He That is Down…


Obinna Chima

Investors in the Nigerian stock market were certainly excited that 2018 has come and gone.
This is because of the disappointing performance displayed by the Nigerian bourse last year, that made a lot of investors to suffer bruises.

In fact, contrary to high expectations that the stock market would sustain its 2017 positive performance last year, it had closed 2018 with a decline of N1.898 trillion, while the Nigerian Stock Exchange (NSE) All-Share Index (ASI) depreciated by 17.8 per cent.

Specifically, the decline in the stock market was in contrast to the 42.3 per cent growth recorded in 2017 after three years of fall, which had made operators and other stakeholders to be upbeat that growth would be sustained last year.

Not even the penny stock investors were spared as they also suffered huge capital losses.
The sustained downswing in the performance of the stock market, which has continued in 2019, has been largely attributed to the uncertainty in the political environment. This even led to foreign portfolio investors (FPI) withdrawing more than N94.4 billion between July and September 2018, from the NSE.

More so, the ongoing monetary policy normalisation in the United States and some advance economies also took its toll on the Nigerian bourse. The Fed Reserve hiked interest rate four times last year and that pushed the US central bank’s key overnight lending rate to a range of 2.25 per cent to 2.50 per cent.

Owing to this, capital inflows in the economy declined consistently especially since 2018, while outflows more than doubled during this same period.
Nevertheless, the fallen share prices clearly offer opportunity for investors to take advantage of low share prices.
In his book, ‘Market Panic’, Stephen Vines stressed that in periods of sharp market decline “it has been demonstrated that those who bought at the height of the carnage were rewarded for their audacity.”

Stock market panics are always the best time to make money because markets “always overreact; they always correct themselves.”
“Investors who are anxious to offload their shares at the first sign of market weakness are usually the same people who bluntly declare that they will stay away from the market while so much uncertainty persists and when prices seem to be in free fall,” Vine stated.

Therefore, in order to take advantage of the opportunities offered by the current trend in the stock market, potential investors must take out time to understand what they are investing in before venturing into the market.
They must also adopt a time horizon before investing. Investors must understand that the stock market is not a casino and should not be looked at from a short-term view.

This is because history has shown that investors who go into the stock market without understanding what it is all about get their fingers burnt.
Most importantly, stock market investors must understand the behaviour of different stocks and sub-sectors on the NSE so that stockbrokers who are always out to get their commission do not mislead them into buying ‘dead’ stocks.

There are specific seasons and dispensation of different stocks and sub-sectors.
The time of the conglomerates was in the 70’s and 80’s and between 2005 and 2009 was largely a period of boom for bank stocks and subsequently, food and beverages, construction, among others.

Many people do make mistake by investing in industries that belong to the past where earnings probability and returns on investment are not visible, even in the long term, such as some insurance stocks on the NSE today.
To this end, investors are expected to spend as much time selecting stocks as they do when buying new shoes.

Similarly, research is extremely important to guide an investor in selecting stocks with good-looking fundamentals, reasonable prices and a fast-looking future.

This is because value investors, that is, investors that seek out companies with solid earnings records and are prepared to hold the stocks over the long term, are those to benefit most in a period of market down turn.

Indeed, the NSE, the Chartered Institute of Stockbrokers as well as the Securities and Exchange Commission (SEC) have big roles to play in driving awareness about the stock market. They must come out with a proper strategy to bring back retail investors to the market.