The cyclical nature of every stock market could only suggests that investors must not be caught napping in their wealth accretion efforts. Many listed stocks on the Nigerian Bourse are no doubt pricier today than they were a year ago, which may usher in market correction in the near-term.
The second wave of COVID-19, its potential pass-through to commodity prices, and the legroom for yield reversal are profound 2021 factors that should fuel renewed anxiety among investors.
“We see a correction on the horizon given the overbought status of the market, especially for major bellwethers. Nevertheless, the first half (H1) is expected to be dominated by attractive dividend yields and the low yield in the fixed income market, which we expect to persist through the first half of the year at the very least,” Ahmed Jinad-led investment analysts at Lagos-based Meristem, said in their 2021 outlook.
When a stock index falls by more than 10 percent, it is often said to have entered “correction” territory. It is called a correction because historically the drop from its most recent peak often “corrects” and returns prices to their longer-term trend.
To hedge against this risk, investing in stocks with track records of high-consistent profitability and strong balance sheets relative to the market could still be a good wager to improve capital preservation if one must play equities.
“As if to demonstrate that our main skill is not to call the direction of the market we wrote, two weeks ago – our current concern is that the market is getting carried away. The equity market is still buoyant, but investors are unwilling to buy the large-cap stocks which they were buying towards the end of last year,” according to Guy Czartoryski-led team of research analysts at Coronation Research, in their recent insight.
The analysts further said they often try not to predict the direction of the market, adding that rather they buy the stocks they like “when valuations are low.”
Profit-taking activities on the Bourse moderated the year’s positive return to 1.82 percent, following a 0.42 percent decline recorded in the trading week ended January 22. The NSE All Share Index closed lower at 41,001.99 points while the market cap came down to N21.448 trillion as against week-open high of 41,176.14 points and N21.530 trillion.
In 2020, equity market transactions were dominated by domestic investors who accounted for 65.28 percent of market turnover by value (Retail: 44.98%; Institutional: 55.02%) while foreign portfolio investors accounted for 34.72 percent. Recall that the market got off to a strong start in 2020, returning 10.4 percent by the eighth trading session. By October, the equities market entered a much awaited bull run.
Buoyed by unattractive fixed income (FI) yields, excess liquidity and relatively resilient corporate performance amid COVID-19 pandemic, the equities market of Africa’s biggest economy recorded 50 percent return in 2020. Riding on the back of this feat, investors will only face a test of their capacity to virtually time market entry and positioning.
“For 2021, we expect a modest All-Share Index (ASI) return of 7.4 percent on relatively contained liquidity, second quarter (Q2) 2021 expected yield reversal and corrections in some overpriced stocks. The current valuation (PE) of the ASI exceeds its 3-year mean, but, our return expectation remains consistent with the existing yield realities,” Philip Anegbe’s team of analysts at CardinalStone Research, said, adding that beyond the milder liquidity impact, they expect rising inflation, widening current account and budget deficits, and currency weaknesses to drive the upward repricing yields in 2021.
“In our view, sustained unorthodox policies, FX illiquidity, and widening inflation differential makes frontier peers, like Egypt, more attractive destinations for foreign capital”, the analysts noted, adding that that current pace of yield increases will likely moderate in first-quarter (Q1) 2021 “on the impact of excessive liquidity but pick pace in second-quarter (Q2) of 2021. Our expectation of an eventual pick-up in yields reflects lower OMO maturities, lesser dovish inclinations on macro recovery, and a wider budget deficit”.
“Thus, investors are likely to stay short in the fixed income space. The government could also frontload greater than expected domestic borrowing ahead of a potential pick-up in yields, especially if there are signs that external funding conditions could deteriorate.
“In the equities market, we expect investors to take advantage of bargain hunting opportunities in cheap, fundamentally strong names with a track record of shareholder wealth creation or veritable evidence of structural breaks from previous constraints,” CardinalStone Research analysts said.
More analysts see lower domestic yields and high inflation rates (15.75percent in December 2020) increasing the appeal of foreign securities and currencies as investors seek to protect their investment returns.
“In view of the first policy meeting of the MPC by mid-week, we think monetary policy in 2021 will be driven by the need to urgently stimulate growth in the face of a recession. As such, the MPC/CBN will sustain its accommodative stance to ensure a V-shaped recovery and avoid a W-shape. Also we opine that the CBN can still make use of a number of policy tools within its disposal to guide its accommodative tone” said the Wale Olusi-led team of research analysts at United Capital in their January 19 insight.
A V-shaped recovery is characterized by a quick and sustained recovery in measures of economic performance after a sharp economic decline; while A W-shaped recovery is when an economy passes through a recession into recovery and then immediately turns down into another recession.
“For instance, the CBN retains discretion over the rollover of the N4.1trillion special bills which it could use to bolster liquidity should it intend to remain accommodative. That said, we think the CBN may revert to a hawkish tone later in the year should economic activities recover considerably considering galloping inflation and weak FX inflows from foreign portfolio investments (FPIs)”, research analysts at United Capital added.
In line with many analysts’ expectations, Nigeria’s headline inflation maintained an upward trend throughout 2020, rising from 12percent in December 2019 to a 37-month high of 15.75 percent year-on-year (y/y) in December 2020 amid domestic supply shortages, increased energy prices, exchange rate devaluation and monetary policy easing. Particularly, price increases were witnessed across all components of the index with the cost of food being the key driver.
