Taking positions in the stock market at a time like this, when the economic downturn from the coronavirus pandemic has made valuations of most blue chip companies cheap, could be one of the biggest gains for long-term investors if historical data are anything to go by.
Since the start of the year, stock markets across the globe have taken a pummelling with no indication of how low the crash will go, as the implications of an escalating coronavirus outbreak and slumping oil prices spook investors.
The global stock markets have seen some of their worst days in history recently, and the Nigerian equities market is not left out of the downturn as the novel coronavirus rips across the world and paralyses economies.
For the Nigerian Stock Exchange (NSE), the market is down as much as -18.49 percent year-to-date, according to BusinessDay data, as investors try to weigh the impact of the deadly virus that has infected over 1.7 million people globally and brought economic activities to a halt.
About N1.814 trillion of investors’ wealth has been lost in the equities market since the year started, and this is due largely to the outbreak.
The downturn has marked a dark time for those with a toe in the market and sparked anxiety, especially among new investors, who had been riding high on continued market rallies over recent years.
But this isn’t the first time – and won’t be the last – the market would experience such a dip, providing clarity and a good opportunity for investors to get their strategy in check.
Historical data tracked by BusinessDay show that market recovery could be very swift after an economic downturn, and long-term investors who are bullish at the time of the market downswings get a good run up for their money.
“We have been in a similar scenario before and history has shown that the markets bounce back time and time again,” Moses Hammed, an analyst at financial services firm Investment One, said.
When a collapse in global oil prices that started in 2014 pushed Nigeria into its first recession in about 27 years, the stock market bled greatly dipping as much 34.97 percent from 2014 through 2016.
In 2014, the market posted a negative return of -13.15 percent. In the wrap of the market in 2015, the Nigerian equity market dipped further by -17.36 percent, while in 2016, the downturn moderated by just -6.17 percent.
In the three-year period, the net worth of the market declined by N3.98 trillion from N13.23 trillion in the start of 2014 to N9.25 trillion at the end of 2016.
This was due to the massive outflows after the fall in oil revenue alongside a depletion of the reserves triggered an acute dollar shortage as foreign portfolio investors booked increased demand for the dollar.
The market reversed from its three-year losing streak, helped by the CBN’s move to create a window where investors could get dollars conveniently at a market-determined rate.
In April 2017 when the Investors and Exporters (I&E) window was created, the market began to experience reactions of FPIs to become net inflows, reaching its highest levels in August that year.
At the end of 2017, the Nigerian equities market fully recovered from the macroeconomic overhang of the commodity down-cycle to become the third best performing market globally, with a 42 percent return, covering up for all the losses in nominal terms within the past three years.
“Stocks do not have clocks to know when a recovery will start. However, it is important for value investors to make good investment decisions now so when the recovery starts one would not have to buy high when one actually sold low,” Oluwapelumi Joseph, head of investor relations at Lagos-based advisory firm Africapractice, said.
According to Joseph, investors wishing to invest in listed companies should look out for companies with strong cash flows, strong history of corporate governance and strong brand names.
For him, listed companies in the telecommunications space, financial services space, health care, and agriculture firms would have a moderate exposure to the hit coming from the coronavirus, hence a positive investment outlook, while those in the oil and gas sector, and consumer goods would have material exposure to the pandemic with a negative investment outlook.
With hopes of possibly finding a vaccine to the virus, a number of factors would help as a propeller in building investor confidence that would aid speedy recovery of the equities market, analysts have said.
The first and the biggest would be Nigeria’s prospect of getting more dollar reserves and oil revenue after a standoff between two of the world’s largest exporters of oil (Saudi Arabia and Russia), following agreement between the Organisation of Petroleum Exporting Countries (OPEC) and its allies to shave off as much as 10 million barrels from the international oil market.
That would help in lifting by $15 the price at which crude oil is sold from its current level of $31 per barrel, and help generate as much as $2.8 billion in additional revenue from expected gains in oil prices after OPEC+ members agreed to cut crude production, according to Timipre Sylva, minister of state for petroleum resources, in a statement.
The second would be the move by members of the NSE to demutualise the exchange by converting from a not-for-profit entity limited by guarantee to a profit-making, public limited liability company owned by shareholders.
MICHAEL ANI
