculture and the healthcare sector. Healthcare and telecommunications are the biggest beneficiaries of the pandemic.

Now building a portfolio around the variables, Bawo recommends leading banks, telecommunication companies and large-cap sectoral leaders in food and cement. "As such, our top stock recommendation includes the tier-1 banking names, specifically, Guaranty Trust Bank, Zenith Bank International, United Bank for Africa (UBA), FBN Holding and Access Bank. Also, telecommunication giants such as MTN Nigeria Communications and Airtel Africa have seen sustained interest. In the manufacturing sector, interest in Dangote Cement, Lafarge Africa and Nestle Nigeria have been significant. Accordingly, these stocks are our favourites because they are fundamentally sound and have a decent dividend yield," Bawo said.

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Steven Rich
Sep 17, 2018:
Well done
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