Volatility is a proxy for risk; more volatility generally means a riskier portfolio. The volatility of a security or portfolio against a benchmark is called Beta.
Beta is helpful in understanding the overall price risk level for investors, particularly during market downturns. The lower the Beta value, the less volatility the stock or portfolio should exhibit against the benchmark.
This year, we have seen theory take its place as more stocks above market beta of 1 currently outperformed the market.
As at Friday, the Nigerian ASI was up 0.32 percent YTD.
Of 11 stocks with stock beta above 1 on the NSE30 index, 5 stocks outperformed the market. This shows above a 50 percent chance of a right decision for investors who took position in more volatile stocks.
Most of the highly volatile stocks that outperformed the market were more of banking stocks.
According to Gbolahan Ologunro, Equity research analyst at CSL stockbrokers, “The banking stock accounts for about 30 percent of the market and most investors are attracting to these stocks because of strong earnings and dividend payments.”
Leading the chart was Fidelity bank which gained 15.76 percent YTD with a stock beta of 1.04. Others included GTB (10.30%, 1.44), Diamond Bank (6.4%, 1.37), Zenith Bank (6.07%, 1.07) and Forte Oil (3.48%, 1.19).
Meanwhile, if you had taken a bet on low beta stocks as at the opening of trading this year, there was an 80 percent chance you took the wrong bet.
Of 20 low beta stocks, only four stocks outperformed the market. Leading the chart was Julius Berger equity with YTD performance of 29.35 percent and a negative stock volatility of -0.22. This indicates that this stock tends to go in an inverse direction to market movement.
Others include Union Bank (11.6%, 0.37), Total Nigeria (8.82%, 0.64), Okomu oil (7.6%, 0.06).
This is different from trends we noticed in the equity market in 2018. The Nigerian All Share Index dipped 17.83 percent in 2018 following massive selloff and foreign investors exit from the market in search for safe haven.
If you had bought low beta stocks earlier in the year 2018 hoping to protect yourself from market volatility, there was a 52 percent chance you took the wrong bet.
In a bear market like we experienced in 2018, these stocks tend to outperform the market, according to conventional theory.
Our analyses show that of 25 companies listed on the NSE30 index, with low beta, 12 low beta stocks outperformed the market in 2018.
Meanwhile, of 6 companies listed on the NSE30 index with beta values above 1, only 3 stocks outperformed the market giving a 50 percent probability or both a right or wrong decision on highly risky stocks.
Importantly, low or high Beta simply measures the size of the moves a security makes; it does not mean necessarily that the price of the security stays nearly constant. Indeed, securities can be low Beta and still be caught in long-term downtrends, so this is simply one more tool investors can use when building a portfolio.
The performance of the Nigeria stock exchange market this year is dependent on a lot of factors ranging from company, industry, macroeconomic and global economy factors, determining the volatility of company stocks as well as overall all share index movement.
Over the years, we have seen the performance of Nigerian stock exchange (NSE) market largely driven by foreign portfolio investors while participation of the domestic investors still remain relatively low.
Some analysts opine that negative sentiment and the risk adverse nature which prevailed after the 2008 financial market crash contributed to the low participation of domestic investors amongst other factors.
“This year is a year of two (2) halves, political uncertainty will linger in the first half of the year and political risk will reduce significantly in the second half. “We should see increased investor’s appetite for risky assets,” Ologunro stated.
“The high volatility we see in banking stocks is driven by high liquidity in these stocks.” Paul Uzum, a Lagos based stockbroker explained. Investors a more interested in liquid and dividend paying stocks and “we have seen that in play since January and expect this to linger throughout the year provided there isn’t any crises during and after elections.”
Economic And Financial Analyst