Investors advised to hedge bets on underperforming stocks
mood in Nigeria’s equities market remains largely bearish, given the low level of activities on the bourse as investors continue to favour the fixed-income market, given the attractive level of yields.
While the global growth outlook appears to have been weakened by monetary policy responses to inflationary pressurethathavedepressedequity valuations,thebearishmomentum seen on the stock exchange could create long-term opportunities for value hunters.
Nigeria’s equities market has seen depressing performance due to elevated yields in the fixed-income market and investors’ waning appetite for risk as the 2023 presidential election approaches.
Bond yields have been rising in the same direction as interest rates. The stock market return is inversely related to interest rate hikes.
Most stocks recorded underwhelming performance in October 2022. The market saw an aggressive sell-off liquid stocks for higheryielding securities. Airtel Africa, the most capitalised stock, recorded the biggest loss last month.
As analysts retained their near-term expectation of persistent sell pressure in the Nigerian equities market, investors are advised to be cautious while buying stocks that are underperforming.
Investors should diversify their portfolio across stock, bond, real estate, gold, exchange-traded funds and Fixed Index Annuities, said Bismarck Rewane, managing director/ceo of Financial Derivatives Company Limited.
He said in his presentation at Lagos Business School’s November breakfast session that investors who want to go for a guarantee should consider treasury security and time deposit, while those who want to hedge should go short on stocks that are underperforming.
A look at the performance of notable counters in the third quarter (Q3) shows that Nestle was down by 13.2 percent, Dangote Cement (-10.9 percent), GTCO (-13.4 percent), PZ Cussons (-3.65 percent), MTN (-24.5 percent), and Zenith Bank (-1.26 percent).
Aside from these negatives in Q3 2022, the market’s declining fortune led to a black October for the Nigerian bourse, driven by Airtel Africa, whose shares plummeted by approximately 36 percent.
Airtel Africa’s shares lost steam following a price correction on the shares. Seplat Energy and MTN Nigeria are two other notable names whose shares declined in October because of investors’ profit-taking activity.
Other factors he identified to have affected the stock market are soaring inflation, heightened uncertainties (miscommunication about debt restructuring, redesigning of the naira, and forex and exchange rate policies), and price correction (is Airtel overpriced?).
Nigeria’s Monetary Policy Committee had adopted a twocapital prongedapproachtocontaininflation by raising the monetary policy rate to 15.5 percent and the cash reserve ratio to 32.5 percent. The decision, which took the policy parameters to multi-year highs, underscores the Central Bank of Nigeria’s growingconcernaboutsurging inflation.expectedly,thepolicy decision worsened bearish sentiments across the equities market as fixed-income yields tracked higher.
From a peak return of almost +27 percent in May, Nigeria’s stock market yearto-date return plunged to a low of +4.16 percent on November 18.
“Fourth-quarter (Q4) 2022 commenced with heightened recessionary angst, as intensified geopolitical risks sustained energy-induced inflationary pressures and provided fodder for increased monetary hawkishness,” said the Philip Anegbe-led team of analysts at Lagosbased Cardinalstone.
They said: “Nonetheless,
akin to July 2022, equity investors’ sentiments were lifted by expectations for a slowdown in the pace of monetary tightening and improvement in global supply chain (aided by progress in the execution of the Russiaukraine grain deal).
“The domestic equity market is likely to continue reeling from the lingering impacts of the CBN’S resolute tightening cycle. This monetary orientation was a justification for the adjustments in our valuation parameters that was communicated through our thirdquarter 2022 pre-earnings update, titled ‘Recognising The Times’.
“With system liquidity still constrained and fund managers aiming to minimize portfolio losses, we see scope for continued docile plays on the local bourse until yearend. However, we see potential opportunities in stocks with strong fundamentals and attractive entry points.”
They noted that given Nigeria’s heightened FX illiquidity, Airtel Africa had reaped material upsides “as its dual-listing status offered a route for dollar repatriation to foreign investors.”