Value stocks seen shielding investors from inflation risks

With rising prices of goods and services injecting uncertainty into the equities market, value stocks are seen as a hedge against inflation risks.

A value stock refers to shares of a company that appears to trade at a lower price relative to its fundamentals, such as dividends, earnings, or sales, making it appealing to value investors, according to Investopedia.com.

During periods of rising inflation, companies’ profit and growth margins may be hit, affecting investor confidence, which in turn affects their willingness to take on risk by holding stocks.

The country’s inflation quickened to a fresh 17-year high of 22.04 percent in March from 21.91 percent in February, according to the National Bureau of Statistics.

Investors in the equities market have been advised to trade cautiously, while taking positions in fundamentally sound stocks at attractive entry points.

Oluwaseun Arambada, research analyst at FBNQuest, said investors could opt for fundamentally sound stocks, preferably liquid growth stocks. “Another option is to invest in exchange traded funds managed by reputable investment houses,” she said.

In the holiday-shortened trading week to April 20, the All Share Index of the Nigerian Exchange Limited and the market capitalisation of equities decreased to 51,355.74 points and N27.963 trillion.

Oyinkansola Aregbesola, an investment research analyst, highlighted the risk associated with investing in the stock market during this period.

“Stocks are generally riskier investments and there is no certainty as to the return it would give, whether it’s going to be above the average inflation rate or not; you could instead explore alternative investments like real estate and so on,” she said.

The Nigerian equities market decreased by 5.30 percent month-to-date as of last Friday and by 1.04 percent week-to-date. The market’s positive close pushed its return year-to-date to 0.20 percent.

Eunice Chiadika, founder of Your Personal Finance Girl, said investors should invest in stocks of companies that are likely to perform well during inflation, such as those that offer goods and services.

Ifeoluwa Adegoke, lead financial consultant at MTWI Services, said it is common to see increased volatility in the stock market as inflation surges.

“In a high-inflation environment, investors are mostly concerned about a possible increase in the interest rate and slowing consumer spending, which tend to impact businesses negatively,” she said.

Adegoke said in such conditions, the best way investors can protect their assets is to stay invested.

“I like to say that a stock market loss is not a loss until you sell. Historically, the stock market has always recovered from losses and delivered growth after. So far you are invested in companies with sustainable business models and strong financials, there is nothing significant to worry about,” Adegoke said.

“The current bear trend is approaching a turning point, as the first-quarter 2023 earnings season draws nearer. We anticipate the broad-based return of investors’ risk-on sentiments, which is to be catalysed by declining yields in the fixed-income market,” United Capital analysts said in a recent note.

“The current low prices and valuations will allow buy-side investors the opportunity to re-enter the market and take positions in fundamentally sound stocks, thus maximising market returns,” they added.

Jesupelumi Oluwagbemi, founder of The Financial Literate, said it’s important for people to know that investing in the stock market should be long-term because of the volatility of the market.

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“This way, you don’t panic at the dip in the market because it would still rise later,” she said.

Oluwagbemi recommended investing in companies whose products people would continually consume despite the economic state of the country.

“Examples of such companies are food companies and pharmaceutical companies. These companies would mostly thrive even in the face of inflation,” she said.

She said anyone investing in stocks should know what they want to achieve from it.

“Basically, there are two ways to benefit from the stock investment – either you receive dividends on your stocks or your stock appreciates in value (when you sell at a higher price than you buy it, you get your benefits), or even both of them,” she said.

Oluwagbemi added: “Once you are able to identify what you want, it helps you in picking the right company, and you don’t feel pressure from the noise of inflation in the market.

“Before investing in a company, research the history of past performance. There are some companies that constantly pay dividends to investors. If receiving dividends is key for you, check that the company you’re investing in pays dividends, irrespective of the inflation of the economy.”