Nigeria: Taking Advantage of Bear Market

20 November 2019

Goddy Egene writes that investors should use the opportunity of low stock prices to increase their stakes in the capital market.

It is less than two months to the end of 2019 and the Nigerian equities market is on its way to recording another yearly decline. The market had last year depreciated by over 17.8 per cent due political risks, oil price volatility and rising global yields among other factors.

Obviously, the market is heading for another decline and has so far declined by 15. 1 per cent as reflected by the Nigerian Stock Exchange (NSE) All-Share Index (ASI) as at last Monday. While the NSE ASI has declined 15.1 per cent, some other sectoral indicators have recorded worse decline.

For instance, the NSE Main Board Index is down by over 24 per cent, the NSE 30 Index has dipped by 21 per cent, while NSE Consumer Goods Index has depreciated by 34.8 per cent. The NSE Oil & Gas Index is also down by about 23.5 per cent. Similarly, the NSE Corporate Government Index and NSE Pension Index have shed 18 and 16.3 per cent respectively. The persistent downtrend in the market is highly discouraging to many investors who have decided to adopt a wait-and-see attitude.

However, rather than be discouraged by the bear run, market experts said investors should take advantage of the low prices of stocks occasioned by continuous decline in prices.

They added that instead of exiting the market as a result of the bearish trend, there are strategies to adopt and await its eventual recovery. Also, in the stock market, money can be made or lost during bullish and bearish period.

One of the strategies investors can use in a bear market is called defensive, which entails investing in larger companies with strong balance sheets and good operational history. Investing in stocks of such companies is seen as defensive because it is believed that larger companies are more stable and tend to be less affected by an overall down in the economy.

Such companies include those service the needs of businesses and consumers, such as food businesses because people still eat even when the economy experiencing a downturn.

Also, another strategy is to buy more of the stocks now that their prices are cheaper so to average out your cost of investment. For instance, if you bought a stock at N10 some months back and it declines to N6 per cent, you would be losing 40 per cent if you sell. On the other hand, it is advisable to increase your investment at the new price is as to reduce your investment cost and eventually record some gains when the market bounces back.

Most stocks that reward shareholders with dividend and have posted improved nine months' results have their prices very low. For example, Zenith Bank Plc, Guaranty Trust Bank Plc, United Bank for Africa Plc, which reported improved performance and are known for regular dividend payment, are trading at discounts compared to the value at which the opened for the year. Zenith Bank Plc and UBA are trading about 26 per cent below their year's opening price. FBN Holdings Plc is 33 per cent lower that its opening price, while GTBank Plc is 24 per cent cheaper than year's opening value.

In the same vein, Nestle Nigeria Plc and Nigerian Breweries Plc have declined 17.2 per cent and 41 per cent year-to-date. Dangote Cement Plc and Seplat Petroleum Product Development Company Plc have shed 21 per cent and 19 per cent respectively.

Realising that the depreciation in the prices of stocks is a very good entry opportunity, the Chairman of Association of Securities Dealing Houses of Nigeria(ASHON), Chief Patrick Ezeagu, said investors should not miss the entry opportunity provided by the low valuations in the market.

He said despite the fact that some of the companies have strong fundamentals, their prices continued to decline, noting that state of the market mirrors the larger economy of every nation.

He said that trend analysis of corporate earnings in recent times and the current nine months results indicate that many companies across sectors have posted higher earnings with good returns, noting that these results have not significantly reflected in the upward movement of their share prices.

"Very attractive valuations exist in the market right now. What investors need to do is to seek the full advice of securities dealers, the stockbrokers for sound professional advice, and each investor will receive peculiar advice based on the outcome of profiling and take advantage of low prices," he said.

He explained that most people selling their shares right now are speculators and not real investors.

"Every stock market needs speculators for liquidity but they can change investment decision in one second. Our stock market is forward looking. Investors need not be nervous. They should consult professional stockbrokers for sound investment decision. There is no basis for panic sale of shares. Many companies have announced strong financial performance with prospects of increased future earnings," he said.

In his remarks, the Managing Director/CEO of Network Capital Limited, Mr. Oluropo Dada, said the market, more than ever before, presents an overwhelming buy opportunity for all categories of investors in the face of the attractive valuations and CBN's policy banning local corporates and individuals from participating in its open market operations (OMO) auctions.

"The market fundamentals, despite the persistent illiquidity is still very strong and prices of quoted securities can only go up , which will be triggered by both arbitrage income and dividend income. Based on the third quarter results being released by the quoted companies, especially the banks, the market is where be to now," Dada said.

Similarly, a market analyst, Mr. Ambrose Omordion of Invest Data Limited,said that discerning investors should latch onto the attractive valuation as a way of averaging down and recouping their investment immediately a recovery stage sets.

According to him, they expect the losing momentum to diminish, as the market reacts to seemingly impressive Q3 numbers released so far and in expectation of more quarterly earnings reports ahead of month-end portfolio alignments, especially as the NSE's new lows offer investors opportunities to position for short and medium-to-long-term views.

He said: "Given that earnings and economic news can change trend at any time, keep your gaze on fundamentally sound and dividend-paying stocks for possible capital appreciation as Q3 numbers giving insight into companies' position and future expectations.

"Also, traders and investors need to change their trading strategies due to the review of the NSE's pricing methodology, now that all class of equities need uniform 100,000 units to effect any price changes. This may be part of efforts to mitigate the persistent price decline that has seen many stocks trading at between their five and ten-year lows and even more, in recent times."

One of the reasons discerning investors should enter the market now is the positive impact the CBN's policy will have on the market and boost its recovery.

According to Michael Nwakalor of CardinalStone Partners Limited, Michael Nwakalor said: "There is real hope this could be good for equities. We should see a lot of corporate heavyweights gain in coming weeks as pension funds look for high-yielding investment."

Omordion said hopes are high that the CBN unconventional monetary policy move that seeks to stimulate the economy, by ensuring liquidity is available to the real sector, is expected to result in the cost of funds reduction soon to the nation's productivity sector.

"This would eventually support the stock market, improving the performance of listed companies, driving prices. It would eventually enhance liquidity in the stock market, given the restriction on classes of those who can invest in the CBN's OMO and Treasury Bills," he said.

Some market analysts had said the market would continue to witness some level of gains in the short-term. For instance, analysts at Greenwich Trust Limited said: "Despite sell-offs witnessed in the banking space, the positive sentiment on counters in the Consumer, and Industrial goods sector pulled the market to a positive close. Although, we observe investors are locking in positions on fundamentally sound stocks, we do not rule out pockets of profit taking, this we expect would characterise trading activities in the coming week."

Also speaking, analysts at Cordros Capital Limited said:"In our view, the performance this week is a reaction to a limited outlet for investments given recent policy directives limiting domestic participation in the market. We expect that the market might continue to benefit over the short-term especially in the face of lower yields in the fixed income market."

On their part, analysts at Afrinvest West Africa Limited said: "We expect to see gains in fundamentally sound stocks as investors' sentiment towards the equities market improves. Nonetheless, we maintain that this might be short-lived as economic buffers are still absent."

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