Relying on historic performance, low valuation of equities, strong fundamentals of listed companies and falling yields in money market, stakeholders in the stock market are hopeful of recovery in 2020, writes Goddy Egene
After declining in 2015 and 2016, the nation’s bourse recovered with a jump of over 40 per cent in 2017. The same scenario appears to be playing out currently. Having dipped in 2018 and 2019, market stakeholders are optimistic that the stock market will rebound in 2020. Their optimism is boosted by developments in the fixed income and money markets space.
The stock market closed 2019 with another decline, falling even by a magnitude that was beyond stakeholders’ expectations. Having posted a negative performance in the first half (H1) of 2019, which was partly attributed to political risks, there were hopes that the market would recover in the second half (H2)of the year.
For instance, analysts at FSDH Research, where highly optimistic last July and projected a recovery for the market in August.
According to FSDH Research, Warren Buffett, a well-known American business magnate and stock investor, once said that as an investor, it is wise to, “Be fearful when others are greedy and greedy when others are fearful.”
“This means that investors who have long-term funds can take advantage of the imbalance in the share prices of some companies that have strong investment case in the equity market.
“Although we may not know exactly when the equity market will take a turn, it is clear that the market is close to the bottom. Therefore, FSDH Research expects the bulls to take over from the bears very soon,” they said.
The analysts said imagine that an investment of N100,000 in the equity market in 1985 recorded a return of 24,590 as at December 2018.
“This means that the N100,000 increased to N24,690,000 within 33 years without an additional capital. This was the performance of the Nigerian Stock Exchange (NSE) All-Share Index (ASI) between 1985 and 2018. Not a bad growth at all.
“Meanwhile, there were some companies that recorded higher returns during this period than the NSE ASI. But be aware that historical performance is no guarantee for future performance in the financial market.
“The point that we are stressing is that investment in the equity market is for the long haul, especially at a time when activities are depressed and share prices are low,” they added.
FSDH had explained that the equity market might recover from August, saying that a number of companies have indicated that they will declare interim dividend for half year results only waiting for regulatory approvals.
“In addition, we expect the various monetary policies the Central Bank of Nigeria (CBN) initiated to boost economic activity and lead to increased liquidity that can flow to the financial market. This assumption is based on the availability of complementary fiscal measures that will de-risk the economy, the absence of which may limit the ability of the monetary policies to achieve the desired objectives. FSDH Research believes the current bearish trend in the equity market is an opportunity for strategic investors to take positions in the market. In addition to the capital gain that investors enjoy in the equity market, investors could also benefit from dividends that companies pay and the bonus issue (additional shares that investors earn, for which they do not pay),” the analysts said.
FSDH Research added that it expected the low yields on fixed income securities in Nigeria to provide an opportunity to source long-term debt capital for infrastructure development in Nigeria that will improve the Nigerian business environment.
“Government and corporates can also leverage on the high appetite for debt securities to issue discount bonds. Meanwhile, we see attractive investment opportunities in the following sectors of the equity market: consumer goods, industrial goods, banking, and oil and gas,” FSDH stated.
However, the bulls never took over from the bears throughout the year, leading to another decline in 2019. But most stakeholders believe 2020 will see the return of the bulls to the stock market.
According to a stockbroker and Chief Executive Officer of Sofunix Investment and Communications Limited, Mr. Sola Oni, the market operated under a tough economic climate in 2019, as evident in incessant bearish trend until the policy of the Central Bank of Nigeria on Open Market Operations (OMO) crashed yields on fixed income securities.
“Expectedly, investors took flight for safety and reverted to purchase of equities with multiplier effects on the rise in many performance indicators. The NSE remains an investment destination,” he said.
According to him, the outlook for the market in 2020 is attractive, adding, however, that this is contingent on fixing of Nigeria’s weak economy where the Gross Domestic Product (GDP) currently grows at 2.3 percent while the country’s population grows at 2.6 per cent.
“We expect faithful implementation of 2020 budget which was approved on record time. Government at all tiers should also take advantage of the market to mobilise fund for development projects.
“However, we expect the market to be driven by a mix of factors. Effects of negative real return on fixed income securities following the new policy on OMO will continue to enhance demand for equities and attract more investors into the market.
“We expect consolidation to be the hallmark of insurance sector as the market shall witness a flurry of mergers and acquisitions as well as business combination in a bid by insurance companies to recapitalize in line with the new policy of the National Insurance Commission (NAICOM),” he said.
Oni, said many stocks are still trading below intrinsic values, hence, attractive valuation will attract more investors.
“We expect intense competition among securities exchanges with the emergence of FMDQ Securities Exchange as a full-fledged exchange and Lagos Commodities and Futures Exchange (LCFE) which is set to commence operations. Already, NASD Plc has raised the bar of over-the-counter (OTC) trading in Nigeria.
“But we expect the government to intensify efforts on creating conducive business environment through its policy on ease of doing business and building security,” he said.
He explained that the Securities and Exchange Commission (SEC) has just released the rules on trading in derivatives, saying that was consistent with the plan by the NSE to commence trading in derivatives in 2020.
“This is expected to enhance price discovery and usher investors on the exchange to modern risk management whereby they can hedge against volatility.
“We expect introduction of more innovative products to accompany derivative trading. Barring unforeseen circumstances, the exchange is likely to commence demutualisation and this will change the structure of the market as the current owners, the dealing member firms shall become shareholders and thus bring a new era of corporate governance on the NSE.
“With the crash of yields on fixed income securities, pension funds may opt for high-yielding stocks in the securities market and this is expected to boost market activities,” he added.
According to Oni, regardless of the nature of the economy, in 2020, financial, health, technology and agriculture sectors have strong potential to provide good returns for investors.
“Financial sector is noted for liquidity. The sector is fast attracting millennial customers through innovative services that thrive on technology. Health sector is recording advancement in medical equipment while pharmaceutical sector is evolving on daily basis.
“We therefore expect health sector to provide investment opportunities in 2020. The technology sector itself is ruling the entire business world. The relevance of Artificial Intelligence is already gaining momentum. “Also, innovative investments such as blockchains and Cryptocurrency are highly dependent on technology. Trading on the securities market is technology-driven.
“The sector holds potential for good returns. The federal government is committed towards reactivating agriculture and other forms of Small and Medium Scale Enterprises in Nigeria through its policy of Anchor Borrower Programme.
“The success of the programme will be measured on its impact on the GDP and its ability to increase export in order to generate foreign exchange for the country and increase external reserve,” he stressed.
Also, speaking on the market outlook for 2020, the MD/CEO, Network Capital Limited, Mr. Oluropo Dada, expressed optimism and is bullish on the market. According to him, fundamentals of the quoted companies remain strong despite the harsh macroeconomic variables.
“By way of dividend, many companies especially banks will return over 10 per cent yield based on historical records. Again, we expect PFA to make occasional intervention as a result of lower yields from the other market.
“However, it appears local investors will be the major determinant of the outlook as higher yields from United States markets may keep foreign investors away for some time.
“By and large, 2020 appears more promising that the previous years because the valuations of the stock market instruments are becoming more attractive to all the various classes of investors,” Dada said.
Speaking in the same vein, the CEO, InvestData Limited, Ambrose Omordion, said low interest rate regime, increased credit to the real sector and early assent of the 2020 budget would impact positively on the market.
“The market in 2020 looks promising as factors that will shape the economy and stock market are on the increase, in spite of the continuous downgrade by rating agencies. The early implementation of capital expenditure would have multiplier effect on the economy,” Omordion said.
According to him, regulatory initiatives and policies such as the CBN Treasury Bills (TBs) and OMO restrictions will encourage local and institutional investors’ sentiment to the equity market.
He noted that the exchange new free float rule expected to commence on January 2, 2020 would improve market liquidity and transparency, thereby impacting positively on the market.
On sectors to watch out in 2020, Omordion said that financial, consumer goods, building materials, telecomms/ICT would be the most sought by investors.
“The financial sector is more marketable, consistent in dividend payout and if the economy finds its feet in 2020, the banks will benefit more,” Omordion said.
He said low price attraction of consumer goods stocks due to huge losses suffered in 2019 would make the sector attractive.
According to him, the low interest rate on consumption would boost industry earnings, while mobile licence would boost telecomms sector’s profitability. In his opinion, Managing Director, APT Securities and Funds Ltd., Garba Kurfi, said 2020 would be a better year for the Nigerian stock market.
“The crash of interest rate in the money market instrument from 15 per cent to about seven per cent or less makes money market returns negative compared with inflation of about 12 per cent,” he said.