Coronation Research recently published its report on the Nigerian Investment landscape titled ‘Navigating the Capital Market: the Investor’s Dilemma’. The revolutionary report studies the Nigerian investment scene over a 10-year period and finds how Nigerians have managed to preserve their capital over the long term.
Some of the conclusions are surprising. For example, it has been remarkably easy to beat inflation over the last 10-years by buying Federal Government of Nigeria Treasury Bills. However, with the crash in interest rates in the first half of 2020, this era has come to an abrupt end.
By contrast, equity market returns have not preserved capital for investors over the long term, even when adding back the generous dividends paid to investors. By looking at the internal profitability of stock exchange-listed companies, ‘Navigating the Capital Market’ identifies which stocks are the ones most likely to generate satisfactory returns for their owners, and back-tests the results.
“Nigerian investors are faced with difficult choices,” says Guy Czartoryski, Head of Research at Coronation Asset Management, “as interest rates have crashed. The alternatives are either to simply wait for rates to rise again in future, or to accept more risk in order to increase returns. But, to do that, they need to increase their understanding of risk.”
‘Navigating the Capital Market’ takes a new approach to setting investment return benchmarks. Instead of targeting inflation, which is the conventional benchmark, it recommends that investors should aim to beat the effects of Naira devaluation against the US dollar, and obtain the risk-free return they would have in US dollars. This suggests that they should ask for Naira risk-free fixed-income (or Treasury bill) return of 14.7% per annum over the long term. And, when it comes to equities, Coronation Research calculates that Nigerian investors should demand a return of 20.5% per annum. These are high benchmarks, but they show what is necessary to preserve the value of investors’ hard-earned money.
Read also: National Diaspora Day: Ecobank offers zero fees on rapidtransfer app
Coronation Research’s investor feedback shows that Nigerian investors have two concerns. The first is inflation. The second is not to lose money in investment schemes. And with fixed-income and bank deposit rates at record lows, and far below the rate of inflation at 12.4%, investors are being tempted to take risks again. Yet the priority now is for them to understand what those risks are, and how they can be managed. ‘Navigating the Capital Market’ is their guide to these challenging times.
Coronation Asset Management Limited, incorporated on 2 October 2015, is registered with the Securities and Exchange Commission (SEC) to provide fund and portfolio management services to institutions and individuals. Coronation Asset Management offers full-fledged investment services across various asset classes to the entire spectrum of investors: major institutions, smaller niche institutions & corporates, public sector family offices, cooperatives and high net-worth individuals.
Our Services include fund solutions (money market fund, fixed income fund and balanced fund), portfolio management (discretionary and non-discretionary), advisory services as well as fund administration and trustee services offered through its subsidiary, Coronation Trustees Limited.
Coronation was recently awarded the Fastest Growing Fund Management Company in Nigeria at the 2020 Global Banking & Finance Awards.
The report noted that none of Nigerian listed companies generated return on equity higher than 20.53(which the research house considers appropriate) as they have been reeling from a myriad of challenges over the past 10 years; investors who have invested in this entities are disappointed over the low returns and the fact that they are unable to get a higher returns in terms of bumper dividend share appreciation.
However the research house noted that there are notable exceptions and several bank stocks deliver returns above this level, while other bank stocks are trending towards this level.
While sectors from consumer goods to Industrial goods to pharmaceuticals have seen profit margins battered by a tough and unpredictable macroeconomic environment, Nigerian banks have been able to take advantage of monetary policies such as Naira devaluation that led to dollar denominated assets and a yield environment to propel their earnings and maximize shareholders wealth.
Drilling down the financial statement of these listed firms in a decade, ‘Navigating the Capital Market’ concluded that only Guaranty Trust Bank (GTBank) and Zenith Bank the have recorded ROE above FVER, over the past four years, while Access Bank joined this fortune group a year ago.
“The same cannot be said about next four largest (by shareholders’ funds) listed banks. The data is volatile (largely thanks to big swings in the RoEs of UBA and Stanbic IBTC), and much of the group fails to reach our benchmark during the period between 2010-2019e,” said Czatoryski.
The report also showed that RoEs of the listed brewers, in two out of three cases, have declined steeply over the past ten years. Neither the two largest brewers, Nigerian Breweries and Guinness Nigeria, have posted RoEs in excess of the FVER during the past five years.
The operators in the brewery industry are the hardest hit from a tepid economic growth as stiff competition termed as “beer war’’ and an elastic product continues to undermine profit margins as beleaguered consumers downgraded to cheaper liquor.
“Indeed this happened as International Breweries stepped up its offering of value brands around 2013 and the larger brewers found top-line growth difficult to sustain in the face of weakening consumer incomes. But International Breweries’ own RoE has only once broken throughout FVER benchmark (in 2014),” said Czatoryski.
With the outbreak of the coronavirus pandemic that ravaged economies across the globe and caused a precipitous drop in the price of crude oil, the path to V- shaped economic recovery for Nigeria is slow.
The domestic economic growth in the first quarter (Q1-2020) slowed to 1.87 percent and the figure for second quarter (Q2 2020) is set to come in negative.
To further compound the already amenic position of the country, The International Monetary Fund (IMF) has announced that the economy would witness a deeper contraction of 5.4 percent and not the 3.4 percent it projected in April 2020
While the Nigerian stock market jumped 10.7 percent in the first three weeks of the year to emerge as the global best performer, the Nigerian Stock Exchange (NSE) All Share Index (ASI) shed -9.94 percent.
After two consecutive years of decline, the Nigerian equity market became deeply undervalued, with dividend yields on top names across sectors for FY-2019 soaring above double digits. But investor apathy toward the Nigeria equity continues as they dumped shares on the back of lack of policy direction on the part of president Buhari led administration and poor corporate results.
