Goddy Egene writes that as the inflation rate remains above 18 per cent, the stock market still provides investors the opportunity to earn positive returns on their investments
When investors stake their funds, their expectation is to reap positive returns on investments. That means a return that is above the inflation rate. And considering the fact that the inflation rate stood at 18.12 percent as at the end of April 2021, investors must invest in securities that would produce a return of above 18.12 percent.
Although it is difficult to come across an investment that can give yields above the inflation rate, the equities market offers investors the opportunity to enjoy positive returns. However, for investors to earn such positive returns in the equities market, they must seek the advice of professionals. This is so because just as the market is capable of fetching positive returns, investors could also lose their investments if not well guided by professionals.
While inflation is above 18 per cent, some stocks have appreciated by over 100 per cent year-to-date.
For instance, LASACO Assurance Plc has appreciated by 231.5 per cent, while Champion Breweries Plc has gained 135.2 per cent, Morison Industries Plc and Regency Insurance Plc have chalked 91.8 per cent and 68.1 per cent in that order.
Consolidated Hallmark Insurance Plc, McNichols Plc and Guinness Nigeria Plc garnered 59.3 per cent, 56.8 per cent and 54.8 per cent in that order.
Others included: Seplat Petroleum Development Company Plc (51.2 per cent); UAC Of Nigeria Plc (47.1 per cent); May and Baker Nigeria Plc (40.1 per cent) and Royal Exchange Plc (38.4 per cent).
Also, some stocks have suffered depreciation. FTN Cocoa Processors Plc has shed 36 per cent, followed by Vanleer Containers with 33.5 per cent. Daar Communications Plc and The Initiates Plc lost 29.8 per cent. SCOA Nigeria Plc and Wema Bank Plc dipped by 26 per cent and 23.6 per cent respectively.
But the Global Head, Wealth Management at Standard Chartered Bank Limited, Marc Van de Walle, advised that investors should always embrace the seven key rules of saving and investing wisely. According to him, investors should prepare an investment plan based on their financial goals, risk tolerance and time horizon and set aside funds for short-term exigencies in cash.
He said: “Invest most of the remaining funds (say 80 per cent) in a core portfolio broadly diversified across asset classes, geographical regions and industry sectors. This will help limit the downside from unexpected events (because they will happen over our lifetime!).
“Stay invested through market cycles, since time and the miracle of compounding returns is your friend. Rebalance the portfolio at regular intervals (say twice a year) to bring it back to your risk tolerance.”
The wealth manager explained that investors should use the remaining funds (at most 20 per cent), for short-term trading (for those who want the thrill).
“Make sure this is based on sound research and not the latest fad, and done with a cool head – not be too greedy at the top and panicky at the bottom (using stop-losses would help remove personal biases and limit downside risks for this part of the portfolio) and finally, follow the investment plan,” he said.
According to him, for some investors, putting all funds to work immediately could be psychologically challenging.
“For this group, setting up a pre-determined regular investment plan would remove any personal biases. This so-called dollar-cost averaging strategy would help the investor to automatically benefit from any market upside while allowing the investor to buy cheaper if the market pulls back along the way. This strategy could include pre-determined rules to
accelerate purchases in the event of larger-than-expected market drawdowns,” he added.
Walle noted that based on decades of market history, it is hard to make a case for an equity bear market without an accompanying economic recession.
“Therefore, the risk of trying to time when to exit the market before any short-term correction and re-enter at the bottom are greater than staying invested (since the investor could lose some of the best days in the market by staying out),” he said.
Walle said for those who have stayed out of the market before or after the pandemic, the challenge of when to get back in is seemingly much harder, adding that often, their hesitation stems from a desire to perfectly time their re-entry. In our experience as wealth managers, this is the single most common investment mistake.
While the market broad index, the Nigerian Exchange Limited (NGX) All-Share Index has recorded a year-to-date decline of 2.4 per cent, analysts at Cordros Securities are bullish that the market would recover in the second half (H2) of 2021, They are therefore urging the investors to take a position now.
According to them, investors taking a position in stocks that usually pay interim dividend to give them the benefit to enjoy good yields in H2.
They said while they expected market conditions to remain the same given still rising fixed income yields, they noted that said the current prices provide a good entry opportunity for long term investors.
“We think it also provides an opportunity for long term investors to take advantage of the current prices in carefully selected fundamentally sound stocks with attractive dividend yields. Since stocks have been primarily impacted by the swift developments in the fixed income market, the fundamental question then is, “Are there events on the horizon that could pressure yields downwards and trigger a renewed appetite for stocks?”
“While I acknowledge that yields will remain elevated for the rest of H1-21, it is equally important to note that there are triggers that could result in a reversal in the yield trajectory and propel the equity market’s performance,” the analysts said.
According to them, one of the triggers is the plan of the federal government (FG) to obtain external borrowing via Eurobond issuances, which, according to him, would lead to less reliance on domestic borrowings to finance the deficit in the 2021 budget, resulting in a supply/demand imbalance akin to 2020.
“In addition, the plan to borrow unclaimed dividends and dormant balances is another “wild card” in the hands of the FG and could reduce the supply of domestic debt instruments. While I note that lawsuits have been filed to restrain the action of the FG, our baseline expectation is that the FG will get a favourable judgment at the end of the court process.
“Asides from that, there is a high possibility that foreign portfolio investors (FPIs) could return gradually to the market in H2-2021 if there is substantial improvement in liquidity conditions in the FX market. With rising crude oil prices, we see scope for improved liquidity in the I&E window by H2-21, given the knock-on effects of high oil prices on the FX Reserves,” they said.
The analysts explained that H2 also coincides with when domestic investors will be taking positions in stocks ahead of half-year dividend announcements, stressing that a more robust market recovery post-H1-21 is on the cards.
“Consequently, we posit that investors should buy stocks with attractive dividend yields now to avoid the “dividend rush”. We believe “early bird” investors will be in a position to earn higher returns in H2-21 by positioning in fundamentally justified stocks with a consistent history of half-year dividend payment. Suppose the positive market performance, albeit short-lived, that ensued in April during the Q1 2021 earnings season is anything to go by; we believe it is compelling for investors to take advantage of the moderation in share prices in making a re-entry into stocks,” they said.
The analysts believe that Access Bank Plc, Guaranty Trust Bank Plc, Stanbic IBTC Holdings Plc, United Bank for Africa Plc, Zenith Bank Plc, MTN Nigeria Plc, Nestle Nigeria Plc and Nigerian Breweries Plc, are some of the stocks investors should buy ahead of the interim dividends declarations. Considering the first quarter results of the companies, the prospects for interim dividends are high.
For instance, Access Bank Plc grew its profit after tax (PAT) for the first quarter (Q1) ended March 31, 2021, by 28 per cent to N52.6 billion compared with N40.9 billion recorded in the corresponding period of 2020. Details of the results showed gross earnings of N222.1 billion. Profit Before Tax (PBT) rose by 30 per cent to N60.1 billion, from N46.2 billion, while PAT grew by 28 per cent to N52.6 billion.
According to the Group Chief Executive Officer of Access Bank Plc, Mr. Herbert Wigwe, the performance showed the strong capacity of their business to generate sustainable earnings on the strength of their balance sheet, diverse revenue streams and their dedicated people.
“As a result of effective implementation of our cost reduction strategy, operating expenses remained flat, despite the inflationary environment and increased regulatory cost.
Our retail banking business also showed steady growth with a 112 per cent increase in revenue to N57.5 billion and a 941,631 new customer sign-on via our financial inclusion drive during the quarter. This improvement is evidenced by the consistent and robust savings account growth to N1.3 trillion, leading to a significant reduction in our cost of funds,” Wigwe said.
The GMD said Access Bank would leverage the African Continental Free Trade Agreement (AfCFTA), and focus on key markets to drive outside Africa and intra-Africa trade.
“In alignment with our objectives, we recently announced our intention to acquire a majority shareholding in African Banking Corporation of Botswana Limited to further strengthen our Southern African footprint. Looking at the quarters ahead, we are poised for strong earnings growth fueled by our retail momentum, robust balance sheet, and operational efficiency,” he said.
Similarly, UBA grew its PAT by 26.8 per cent to N38.2 billion in Q1 2021 from N30.1 billion in 2020. The bank leveraged on modest growth in both interest and non-interest income as well as increased efficiency to deliver an improved bottom-line.
The bank recorded an annualised 20.5 per cent return on average equity (RoAE) compared to 19.9 per cent in the same period of 2020.
UBA’s total assets rose by 2.5 per cent to N7.9 trillion compared to N7.7 trillion recorded at the end of the 2020 financial year whilst shareholders’ funds grew to N762.4 billion up by 5.3 per cent from N724.1 billion as at the end of 2020.
Commenting, the GMD, UBA, Mr. Kennedy Uzoka, said the results reflected the bank’s capacity to sustainably grow earnings even in a highly uncertain macroeconomic environment.
According to him, the robust capital and liquidity positions have boosted the bank’s capacity as it continues to support its customers across diverse sectors and markets, guided by prudent risk management practices.
He said: “These impressive 2021 Q1 results reflect the capacity of our business to sustainably grow earnings even in a highly uncertain macroeconomic environment. We remain upbeat on the macroeconomic outlook of the countries in which we operate, especially as the COVID-19 vaccine distribution gains traction globally, whilst commodity prices and currencies continue to stabilise. Our robust capital and liquidity positions have positioned us to continue to support our customers across diverse sectors and markets, guided by prudent risk management practices.”
Uzoka explained the bank’s effort towards diligently executing its priorities for the year 2021, as it leverages people, process, and technology to deliver the best customer experience across all its channels and touchpoints, achieving industry leadership and dominance.
“The bank is making strong progress in Nigeria where our continuous market share and efficiency gains are translating into higher profits. We are committed to sustaining this strong start throughout the year, leveraging our customer-First (C-1st) philosophy and unparalleled execution to deliver even stronger returns to our esteemed shareholders in 2021 and beyond;” Uzoka said.
