The Equity Strategy Diary is a new report from ARM Research aimed at emphasizing trading and investment ideas in a clear and concise manner.
In this maiden edition, ARM highlights the trend in the global equities market with particular focus on the Nigerian bourse where extended decline in oil prices has triggered arguably a worse sell off than in the 2008/09 financial crises—and probably ever.
In this maiden edition, ARM highlights the trend in the global equities market with particular focus on the Nigerian bourse where extended decline in oil prices has triggered arguably a worse sell off than in the 2008/09 financial crises—and probably ever.
The hope is that insights provided in this report will help guide your investment strategy in years to come.
The Worst Start Ever?
So, equity markets have had an interesting start to the year, to say the very least. It’s only the worst start in nearly 50 years and appears to be showing no signs of let up.
Figure 1: Global equities performance
Nigerian markets have been no different, what with the cocktail of plunging oil prices, falling corporate earnings and slowing GDP growth. An interesting chart from Bloomberg summarises just how far things have fallen, and how fast. And we’re only part-way through January.
Figure 2: Nigeria equity market performance
At this pace, we’re expected to have an annualized return for FY 2016 of -99.1%! Think about that for a minute. And another. That’s effectively all share prices at par. From AIICO to Access bank, Berger to Betaglass Paints, Caverton to Custodian, and DeapCap to Dangcem. You get the picture…
Interestingly, back in 2008, things were not even this bad. NSEASI stayed positive through May and only turned negative in June. Despite the rapid declines thereafter, the maximum annualized loss was 46%. Somewhat reasonable compared to what we have now.
Table 1: 2008 Monthly NSE-AS1 performance
So are we saying it’s time to Buy?
Whilst the rate of decline is somewhat slower compared with 2008, what’s near identical is the building pressure on the Naira. This is particularly important for foreign investors who on top of a bleak outlook cannot afford to see portfolios already savaged by falling prices (no matter how overdone relative to earnings) take another 20-25% wipeout by an adjustment of the currency peg. In this wise, the CBN’s recent announcement2 perhaps only added fuel to the fire and confirmed the extent of pressures.
Having re-understood domestic market events in the context of additional layer of risk from devaluation, what’s then to be done? Evidently, the current pace of declines cannot be sustained and we believe the current situation poses a very unique opportunity for domestic PFAs. By and large, there’s no devaluation risk to worry about and relatively steady inflows means that positions can easily be diluted on an ongoing basis.
However, does this in any way preclude foreign investors with a long-term view? Certainly not. And indeed, at these price levels potential returns would appear to more than compensate for extant devaluation risk.
Regardless of investor category, a staggered portfolio entry approach can be adopted to minimize risk and bang for your buck.
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