On the morning of 7th of October 2020, the Nigerian equities market was the talk of the town. A Bloomberg article read ‘Nigerian stocks surged by the most in more than five years, extending their rally to a 12th day, as meager local interest rates sent traders on a hunt for yields’. This followed an overwhelming day of gains across the local bourse complimenting the 12-day rally, which sent the stock exchange to rank at the top of major global gauges around the world, in terms of performance. The questions on many lips are why, how and what? We would take a look at some of the factors at play and give our two kobo.
Why is it gaining?
Following two/three years of consecutive losses in the local bourse, fueled by weak macroeconomic conditions, increasingly risky country profile and attractive fixed income yields, the equities market looks destined to finally close the year on a positive note. At the start of the year, most analysts projected that given the attractive valuations of most stocks on the local market coupled with the CBN pushing for a lower interest rate environment, investors are likely to rotate funds to the equities market. The unprecedented spread of COVID-19 seemed to throw projections out of the window, with risky assets such as equities seeing exceptional sell-offs in favor of risk-free assets such as FGN bonds earlier in the year. Nine months into what has been an extraordinary year, the ‘inevitable’ rotation to the equities space seems to be playing out in a big way.
How long would this rally last for?
With eye watering gains across quality names suggesting that the equities market may be on its way towards an upward trend, it’s doubly important to be cautious when making investment decisions. Our view is that the persistently low interest rate environment and expected maturities, coupons and dividends, coupled with limited investment outlets would push locals’ attention towards the equities market for some time. Although some profit taking may take place, we view the valuations on some of the quality names, as well as dividend yields on select stocks, as attractive.
What should interested and invested parties be doing?
For invested parties, the dilemma to stick or sell becomes increasingly difficult. The popular saying goes “The equities market is driven by two things: greed and fear”. Ultimately the decision depends on numerous factors ranging from individual entry prices to individual return targets. A sell for one could be a buy for another. However, it is pertinent to keep in mind research outlooks for the recommended companies as the major backbones for making investment decisions. We still opine that the current price levels are attractive for investors with a medium to long term investment horizon as we implore investors to be wary of the pitfalls of day trading. With that being said, given the drivers of the recent buy interest, we urge investors to keep an eye on near term developments in the fixed income and FX space. A rise in interest rates could see investments flow more rapidly to less risky assets, while improved liquidity in the Investors and Exporters Foreign Exchange (IEFX) space could incentivize foreign investors to shed their existing positions in equities, in line with their strategic allocations.
Having said that, we also recommend mutual funds with exposures to equities as a viable investment opportunity for investors. This provides access to skilled portfolio management services, a cheaply diversified portfolio, amongst others. Some examples of equity-exposed mutual funds include Vantage Equity Income Fund (VEIF) and Vantage Guaranteed Income Fund (VGIF).
Our stock preference remains companies with strong fundamentals and strong dividend policies. Our top picks are DANGCEM, GUARANTY, MTN, SEPLAT, NESTLE, UBA, UNILEVER & ZENITHBANK.
