Legendary value investor Warren Buffett famously said that investors “should be fearful when others are greedy and greedy when others are fearful.”
It is certainly a fearful time for the markets this period as almost all asset classes are selling off globally, including equities, cryptocurrencies, oil, bonds, currencies and other commodities.
Across the world, most equity indices last week entered a bear market (which is defined as a decline of 20 percent or more from a recent high), a grim milestone for the decade long rally in stocks.
The Dow Jones Industrial Average (DJIA) lost 8 percent on Thursday morning, officially entering a bear market. Just a month ago, the Dow was at its all-time peak.
In Nigeria, stocks that got off to a great start for the year (after a disappointing 2019) have seen gains all but go up in smoke, as the twin shocks from the corona-virus and oil selloff begins to hit closer to home.
The Nigerian Stock Exchange (NSE) All Share index has returned -27 percent in the past year and -15.3 percent year to date (YTD), with the selloff intensifying in just the past one week, mirroring global trends.
In that sense Nigeria is not alone as most Emerging Markets (EM) have seen funds flee from them including Brazil, India, South Africa, China and Indonesia.
While the panic selling is no doubt, unhelpful it is understandable why investors are suddenly rattled.
The novel corona-virus outbreak has spread from China to every continent around the world, forcing Italy into a lock-down, and disrupting daily life in the U.S. as well as much of the world.
Festivals and conferences have been cancelled or put on hold, and sports fans are being told to stay home (games will be played in empty arenas). The popular English premier league is the most recent casualty, with all matches suspended until April.
Americans are also increasingly cancelling trips and working from home in order to avoid exposure to the virus, which in addition to the slowdown from China, is a one-two punch to the global economy, as the largest and second largest economies in the world calibrate towards total shutdown of economic activity.
The Naira has not been left out of the misery parade, with demand by Nigerians for a FX hedge growing, amid lackluster and lackadaisical leadership coming out of Abuja, leading to a surge in demand for the greenback.
As such in the black market the Naira fell to as low as N420 to a dollar, while on the more formal Investor and Exporters (I & E) window it dropped to $/N374, before paring losses on Friday.
The Central Bank of Nigeria (CBN), came out with a head scratching statement on Friday that “market fundamentals don’t support devaluation.”
Whatever the CBN may think of the situation, the only fundamentals that market participants are focused on are the level of Central Bank reserves and direction of oil prices. Today both indicators are negative for the ability of the CBN to maintain its Naira peg at the official $1/N306.
The simple reason for this is that dollars flowing into Nigeria are becoming scarcer as oil prices slump, while at the same time demand for dollars is growing rapidly as foreign investors who seek to exit, sell down Naira assets.
So what should investors do in such a situation?
I ran a simple screen of the NSE looking for stocks which had solid earnings growth in the past year, but had been sold off the most in the current rout.
A few names standout.
The stocks include, MTN Nigeria (MTNN) whose stock is down -11 percent YTD, United Bank for Africa (UBA) -14 percent, Zenith Bank – 36 percent, and Guaranty Trust Bank (GTB) – 36 percent.
GTB grew its Net Income by 6.61 percent in 2019 to N196 billion. Earnings per Share (EPS) for the lender also rose some 6.42 percent to N6.96 per share. Impressively GTB plans to pay a final dividend of N2.50 per share (up 2% compared to the N2.45 it paid in 2018) to investors whose names appear on the register as at March 19th, 2020.
The stock closed trading at N19 per share the lowest level in a year and equivalent to a dividend yield of 14.7 percent.
UBA for its part grew EPS by 14.5 percent to N2.52 on the back of a 13.3 percent growth in Net Income in 2019. A final dividend of N0.80 is proposed (up 23% compared to N0.65 paid in 2018). The stock closed trading at N6.15 on Friday, equivalent to a dividend yield of 16.4 percent.
MTNN now trades close to its listing price (when nobody could get their hands on the stock to buy as demand was through the roof) even though fundamentally nothing has changed since then except an even more solid execution by the Telco. Net income grew by 38.7 percent in 2019, while revenues rose 12.5 percent to N1.16 trillion. MTNN will pay a final dividend of N4.97.
Zenith has sold off even though it grew its bottom-line by 8 percent in 2019 to N208.84 billion, with EPS coming in at N6.65. A final dividend of N2.50 will be paid to shareholders today (March 16th), equivalent to a yield of 25 percent.
It may be time for brave investors to get greedy!
