• Thursday, March 28, 2024
businessday logo

BusinessDay

Why liquidity matters in picking stocks to buy

Stock

Nigerian stocks are proving that it will take more than the successful completion of general elections and stellar earnings season to shake off bearish investor sentiments.

The performance of the market so far is an indication of low confidence of foreign investors (FPI) in the market and economy, according to Paul Uzum, a stockbroker on the floor of the NSE.

The bearish performance of the market so far has necessitated the need for investors to exercise caution in making investment decisions and safety of investment value, as the medium to long term expectations of the market remains bleak against rally expectations.

The equities market has lost 3.42 percent since the result of the presidential polls was announced while Banking index, a preferred destination for FPIs has fared worse, losing 7.03 percent over the same period.

Most importantly, Uzum pointed out that ‘‘liquidity’’ should be the most important factor for investors in the market now.

The broker advised that investors cherry pick stocks which allow for easy entry and exit, otherwise the returns earned on such assets may be pared or losses incurred, if the stock becomes illiquid and the holder is forced to sell at a significant discount.

According to weekly reports of the NSE, the financial service Industry led by deposit money banks dominates activities (measured by volume and value) on the exchange.

The report for week ended March 8 show that of a total turnover of 1.290 billion shares worth N13.873 billion traded, Financial services accounted for 84.06% and 83.70% to the total equity turnover volume and value respectively.

Our analysis of the Nigerian banking sector has shown that on the average, banks listed on the banking index have traded volumes amounting to 786.7 billion units’ year to date on a weekly basis.

Total volume traded a week on week of all ten banks listed on the index stood at 6.29 billion units of shares.

However, in this analysis, we excluded Access bank and Diamond bank on the note that current merger talks and plans have seen their stocks activities unusual compared to other banks, hence, not a good basis for comparison.

Result shows that amongst peers, Zenith bank, a tier-1 lender, lead the chart of the most traded stock on the index so far in 2019. The tier-1 DMB led with average volumes of trade amounting to 159.10 million units and a total volume of 1.59 billion units of shares traded as at close of market on Friday.

 

Total value of shares traded by Zenith Bank amounted to N37.72 billion in 2019 so far. Activities on the bank’s stock have been more of a sell pressure as stocks are down 4.56 percent Year to Date after stock price closed at N22 on Friday.

Amongst peers, Zenith bank stood as the worst performing stock in the index underperforming both the index and the all share index.

Furthermore, the analysis shows that Tier-1 lenders; Zenith Bank, UBA, Access, GTB and First Bank, all outperformed the industry average of 1 billion units traded weekly making the stocks the most liquid among peers in the index.

However, the result shows more of a sell pressure on Zenith and UBA as these banks have lost 4.56 percent and 3.25 percent respectively to underperform both the banking index (0.39%) and the all share index (-0.92%).

On the other hand, First Bank and GTB witnessed more of a buy pressure as stocks outperformed the banking index and the all share index gaining 3.14 percent and 2.76 percent respectively.

Stanbic IBTC, on the other hand, stood as the least traded stock on the banking index during the period under review. The bank traded a total of 58.56 million units of shares from January to date at an average of 5.8 million units’ week on week.

Total value of trade during the period amounted to N2.76 billion YTD, while stock performance appreciated marginally by 0.31 percent during the same period.

While it is vital to ensure that your stock doesn’t trade low volume, you would find it useful to also consider other fundamentals on the stock especially if you are a long term investor.

Note that currently, the poor performance of certain stocks has been driven largely by sentiments in spite of relatively impressive results for 2018 full year. As such, certain other factors could change and drive the market in the opposite direction.