By CHUKWUMA KELECHUKWU
Last December, Abiodun Keripe, Afrivest’s Head of Investment Research bought the shares of Zenith Bank Plc for clients at about N18.50 per share and by last month, January precisely, the stock had risen to N22 per share. Wanting to make some gains, he offloaded at premium price of over N22 per share, returning about 19 percent yield to his client. He was grateful to the Central Bank of Nigeria (CBN) policy on Open Market Operations (OMO) which restricted access to certain categories of people, a policy that crashed yield on fixed income assets, making equities investment attractive for first time in over a decade after the 2008 market crash.
Now, the same stock has depreciated to as low as N19 as at Wednesday February 5, 2020. The market has slumped again, shedding about N1 trillion in value, having been overwhelmed by three critical headwinds of fast-spreading coronavirus, crude price slump, and hike in Credit Reserve Ratio (CRR) of banks in Nigeria.
Nigeria’s equities market opened trading in the year at 26,842.07 basis points on 3 January and rose sharply in the first week of trading to close on 12 January at 29,415.39 points while market capitalization equally rose to N15.175 trillion up from N12.970 trillion. The All Share Index which measures performance of listed equities further rose to 29,710.56 basis points as of 20 January indicating that the market valuation appreciated by more than 10.68 percentage points in less than three-week trading sessions between 3 January and 20.But by Wednesday 5 February, it has reversed much of the gains. From record 29, 710.56 basis points, it dropped to 28,432.27 points. Similarly, the overall market capitalization which rose above N15.5 trillion shed over N1 trillion to close at N14.645 trillion. This implies that the market capitalization has depreciated by about N1 trillion in less than one month since the headwinds set in.
Dilemma Of Equity Traders
At an entry price of less than N19 per share, should Abiodun buy more of Zenith Bank shares against the backdrop of three critical headwinds threatening to ruin investments returns in first quarter of 2020?
This is the dilemma most investment managers are facing. A novel coronavirus has weakened global demand for various assets classes across markets. Just as in 2003 when SARS outbreak crippled markets, investors are already over reacting.
For now, only Zenith Bank and some other listed stocks have been consistent with mouthwatering returns annually. And there is indication that these companies are not in any threat of liquidation in the nearest future. The only challenge seems to be investor apathy occasioned by more factors than those highlighted here.
Global Markets React
In what was considered the most turbulent and costly week for many markets since August, global equities were battered but the confirmed upsurge in number of new cases of fast-spreading deadly coronavirus has worsened the situation. Consequently, as at last week, US Dow Jones Industrial Average went down 500 basis points or 1.8 percent at one point. Asian Nikkei 225 sank -2.6 percent; CSI 300 was flat week-on-week. European Euro Stoxx also sharply declined -2.2 percent; and FTSE 100 was worse hit with -2.9 percent decline week-on-week.
For emerging (MSCI EM: -4.2 percent) and frontier (MSCI FM: -1.7 percent) markets, virus fears took center stage, as optimism around faster global growth faded.
Nigeria was not any exception. The All-Share Index plummeted by 2.7 percent – largest weekly loss since the week ended April 5, 2019 (-4.6 percent) – moderating the year-to-date return to +7.5 percent. Nigerian equities headwind is further weighed by a slate of disappointing unaudited earnings updates trickling into the Lagos trading floor of the Nigerian Stock Exchange (NSE).
Before market slump, stocks had returned up to 11 percent in about six weeks from December to January driven by CBN’s new rule about OMO trading that has been restricted to certain people, and the need for asset managers to look for new assets classes that will yield returns for them.
CBN’s New CRR Policy
The gains CBN OMO policy offered, its CRR policy is threatening to wipe out. In other words, what one policy of the apex bank giveth, another of its policy taketh.
“The same CBN, in January decided to increase the CRR by 500 basis points to 27.5 percent from 26.5 percent. The market has been reacting to that policy decision,” Abiodun Keripe told InsideBusiness.
Speaking over the telephone, Keripe said that the market is still adjusting to the development, implying that more impact of the policy may still crystallize. In other words, market bearish trend may persist longer than expected.
Crude Price Slump
Added to that also, the crude price has been moderating down wards from above $60 per barrel at the beginning of the year to about $55 per barrel. Moderation in crude earnings implies that funds available for investment may be shrinking.
“We know why it is that way: the outbreak of coronavirus is affecting global demand and it is not only the Nigerian market that has been reacting negatively. Global markets have also been bearish, all because of this coronavirus,” Keripe added.
Disappointing Unaudited Earnings
A slate of disappointing unaudited earnings updates has further weakened demand for equities. In the last few weeks, earnings report filed to the stock exchange indicates poor returns for the year ended December 31, 2019.
Mr. Malomo Oladapo, a dealing clerk of the Exchange told InsideBusiness that most of the filings received so far were unimpressive.
“Unaudited reports we have seen so far, have not been impressive although the key players have not released results. That is also the reason the market has been bearish,” Oladapo stated.
According to him, good earnings report ought to bring respite to a bearish market.
FBN Holdings, FCMB Holdings, Wema Bank Plc, Sterling Bank Plc. Fidelity Bank Plc and Stanbic IBTC Holdings Plc have released unaudited results for the year ended December 31, 2019. Since the results are mere management accounting to meet up with NSE regulatory deadline, the results are of little or no consequence.
FBN Holdings, in a statement to NSE said, “In line with section 60-65 of the Investments and Securities Act (ISA) 2007 and Rules 39 and 41 of the Securities and Exchange Commission (SEC) rules and regulations, FBN Holdings has elected to file Q4 Unaudited Financial Statements (UFS) within 30 days after the quarter and the audited financial statements (AFS) within 90 days from the year ended and after obtaining the approval of the Central Bank of Nigeria (CBN).
”The likes of Zenith bank plc and Guaranty Trust Bank plc (GTbank) have notified the Exchange of submitting audited results to the Central Bank of Nigeria (CBN) and awaiting final approval.
“We believe that the market would continue this downtrend, especially as earnings released have been largely mixed and insufficient to boost investors’ confidence,” analysts at Afrinvest Securities Limited wrote in their latest report.
Entry Point After Bottom Out
Has the market bottomed out? Perhaps not yet. But stocks analysts insist that at the current price levels those whose positions are strong are likely to reap more than 50 percentage returns when market correction sets in.
“But we don’t have to lose hope. For some investors who did not have the opportunity to enter the market early January, this is an opportunity for them to enter because they are likely to enjoy more than 50 percentage returns when market correction sets in motion,” said Keripe of Afrinvest.
Another stockbroker, points out: “We still have so much liquidity in the system that is looking for assets they can invest in. We still have quality assets they can invest in. The blue-chip companies that are listed on the Exchange cannot go down overnight.
“Even when we had crude price crash from $100 to about $30 per barrel, some of the banks still reported good numbers; how much more now that we still have crude price above $50 per barrel, said Oladapo.
What To Invest In
Keripe, an investment expert, offers this guide: “In scenarios like this, it is always safe to play or invest in companies that are industry leaders. It is safe because they are stronger, they are better positioned. They have larger market share.
“If you are looking at the banking sector, look at Tier 1 banks, they are the ones that are better positioned. In terms of financial stability, they are stronger. In terms of return profile, they offer better returns. In terms of risk, their risk profile is lower compared to Tier 2 banks. They are systemically important banks,” Keripe told InsideBusiness exclusively.
He continues: “In the last three days since Monday, I have been buying Zenith. I bought at N19.20. I bought at N19.10. Today, I bought at N19 flat. Mind you I bought last upper week at N22. I bought also at N21. As it is coming down, I have been buying”.
“If you pick Zenith, Guaranty Trust, Access, and UBA. I am comfortable with all these ones. In the industrial sector, you pick Dangote Cement, Wapco. In the consumer sector, I recommend Nestle and Dangote Sugar. In the Brewery space, Guinness and Nigerian Breweries have been my favourite picks. And in the Telecom space, MTN and Airtel. I bet you, you are home and dry,” said the investment expert.