It is no longer news that our banks will need to make provisions against losses from margin and downstream oil sector loans. ETI set the ball rolling by releasing a very disappointing full year result. This was followed by FBN writing off N26 billion to everyone’s surprise. However, not many were surprised when Oceanic bank set a record by writing off N42 billion in one swoop.
Since then Zenith, Oceanic and UBA have released their quarterly results and all 3 have written off billions. I expect all the other banks to follow suit with write offs in their quarterly announcements. I am glad the banks have decided to come clean after being helped along by the new CBN governor. As an insider the Governor was very aware of the extent of the problem at least in FBN.
While i welcome the write offs so that we can move forward, i believe the management of the banks need to show some accountability. It is not just enough to write off billions and pretend all is well. We as shareholders need to know what management has put in place to avoid a future recurrence of almost complete breakdown in risk management. We need to know whether the key parties in the debacle have been sanctioned appropriately. As a minimum no one should get a performance bonus after such disastrous results. For many years bank executives have been handsomely compensated on the back of good results. Now that the tide has changed we expect to see some restraint on executive compensation.
I therefore call on all shareholders to attend the Annual General Meeting and voice their concerns. We need to see some remorse from management for such wealth destruction. We also need to hear what they are doing to avoid recurrence. Hopefully the end of the era of praise singing at AGM’s is in sight.
Showing posts with label Investing. Show all posts
Showing posts with label Investing. Show all posts
Saturday, August 1, 2009
Saturday, July 18, 2009
Round 2
Someone once said “the ability to anticipate the market instead of reacting to it is the most important attribute that separates the consummate investor from the rest of the investing crowd”. Can we anticipate the market? Perhaps. Attempting to predict the direction of the market is usually a fools errand, but there is no harm in trying.
There is no doubt we are in bear territory. The NSE All Share Index has lost 23.5% since it peaked for the year at 30,925 on 2nd June. On June 2nd , the market had by then been on a spectacular run and was up a stunning 56% since its low of 19,804 established on 26th March. It was an incredible reward for those who went in during the dismal first quarter. Therefore the current bear run is not shocking when considered alongside the remarkable gains.
So how can we recognise the signs of a recovery from the current bear run? Can we anticipate the next bull and jump in at close to the bottom? Back in late January when i decided to jump back in big time it was because i felt stocks were cheap using various valuation methods. Using Price to Earnings (PE), Price to Book and Dividend Yield, stocks were selling at 4 year lows. The average Yield at the end of January was 6% while the PE was 14.3. That compared favourably with the average of 16.3 and Yield of 4.75% on 30th December 2005. The market did not bottom out until March after a suckers rally in February. At the bottom of the market on 26th March 2009 the yield was 6% and PE 12.5%. However, all the stocks i bought in late January and early February did not breach their lows in the March sell off. What i did not anticipate then was that i will be rewarded so quickly.
I used mainly two criteria to decide what to buy: the dividend yield and the PE. I placed more emphasis on the dividend yield. Deciding that at worst i will get a dividend. Most of the banks stood out. I selected those i was familiar with and those that have taken the worst beating. A number of non bank stocks also stood out. I bought those with the largest yields and a reasonable dividend paying record. I avoided Insurance companies. Having just taken a course on Risk management, the faith of Insurance companies in the UK during the stock market collapse in the early 2000’s kept ringing in my ears. Despite their “attractive” valuations i stayed away.
Within two weeks of my entry the February suckers rally was in full swing. I sold a few to reduce my losses from the previous year but mercifully held on most until May/June. I guessed correctly that the stocks had more to run and that they were still fundamentally attractive. Anticipating a selloff in the 3rd quarter i decided to bank some of my gains, I took out all the cash i put in during the first quarter plus more in May and June. I rebalanced my portfolio keeping a few banks and buying more non banks that i hope will act as stabilizers. I kept a nice amount of cash to take advantage of any opportunities that might arise. So far so good.
July has so far been testing. The Index has gained only 3 times in 13 trading days shedding 11.9% in the process. The average PE as at July 17th was 13 and the Yield 5%. The PE is now more attractive than in January but the Yield has dropped probably reflecting some of the poor dividends announced by some Insurance companies. A few stocks are definitely becoming more attractive. My eyes are firmly on non banks stocks for now. The banks need to fall further to compensate for the more uncertainty hanging over them. Insurance stocks are still a no go.
Another positive development that might affect the faith of the market is the reduction in Monetary Policy Rate by the Central Bank. Lower interest rates are generally good for the economy and the market.
I still believe the last half of the year will be tough due to the common year end for banks and the painful write downs some banks need to make. However, if one has a thick skin and some cash to last a long bear run, it will also present an opportunity.
The strategy is to try hard not to exhaust cash before the bear is finally slaughtered. Buy in bits and avoid needless risk like buying IAA or Transcorp for instance. And above all be patient and prepared for a long, bumpy and exhausting ride.
There is no doubt we are in bear territory. The NSE All Share Index has lost 23.5% since it peaked for the year at 30,925 on 2nd June. On June 2nd , the market had by then been on a spectacular run and was up a stunning 56% since its low of 19,804 established on 26th March. It was an incredible reward for those who went in during the dismal first quarter. Therefore the current bear run is not shocking when considered alongside the remarkable gains.
So how can we recognise the signs of a recovery from the current bear run? Can we anticipate the next bull and jump in at close to the bottom? Back in late January when i decided to jump back in big time it was because i felt stocks were cheap using various valuation methods. Using Price to Earnings (PE), Price to Book and Dividend Yield, stocks were selling at 4 year lows. The average Yield at the end of January was 6% while the PE was 14.3. That compared favourably with the average of 16.3 and Yield of 4.75% on 30th December 2005. The market did not bottom out until March after a suckers rally in February. At the bottom of the market on 26th March 2009 the yield was 6% and PE 12.5%. However, all the stocks i bought in late January and early February did not breach their lows in the March sell off. What i did not anticipate then was that i will be rewarded so quickly.
I used mainly two criteria to decide what to buy: the dividend yield and the PE. I placed more emphasis on the dividend yield. Deciding that at worst i will get a dividend. Most of the banks stood out. I selected those i was familiar with and those that have taken the worst beating. A number of non bank stocks also stood out. I bought those with the largest yields and a reasonable dividend paying record. I avoided Insurance companies. Having just taken a course on Risk management, the faith of Insurance companies in the UK during the stock market collapse in the early 2000’s kept ringing in my ears. Despite their “attractive” valuations i stayed away.
Within two weeks of my entry the February suckers rally was in full swing. I sold a few to reduce my losses from the previous year but mercifully held on most until May/June. I guessed correctly that the stocks had more to run and that they were still fundamentally attractive. Anticipating a selloff in the 3rd quarter i decided to bank some of my gains, I took out all the cash i put in during the first quarter plus more in May and June. I rebalanced my portfolio keeping a few banks and buying more non banks that i hope will act as stabilizers. I kept a nice amount of cash to take advantage of any opportunities that might arise. So far so good.
July has so far been testing. The Index has gained only 3 times in 13 trading days shedding 11.9% in the process. The average PE as at July 17th was 13 and the Yield 5%. The PE is now more attractive than in January but the Yield has dropped probably reflecting some of the poor dividends announced by some Insurance companies. A few stocks are definitely becoming more attractive. My eyes are firmly on non banks stocks for now. The banks need to fall further to compensate for the more uncertainty hanging over them. Insurance stocks are still a no go.
Another positive development that might affect the faith of the market is the reduction in Monetary Policy Rate by the Central Bank. Lower interest rates are generally good for the economy and the market.
I still believe the last half of the year will be tough due to the common year end for banks and the painful write downs some banks need to make. However, if one has a thick skin and some cash to last a long bear run, it will also present an opportunity.
The strategy is to try hard not to exhaust cash before the bear is finally slaughtered. Buy in bits and avoid needless risk like buying IAA or Transcorp for instance. And above all be patient and prepared for a long, bumpy and exhausting ride.
Sunday, July 12, 2009
Ray of Hope
May provided further respite and ray of hope to beleaguered investors on NSE. The Index gained a stunning 38% , surely a record gain in any one month. It was a month in which investors who took the risk in the first quarter were rewarded beyond their imagination. Value of transaction at just over N56 billion was the highest for the year which is consistent with a rising market which generates more interest.
June on the other hand was a reality check. Value of transactions at over N94 billion was the highest in 9 months. The Index reached a year high on June 2nd at 30,925 and came within whiskers of the year opening. However, by the end of the month the Index had dropped to 26,862 a 9.6% decline from May closing. This was certainly not a surprise after the record setting gains in May.
As we enter the summer the dullest time of the year, it is likely that the index will drop further from its June closing before the summer is out. Already the first few days in July indicate a declining interest in the market. Value of transactions are declining daily albeit slowly. But the signs of a bear market are there: lower lows and lower highs combined with shrinking volume.
With the new Central Bank Governor talking tough and uncertainty still hanging over the faith of some banks this is the time for caution. A time to perhaps sit still. Except for some investors still holding on to dead wood. This might be another opportunity to exit with modest losses before another round of meltdown.
June on the other hand was a reality check. Value of transactions at over N94 billion was the highest in 9 months. The Index reached a year high on June 2nd at 30,925 and came within whiskers of the year opening. However, by the end of the month the Index had dropped to 26,862 a 9.6% decline from May closing. This was certainly not a surprise after the record setting gains in May.
As we enter the summer the dullest time of the year, it is likely that the index will drop further from its June closing before the summer is out. Already the first few days in July indicate a declining interest in the market. Value of transactions are declining daily albeit slowly. But the signs of a bear market are there: lower lows and lower highs combined with shrinking volume.
With the new Central Bank Governor talking tough and uncertainty still hanging over the faith of some banks this is the time for caution. A time to perhaps sit still. Except for some investors still holding on to dead wood. This might be another opportunity to exit with modest losses before another round of meltdown.
Thursday, April 30, 2009
April
April brought welcome relief after the destruction in March when the All Share Index lost 15.1% closing at 19.852. This was the first time it closed for the month below 20,000 since November 2003.
Mercifully April was much better, in fact better than February as the Index gained 8.7% closing at 21,491. The full year result for GTB contributed to the positive performance of the Index. The Index gained 8.3% in 7 days following the release of the result. Without the positive impact of GTB, the month would have closed almost flat.
The full year result of GTB restored some confidence to the beleaguered market. The level of disclosure was impressive and the performance above expectations in the light of the gloom. The result lifted some of the clouds hovering over the banks.
The value of transactions in April was also encouraging. Although just under N43 billion was exchanged a far cry from the N250 billion that was exchanged in April last year, it was the highest for the year. Indicating investors are becoming more interested in the market.
May will be pivotal. Will the gains made in April be reversed just as we saw in March? Or would the flurry of full year results (Oceanic, Ecobank, Dangote Sugar etc) and quarterly results (Zenith, UBA, Skye etc) lift the market?
That said, the feeling is that the worst is over. The Index might commence mild fluctuations till the last quarter of the year. In general the faith of the market, just like its capitalization rests on the performance of the banks. As the banks perform so will the Index. Let’s hope the result released by GTB is an indication of positive news to come.
Mercifully April was much better, in fact better than February as the Index gained 8.7% closing at 21,491. The full year result for GTB contributed to the positive performance of the Index. The Index gained 8.3% in 7 days following the release of the result. Without the positive impact of GTB, the month would have closed almost flat.
The full year result of GTB restored some confidence to the beleaguered market. The level of disclosure was impressive and the performance above expectations in the light of the gloom. The result lifted some of the clouds hovering over the banks.
The value of transactions in April was also encouraging. Although just under N43 billion was exchanged a far cry from the N250 billion that was exchanged in April last year, it was the highest for the year. Indicating investors are becoming more interested in the market.
May will be pivotal. Will the gains made in April be reversed just as we saw in March? Or would the flurry of full year results (Oceanic, Ecobank, Dangote Sugar etc) and quarterly results (Zenith, UBA, Skye etc) lift the market?
That said, the feeling is that the worst is over. The Index might commence mild fluctuations till the last quarter of the year. In general the faith of the market, just like its capitalization rests on the performance of the banks. As the banks perform so will the Index. Let’s hope the result released by GTB is an indication of positive news to come.
Wednesday, March 25, 2009
NSE and Alleged Price Manipulation
I read with interest an advert placed by African Petroleum (AP) on the alleged price manipulation of their stock. The advert was disturbing and has the capacity to further undermine the already fragile public confidence in the market.
There were several things that were quite disturbing about the advert. How did AP get hold of the Central Securities and Clearing System (CSCS) transactions of Dangote or is this information available in the public domain? Why is AP now crying that their price has fallen down to earth? Why did they not complain when the price went up to ridiculous levels before the public offer? Did it not go up due to the same loop hole that is now being exploited?
It is obvious especially in hindsight that prices were manipulated up during the public offer mania. We are all living through the consequences. I sincerely hope the Securities and Exchange Commission (SEC) and the Nigeria Stock Exchange (NSE) will be alive to their various responsibilities.
A situation whereby price manipulation whether up or down go unchecked by the authorities is not healthy for our market. Investors should also be reminded that it is not only when prices are going down that they should ask questions. When prices go up to levels that are obviously irrational, investors should also seek logical explanation otherwise they should stay out of the market and resist the temptation offered by a quick gain.
I also use this opportunity to call on the NSE and SEC to sanction companies that have refused to provide their quarterly earnings as required. Such sanctions should not just be a slap on the wrist but should be sanctions that are appropriate. We need better disclosure to calm investors’ nerves. Now is certainly not the time to continue to turn a blind eye on such obvious non compliance.
There were several things that were quite disturbing about the advert. How did AP get hold of the Central Securities and Clearing System (CSCS) transactions of Dangote or is this information available in the public domain? Why is AP now crying that their price has fallen down to earth? Why did they not complain when the price went up to ridiculous levels before the public offer? Did it not go up due to the same loop hole that is now being exploited?
It is obvious especially in hindsight that prices were manipulated up during the public offer mania. We are all living through the consequences. I sincerely hope the Securities and Exchange Commission (SEC) and the Nigeria Stock Exchange (NSE) will be alive to their various responsibilities.
A situation whereby price manipulation whether up or down go unchecked by the authorities is not healthy for our market. Investors should also be reminded that it is not only when prices are going down that they should ask questions. When prices go up to levels that are obviously irrational, investors should also seek logical explanation otherwise they should stay out of the market and resist the temptation offered by a quick gain.
I also use this opportunity to call on the NSE and SEC to sanction companies that have refused to provide their quarterly earnings as required. Such sanctions should not just be a slap on the wrist but should be sanctions that are appropriate. We need better disclosure to calm investors’ nerves. Now is certainly not the time to continue to turn a blind eye on such obvious non compliance.
Monday, March 16, 2009
February
In line with tradition, February 2009 was a much better month than January. The volume and value of transactions was higher. A total of N37 billion was exchanged compared to N29.8 billion in January. However, the amount was a far cry from the N375 billion that was exchanged in February 2008 (an all time record). The NSE All Share Index closed at 23,377 up 7.2%. This is the first time since February 2008 that the Index has closed higher the following month.
Unfortunately, the gains made in February have since been eroded in March. As at 13th March, the Index has dropped to 21,003 a new 52 week low and a decline of 10.2% compared to February.
In my view the outlook for the capital market does not look very good for the rest of the year. I base my opinion on the following:
- Very tight liquidity which has resulted in high deposit and lending rates. This liquidity will not ease up quickly especially with the adoption of December uniform year end at the end of this year.
- A depreciating Naira as a result of policy inconsistency from the Central Bank. This means more Naira is required to fund imports further worsening liquidity.
- High inflation which is usually not good for companies and individuals since it discourages long term investments.
- Gloomy economic outlook: Low oil price, reduced production due to OPEC quota and high government deficit. Due to the deficit the government will need to borrow locally to fund the shortfall. This will further reduce the funds available to the private sector and continue to impact negatively on cost of funds.
I therefore advice a long term view for any investment on the NSE. I expect the All Share Index to close down this year. The Index needs to go up at least 50% to close even for the year. I believe that is a tall order given the points outlined above.
For the long term patient investor, now is the time to look for quality stocks at reasonable valuations. For the trader, trade with caution.
Unfortunately, the gains made in February have since been eroded in March. As at 13th March, the Index has dropped to 21,003 a new 52 week low and a decline of 10.2% compared to February.
In my view the outlook for the capital market does not look very good for the rest of the year. I base my opinion on the following:
- Very tight liquidity which has resulted in high deposit and lending rates. This liquidity will not ease up quickly especially with the adoption of December uniform year end at the end of this year.
- A depreciating Naira as a result of policy inconsistency from the Central Bank. This means more Naira is required to fund imports further worsening liquidity.
- High inflation which is usually not good for companies and individuals since it discourages long term investments.
- Gloomy economic outlook: Low oil price, reduced production due to OPEC quota and high government deficit. Due to the deficit the government will need to borrow locally to fund the shortfall. This will further reduce the funds available to the private sector and continue to impact negatively on cost of funds.
I therefore advice a long term view for any investment on the NSE. I expect the All Share Index to close down this year. The Index needs to go up at least 50% to close even for the year. I believe that is a tall order given the points outlined above.
For the long term patient investor, now is the time to look for quality stocks at reasonable valuations. For the trader, trade with caution.
Sunday, February 1, 2009
Crash
January 2009 will go down as the worst month in the history of the Nigerian Stock Exchange. The All share Index lost 30.6% to close at 21,814. The last time the Index was below 22,000 was in 2003. The drop of 30.6% was incredible given that the cumulative losses suffered in the entire forgettable 2008 was 46%.
The value of transactions exchanged did not fare any better. Only N29.8 billion was exchanged an average of about N1.4 billion daily. This compares miserably to the N286 billion exchanged in 2008 an average of N13 billion daily. It is safe to say that what we witnessed in the last 7 months is a crash.
For the value investor times could not be more exiting. The market PE is currently about 14.3 while the dividend yield is 6%. The market has not been this attractive for quite a while. In my view the market is currently oversold and there are opportunities in most sectors. Definitely, this is not the time for the trader as there has been little volatility to trade. However, for long term investors, this is the time to seriously consider buying quality dividend paying stocks at prices last seen 5 years ago.
Year............PE.....Yield %
30th Jan 2009...14.3... 6
31st Dec 2008...16.7... 4
25th Jun 2008...27.0... 2.1
5th Mar 2008...35.9... 1.6
31st Dec 2007...30.0... 2.1
29th Dec 2006...23.4... 3.88
30th Dec 2005...16.3... 4.75
Whether investors will have the courage and liquidity to go on a buying spree is yet to be seen. One of the things I learnt during this long bear market is that fear is indeed more powerful than greed.
The value of transactions exchanged did not fare any better. Only N29.8 billion was exchanged an average of about N1.4 billion daily. This compares miserably to the N286 billion exchanged in 2008 an average of N13 billion daily. It is safe to say that what we witnessed in the last 7 months is a crash.
For the value investor times could not be more exiting. The market PE is currently about 14.3 while the dividend yield is 6%. The market has not been this attractive for quite a while. In my view the market is currently oversold and there are opportunities in most sectors. Definitely, this is not the time for the trader as there has been little volatility to trade. However, for long term investors, this is the time to seriously consider buying quality dividend paying stocks at prices last seen 5 years ago.
Year............PE.....Yield %
30th Jan 2009...14.3... 6
31st Dec 2008...16.7... 4
25th Jun 2008...27.0... 2.1
5th Mar 2008...35.9... 1.6
31st Dec 2007...30.0... 2.1
29th Dec 2006...23.4... 3.88
30th Dec 2005...16.3... 4.75
Whether investors will have the courage and liquidity to go on a buying spree is yet to be seen. One of the things I learnt during this long bear market is that fear is indeed more powerful than greed.
Thursday, December 11, 2008
A Year to Forget
On 6th November, the All Share Index (ASI) went up for the first time in 43 trading days. It was a welcome respite. The relief lasted only 8 trading days during which the ASI gained 12.6% and closed at 38,018 on 17th November. Since then it has been all downhill once again.
From 17th November to 11th December the Index lost a further 23%. The ASI closed at 29,262 on 11th December, a year low. The last time the Index was this low was in August 2006.
Based on the records for the Index from 1995 to 2008, this year is on track to close with the biggest decline for the Index. The worst so far was 1998 which recorded an 11.9% drop. The cumulative losses between 1997 and 1999, the 3 bear years was 27.5%. The year 2008 is set to eclipse this. 2008 is indeed a year to forget.
What we are witnessing is unprecedented. Our very own financial Tsunami, the like of which we have never seen. Oil price has collapsed, the Nigerian Stock Exchange ASI is down 49.5% year to date and our banks are suffocating under the weight of margin loans. Suddenly it is no longer so rosy for the banks with Zenith, Ecobank and Skye all reporting a poor quarter July to September 2008. I am sure others will follow in due course.
The best thing to do now for those already invested is to do nothing! It is too late to sell to cut losses assuming you can find a buyer. And with the meltdown not showing any sign of slowing down, averaging down is not ideal.
As 2008 draws to a close, i am looking forward to 2009 with the hope that it can’t get worse. Or can it?
From 17th November to 11th December the Index lost a further 23%. The ASI closed at 29,262 on 11th December, a year low. The last time the Index was this low was in August 2006.
Based on the records for the Index from 1995 to 2008, this year is on track to close with the biggest decline for the Index. The worst so far was 1998 which recorded an 11.9% drop. The cumulative losses between 1997 and 1999, the 3 bear years was 27.5%. The year 2008 is set to eclipse this. 2008 is indeed a year to forget.
What we are witnessing is unprecedented. Our very own financial Tsunami, the like of which we have never seen. Oil price has collapsed, the Nigerian Stock Exchange ASI is down 49.5% year to date and our banks are suffocating under the weight of margin loans. Suddenly it is no longer so rosy for the banks with Zenith, Ecobank and Skye all reporting a poor quarter July to September 2008. I am sure others will follow in due course.
The best thing to do now for those already invested is to do nothing! It is too late to sell to cut losses assuming you can find a buyer. And with the meltdown not showing any sign of slowing down, averaging down is not ideal.
As 2008 draws to a close, i am looking forward to 2009 with the hope that it can’t get worse. Or can it?
Sunday, November 23, 2008
Respite
The last two months were a nightmare for investors on the Nigerian Stock Exchange (NSE). The NSE All Share Index (ASI) went down for 42 consecutive trading days loosing 32.4% in the process. Value of transactions also plummeted and stocks became almost illiquid as there were no buyers in sight. On November 5th the ASI closed at 33,754 down 41.8% for the year and a new 52 week low.
It was therefore a huge relief when on 6th November the ASI went up by 0.35%. A small but giant leap! The collective sigh of relief by investors was almost audible in the papers the next day.
The uptrend lasted 8 days with the ASI gaining 12.6% closing at 38,018. Another downward trend started on 18th November with the ASI loosing 8.8% in 4 days. This was expected as the ASI this year tend to move up or down for a maximum of 8 trading days (except during the 1% downward rule).
Despite the current negative trend I believe most investors were very happy to have had 8 days of respite. The question now on everybody’s lips is will the previous low of 33,754 be breached? A breach will not bode well for the market in general. The next two to three trading days will provide an answer.
In the meantime, it is best to sit out this trend until it is clearer where we are heading. The only clear thing so far is that barring a miracle, the Index will close down for the year. That will be for the first time since 1999. Ouch…..
It was therefore a huge relief when on 6th November the ASI went up by 0.35%. A small but giant leap! The collective sigh of relief by investors was almost audible in the papers the next day.
The uptrend lasted 8 days with the ASI gaining 12.6% closing at 38,018. Another downward trend started on 18th November with the ASI loosing 8.8% in 4 days. This was expected as the ASI this year tend to move up or down for a maximum of 8 trading days (except during the 1% downward rule).
Despite the current negative trend I believe most investors were very happy to have had 8 days of respite. The question now on everybody’s lips is will the previous low of 33,754 be breached? A breach will not bode well for the market in general. The next two to three trading days will provide an answer.
In the meantime, it is best to sit out this trend until it is clearer where we are heading. The only clear thing so far is that barring a miracle, the Index will close down for the year. That will be for the first time since 1999. Ouch…..
Friday, October 31, 2008
Meltdown
October 2008 will go down as one of the worst months for the Nigerian Stock Exchange (NSE) All Share Index (ASI). The Index closed at 36,326 down 21.4% from its opening. This is the worst performance in any one month between 1995 and 2008. The Index has now lost 37.4% year to date and is down 45% from its peak in March 2008.
Value of transactions has all but collapsed. Only N39.7 billion was exchanged in October an average of less than N2 billion a day. This is the worst so far this year and a far cry from the N388 billion exchanged in February 2008. Another record set in October was that the Index went down throughout the month. There was no single positive day for the Index. It was so bad that on some days no stock gained. Another unwanted record!
The 1% cap on downward movement on prices was removed on 28th October which allowed October to set some of the above records. Despite the meltdown, the removal of the cap is a welcome development. We need the market to bottom out sooner rather than later. The 1% cap was merely postponing the inevitable.
By the end of the week most of the banking stocks were selling at more than 50% off their 52 week high. The ASI itself is back to the level last seen in January 2007. If care is not taken, all the gains of 2007 will be wiped out by the end of next week.
What we witnessed in October is probably a once in a generation event. The NSE has been wrecked by the financial tsunami tormenting the world financial markets. The collapse of markets all over the world in the last few months precipitated by the sub-prime mortgage crises in the United States has confirmed the impact of globalization and the interconnectedness of world economies.
Next week will be interesting. I shudder to think that another 25% decline is in the offing. The worse is surely over. Or is it not? Stay tuned.
Value of transactions has all but collapsed. Only N39.7 billion was exchanged in October an average of less than N2 billion a day. This is the worst so far this year and a far cry from the N388 billion exchanged in February 2008. Another record set in October was that the Index went down throughout the month. There was no single positive day for the Index. It was so bad that on some days no stock gained. Another unwanted record!
The 1% cap on downward movement on prices was removed on 28th October which allowed October to set some of the above records. Despite the meltdown, the removal of the cap is a welcome development. We need the market to bottom out sooner rather than later. The 1% cap was merely postponing the inevitable.
By the end of the week most of the banking stocks were selling at more than 50% off their 52 week high. The ASI itself is back to the level last seen in January 2007. If care is not taken, all the gains of 2007 will be wiped out by the end of next week.
What we witnessed in October is probably a once in a generation event. The NSE has been wrecked by the financial tsunami tormenting the world financial markets. The collapse of markets all over the world in the last few months precipitated by the sub-prime mortgage crises in the United States has confirmed the impact of globalization and the interconnectedness of world economies.
Next week will be interesting. I shudder to think that another 25% decline is in the offing. The worse is surely over. Or is it not? Stay tuned.
Tuesday, October 28, 2008
Back to Sanity
After two months of the bizarre ill advised 1% cap on downward price movement of stocks on the Nigerian Stock Exchange, the rule has been modified to its previous position. Effective 28th October stocks can move up or down by 5% which was the previous position before 27th August.
The Index promptly fell to 40,163 loosing 3.5% from its previous days close. That is all well and good. The sooner most stocks bottom out the better for everybody. The daily downward slide of the last 36 consecutive trading days has been very damaging to investors’ confidence. The continuous daily slide was largely due to the 1% cap. Now it is gone and hopefully the market will bottom out within the next 20 trading days at worst.
Another rule that seems to have been modified is the 100,000 units rule before an upward or downward movement in price. This has reportedly been modified to 50,000 units. Although this is yet to be confirmed, it will also be another positive development. Some “illiquid” stocks have been stagnant for a while due to this rule.
It will take some time before confidence will return and investors start pouring money into the market. However, the above measures will help boost confidence and hopefully we would see some upward movement in the Index before the year runs out.
In the meantime, my eyes are on the value of daily transactions which have been very low this month. Until this goes up significantly, there will be no meaningful recovery.
The Index promptly fell to 40,163 loosing 3.5% from its previous days close. That is all well and good. The sooner most stocks bottom out the better for everybody. The daily downward slide of the last 36 consecutive trading days has been very damaging to investors’ confidence. The continuous daily slide was largely due to the 1% cap. Now it is gone and hopefully the market will bottom out within the next 20 trading days at worst.
Another rule that seems to have been modified is the 100,000 units rule before an upward or downward movement in price. This has reportedly been modified to 50,000 units. Although this is yet to be confirmed, it will also be another positive development. Some “illiquid” stocks have been stagnant for a while due to this rule.
It will take some time before confidence will return and investors start pouring money into the market. However, the above measures will help boost confidence and hopefully we would see some upward movement in the Index before the year runs out.
In the meantime, my eyes are on the value of daily transactions which have been very low this month. Until this goes up significantly, there will be no meaningful recovery.
Saturday, October 25, 2008
Illiquid
Our stock market has become illiquid. There are no buyers. Value of transactions has dried up. The daily average Naira value of trades in October has been less than two billion Naira. The All Share Index has continued its downward slide unabated.
If anybody had told me six months ago that Access Bank will be selling at less than ten Naira I would not have believed it. Access closed at N9.88 on 24th October, a 20 month low. The 2009 forward PE ratio of Access is 6.1 while the 2009 forward dividend yield is 9.8%. It is not just Access, most of the quoted banks are selling at what appears to be a bargain. A few are still pricey (eg Union and Wema). The only rational explanation for this collapse is that the “Financial Tsunami” that has wrecked havoc in Europe and US is taking its toll on our banks.
The main fear I have however, is that the short term profitability of some of the banks could be compromised due to their exposure to margin loans. If the stock market does not recover to its February level within the next six months, some banks will be forced to write off several billions of Naira.
In the light of the above, it would be prudent to discount the forecast profit of the banks in carrying out valuations. Using Access bank as an example and discounting their forecast earnings by 25%, the forward 2009 PE ratio becomes 7.8 and the dividend yield 7.9%. The result still shows that Access is currently selling at an attractive price.
For the long term investor (at least 3 years horizon) who is not exposed to Nigerian banks, and who has an appetite for risk, this is a good time to consider buying selectively. The key word is selective. Valuations should be done with discounted forecast earnings. For those of us who are already in, my advice is, stay put.
Other sectors worth watching are foods and beverages and healthcare. These two sectors are generally immune to a slowing economy as we must all eat and health is wealth. The healthcare sector is still pricey but could be attractive if its looses another 20%. Dangote Sugar in the Foods & Beverages sector is attractive and worthy of consideration.
Slowly, slowly the market is looking attractive, perhaps even presenting us with an opportunity of a life time. Do we have the confidence, courage (and dare I say – liquidity) to grab it? I hope so.
If anybody had told me six months ago that Access Bank will be selling at less than ten Naira I would not have believed it. Access closed at N9.88 on 24th October, a 20 month low. The 2009 forward PE ratio of Access is 6.1 while the 2009 forward dividend yield is 9.8%. It is not just Access, most of the quoted banks are selling at what appears to be a bargain. A few are still pricey (eg Union and Wema). The only rational explanation for this collapse is that the “Financial Tsunami” that has wrecked havoc in Europe and US is taking its toll on our banks.
The main fear I have however, is that the short term profitability of some of the banks could be compromised due to their exposure to margin loans. If the stock market does not recover to its February level within the next six months, some banks will be forced to write off several billions of Naira.
In the light of the above, it would be prudent to discount the forecast profit of the banks in carrying out valuations. Using Access bank as an example and discounting their forecast earnings by 25%, the forward 2009 PE ratio becomes 7.8 and the dividend yield 7.9%. The result still shows that Access is currently selling at an attractive price.
For the long term investor (at least 3 years horizon) who is not exposed to Nigerian banks, and who has an appetite for risk, this is a good time to consider buying selectively. The key word is selective. Valuations should be done with discounted forecast earnings. For those of us who are already in, my advice is, stay put.
Other sectors worth watching are foods and beverages and healthcare. These two sectors are generally immune to a slowing economy as we must all eat and health is wealth. The healthcare sector is still pricey but could be attractive if its looses another 20%. Dangote Sugar in the Foods & Beverages sector is attractive and worthy of consideration.
Slowly, slowly the market is looking attractive, perhaps even presenting us with an opportunity of a life time. Do we have the confidence, courage (and dare I say – liquidity) to grab it? I hope so.
Thursday, October 9, 2008
Financial Tsunami
A financial tsunami is currently sweeping the world, wrecking havoc and threatening to significantly damage entire economies. We are definitely in the middle of a major financial crisis the like of which the world has not seen in generations.
It all began in the US last year when home owners with sub-prime mortgages began defaulting on payments. This led to cash flow problems for a lot of banks which led them to squeeze credit. A large number of these banks had to take big losses which led to the melt down of their share prices and ultimate collapse of some Wall Street speculators. Major casualties include Bear Sterns, Lehman Brothers, AIG, Freddie Mac, Fannie Mae, Washington Mutual, IndyMac and the list goes on.
The greed of Wall Street and living beyond one’s means lifestyle of Americans has finally come home to roost sucking in the entire world. Due to globalization, what is essentially a crisis manufactured in the United States, has become a major world crisis. American banks have bundled up these toxic mortgages and sold them to banks in Europe & Asia. Sovereign funds not fully grasping the full magnitude of the crisis pumped in money into several American financial institutions in the last one year. They are now forced to write off these bailouts as several of these companies go bankrupt or are taken over for peanuts. Oil prices have gone south on fears of world recession threatening economies of major oil producers including Nigeria.
Our capital market in Nigeria has not been spared. The difference however is that our banks are not really distressed. The fall in share prices is more due to market liquidity drying up than because our banks are distressed. This is why the recent suggestion by Nigerian Stock Exchange (NSE) that banks should bail out the capital market is dangerous. How can NSE suggest our banks should risk depositors’ money by propping up share prices of quoted companies some of which are over valued anyway? No value will be added to the economy except to enrich a few people in the process. I hope the banks have more sense than to engage in such dangerous speculation.
The drying up of liquidity was probably caused by a combination of many factors including:
1) The exit of foreign portfolio managers from our market between February & June this year.
2) The apparent over valuation of the market which led to the exit of discerning local investors from the market.
3) The global financial crisis which has led to reduction in speculators both foreign and local.
4) The continued slide which continues to undermine confidence scaring away new money from the market in the process.
As we live through this historic crisis, I hope our banks and regulators will learn valuable lessons. Nigerian banks post consolidation are gradually embracing the culture of consumer loans. We see on a daily basis in our newspapers adverts by banks of all kinds of consumer loans. These banks need to ensure their risk management is robust enough to deal with the added new risk they are taking.
The crisis was mostly caused by Wall Street greed and American debt culture. Nigerians and Nigerian banks will do well not to be sucked into this dangerous debt culture whose ultimate outcome is the destruction of wealth and livelihoods.
It all began in the US last year when home owners with sub-prime mortgages began defaulting on payments. This led to cash flow problems for a lot of banks which led them to squeeze credit. A large number of these banks had to take big losses which led to the melt down of their share prices and ultimate collapse of some Wall Street speculators. Major casualties include Bear Sterns, Lehman Brothers, AIG, Freddie Mac, Fannie Mae, Washington Mutual, IndyMac and the list goes on.
The greed of Wall Street and living beyond one’s means lifestyle of Americans has finally come home to roost sucking in the entire world. Due to globalization, what is essentially a crisis manufactured in the United States, has become a major world crisis. American banks have bundled up these toxic mortgages and sold them to banks in Europe & Asia. Sovereign funds not fully grasping the full magnitude of the crisis pumped in money into several American financial institutions in the last one year. They are now forced to write off these bailouts as several of these companies go bankrupt or are taken over for peanuts. Oil prices have gone south on fears of world recession threatening economies of major oil producers including Nigeria.
Our capital market in Nigeria has not been spared. The difference however is that our banks are not really distressed. The fall in share prices is more due to market liquidity drying up than because our banks are distressed. This is why the recent suggestion by Nigerian Stock Exchange (NSE) that banks should bail out the capital market is dangerous. How can NSE suggest our banks should risk depositors’ money by propping up share prices of quoted companies some of which are over valued anyway? No value will be added to the economy except to enrich a few people in the process. I hope the banks have more sense than to engage in such dangerous speculation.
The drying up of liquidity was probably caused by a combination of many factors including:
1) The exit of foreign portfolio managers from our market between February & June this year.
2) The apparent over valuation of the market which led to the exit of discerning local investors from the market.
3) The global financial crisis which has led to reduction in speculators both foreign and local.
4) The continued slide which continues to undermine confidence scaring away new money from the market in the process.
As we live through this historic crisis, I hope our banks and regulators will learn valuable lessons. Nigerian banks post consolidation are gradually embracing the culture of consumer loans. We see on a daily basis in our newspapers adverts by banks of all kinds of consumer loans. These banks need to ensure their risk management is robust enough to deal with the added new risk they are taking.
The crisis was mostly caused by Wall Street greed and American debt culture. Nigerians and Nigerian banks will do well not to be sucked into this dangerous debt culture whose ultimate outcome is the destruction of wealth and livelihoods.
Sunday, October 5, 2008
September
September was a tough month for investors in Nigerian quoted equities. The NSE All Share Index declined for 17 straight days loosing 6.1% in the process and down 20.3% for the year. Value of transactions during the month was a meagre N134 billion, the lowest for the year. Most stocks were on offer throughout the month with no buyers in sight.
The current situation should not come as a surprise given the trend in the last 6 months. The 1% limit placed on downward movement in stock prices has not stopped the decline. What it has succeeded in doing is driving away speculators from the market. Without speculators, liquidity has all but disappeared. In addition, the continued daily slide has continued to weigh on investors mind further draining away their fragile confidence in the market.
The Central Bank of Nigeria announced further measures in September to improve liquidity. These included the reduction in Cash Reserve Requirement and liquidity ratio for banks. So far the new measures have not affected the market positively.
What next? Can it get worse? The reality is that we are in uncharted territory. World markets have been in a state of turmoil throughout the year with almost all markets in negative territory for the year. The good news however, is that Nigerian banks have not been involved in the reckless financial engineering that has threatened the very survival of some US banks.
My advice is to stay out of the market if your horizon is less than 2 years. For those with a long term view, now is the time to consider value investing. There are definitely bargains to be had.
October promises to be interesting. Will the year low achieved on August 26th be breached? We will know in the next two weeks. Stay tuned.
The current situation should not come as a surprise given the trend in the last 6 months. The 1% limit placed on downward movement in stock prices has not stopped the decline. What it has succeeded in doing is driving away speculators from the market. Without speculators, liquidity has all but disappeared. In addition, the continued daily slide has continued to weigh on investors mind further draining away their fragile confidence in the market.
The Central Bank of Nigeria announced further measures in September to improve liquidity. These included the reduction in Cash Reserve Requirement and liquidity ratio for banks. So far the new measures have not affected the market positively.
What next? Can it get worse? The reality is that we are in uncharted territory. World markets have been in a state of turmoil throughout the year with almost all markets in negative territory for the year. The good news however, is that Nigerian banks have not been involved in the reckless financial engineering that has threatened the very survival of some US banks.
My advice is to stay out of the market if your horizon is less than 2 years. For those with a long term view, now is the time to consider value investing. There are definitely bargains to be had.
October promises to be interesting. Will the year low achieved on August 26th be breached? We will know in the next two weeks. Stay tuned.
Sunday, August 31, 2008
Intervention
For the second time this year, the authorities saw it fit to intervene in the capital market. The market was in a free fall as the All Share Index (ASI) was down 35% from its peak and down 25.5% for the year as at 26th August. The measures taken were effective 27th August.
One positive measure was the reduction in transaction fees. This is a welcome development as the fees charged are rather too high compared to other exchanges. One very negative measure which had an immediate impact was the capping of downward movement of price of all stocks to a maximum of 1% daily. Upward movement was retained at 5% daily. A similar measure was enforced in early June when prices were not allowed to fall for 1 week. No date has been announced for the removal of the 1% cap.
This one way cap is disturbing as it amounts to manipulation. Any capping should be the same both ways. The last time a cap was applied and then removed, the ASI went on a free fall loosing 28% resulting in this new cap. So when will this temporary fix end?
Since the cap, the ASI has gained 10.6% in just three days. Most stocks have suddenly become scarce. Just a day earlier there were no takers but now everybody wants to get in on the action.
I see this capping as an opportunity to exit some weak stocks as prices move up to break even territory. Some stocks showed serious weakness during the bear run and one would be better off selling them.
On the other hand, this is not the time to buy assuming one can even get anything to buy. The constant changing of the rules of the game erodes confidence and discourages long term investing. The authorities have shown they have no appetite for a declining market. Who knows whether they might decide in the future to peg upward movement during a bull run?
My approach is simple. Sell off weak stocks and buy nothing until sanity returns.
One positive measure was the reduction in transaction fees. This is a welcome development as the fees charged are rather too high compared to other exchanges. One very negative measure which had an immediate impact was the capping of downward movement of price of all stocks to a maximum of 1% daily. Upward movement was retained at 5% daily. A similar measure was enforced in early June when prices were not allowed to fall for 1 week. No date has been announced for the removal of the 1% cap.
This one way cap is disturbing as it amounts to manipulation. Any capping should be the same both ways. The last time a cap was applied and then removed, the ASI went on a free fall loosing 28% resulting in this new cap. So when will this temporary fix end?
Since the cap, the ASI has gained 10.6% in just three days. Most stocks have suddenly become scarce. Just a day earlier there were no takers but now everybody wants to get in on the action.
I see this capping as an opportunity to exit some weak stocks as prices move up to break even territory. Some stocks showed serious weakness during the bear run and one would be better off selling them.
On the other hand, this is not the time to buy assuming one can even get anything to buy. The constant changing of the rules of the game erodes confidence and discourages long term investing. The authorities have shown they have no appetite for a declining market. Who knows whether they might decide in the future to peg upward movement during a bull run?
My approach is simple. Sell off weak stocks and buy nothing until sanity returns.
Tuesday, August 26, 2008
Never Argue with Market Trend
Although I am not a practitioner of Technical analysis, I was very concerned when on 8th August the NSE All Share Index (ASI) dropped to below 50,000 for the first time in over a year. Since then the Index has been in a free fall loosing 18% in August. Out of 18 trading days in August, we have had only one positive day and that was a meager 0.16% rise. August has also produced the longest loosing streak for the year (11 consecutive loosing days and counting). It has been a very testing month with value of transactions also drying up to less than 40% of what was recorded in February.
When we welcomed August, I was not very optimistic going by past trends. From August to mid September is usually the time of the year when the Index and Value/Volume of transactions slow down and/or falter. However, I have never witnessed such level of decline. And that is including the bear years of 1997-1999. Looking at the data from 1995 to date, we have never had such level of decline in one single month. The worst so far was July 1999 when the ASI lost 17%. Unless something positive happens in the next 3 trading days, August is on track to be the worst month in 13 years.
So what can one do? All the books I have read so far have advised staying out of a bear market. In their opinion when panic sets in investors throw out all rational thinking and dump stocks at ridiculous prices. They advice staying out until a new positive trend develops: higher highs and higher lows. This advice has been vindicated in the last four months. If one had stayed out of the market from April when the negative trend became obvious one would have been in good shape. In fact the opportunity to get out was available in June. Alas some of us refused to take the advice of experienced experts. We stayed in. Rationalizing that GTB at N22 was cheap etc. Two months down the line GTB fell to below N20.
Never argue with the market, the experts say and they are right. When the trend is downward, stay out (unless you are an astute short seller). When the trend is upward get in. Cut losses short and let winners run. It is that simple. Alas only a few practice it with discipline. I hope when the next bear calls we would have the discipline to follow the wisdom of experienced traders.
When we welcomed August, I was not very optimistic going by past trends. From August to mid September is usually the time of the year when the Index and Value/Volume of transactions slow down and/or falter. However, I have never witnessed such level of decline. And that is including the bear years of 1997-1999. Looking at the data from 1995 to date, we have never had such level of decline in one single month. The worst so far was July 1999 when the ASI lost 17%. Unless something positive happens in the next 3 trading days, August is on track to be the worst month in 13 years.
So what can one do? All the books I have read so far have advised staying out of a bear market. In their opinion when panic sets in investors throw out all rational thinking and dump stocks at ridiculous prices. They advice staying out until a new positive trend develops: higher highs and higher lows. This advice has been vindicated in the last four months. If one had stayed out of the market from April when the negative trend became obvious one would have been in good shape. In fact the opportunity to get out was available in June. Alas some of us refused to take the advice of experienced experts. We stayed in. Rationalizing that GTB at N22 was cheap etc. Two months down the line GTB fell to below N20.
Never argue with the market, the experts say and they are right. When the trend is downward, stay out (unless you are an astute short seller). When the trend is upward get in. Cut losses short and let winners run. It is that simple. Alas only a few practice it with discipline. I hope when the next bear calls we would have the discipline to follow the wisdom of experienced traders.
Tuesday, August 5, 2008
Liquidity
The Nigerian financial system has been suffering a liquidity squeeze for some months. The stock market has felt the full force of the squeeze as Naira value of trading has been on the decline since early March. The All Share Index (ASI) has also lost 22% since its all time high achieved on 5th March this year.
One common explanation offered for the decline in liquidity is the proposed common year end for all banks. This is as a result of desperation of some banks to attract deposits to boost their balance sheets. Previously some of the banks have used inter bank borrowings to boost their balance sheets at year end. However, these funds will no longer be available if the common year end is implemented.
The Central Bank of Nigeria (CBN) concerned with the outrageous deposit rates some banks have been offering out of desperation to attract deposits decided on July 23rd to postpone the policy implementation to December 2009 instead of December 2008. The postponement only lasted 13 days as the CBN announced on August 5th that the policy has been completely cancelled. Banks can now do as they wish.
Will the policy reversal improve the liquidity situation? Yes it will. But in my view not to the level that will push the Index back to record territory.
Liquidity will take some time to improve significantly. This is because another major cause of the liquidity squeeze will take time to disappear. This is the effect of the capital raising of banks and other companies on the liquidity of individuals and institutional investors. More than N1.5 trillion was raised through IPO’s and PO’s in the last two years. This is a significant amount representing more than 14% of the current market capitalization. To put it in context Guaranty Trust Bank had N365 billion deposit liabilities as at 29th February 2008. So taking out N1.5 billion (this does not include funds raised through private placements) from the banking deposit system is bound to create a strain on the system.
Therefore unless something happens to accelerate the replenishment of funds in the pockets of Nigerians and Institutional investors, the liquidity squeeze will continue for another couple of months. Perhaps even till the implementation of the 2009 budget.
The banks off course can help accelerate the replenishment by offering cheap credits to consumers using the capital they have raised. This might take some time as some of the banks have expensive deposit liabilities raised during the “desperation” period.
My outlook for August and September remain the same. I don’t expect any significant upward movement in the ASI.
As is the usual trend, October might offer some respite buoyed by the policy reversal, gradual improvement of liquidity and year end positioning.
I hope so.
One common explanation offered for the decline in liquidity is the proposed common year end for all banks. This is as a result of desperation of some banks to attract deposits to boost their balance sheets. Previously some of the banks have used inter bank borrowings to boost their balance sheets at year end. However, these funds will no longer be available if the common year end is implemented.
The Central Bank of Nigeria (CBN) concerned with the outrageous deposit rates some banks have been offering out of desperation to attract deposits decided on July 23rd to postpone the policy implementation to December 2009 instead of December 2008. The postponement only lasted 13 days as the CBN announced on August 5th that the policy has been completely cancelled. Banks can now do as they wish.
Will the policy reversal improve the liquidity situation? Yes it will. But in my view not to the level that will push the Index back to record territory.
Liquidity will take some time to improve significantly. This is because another major cause of the liquidity squeeze will take time to disappear. This is the effect of the capital raising of banks and other companies on the liquidity of individuals and institutional investors. More than N1.5 trillion was raised through IPO’s and PO’s in the last two years. This is a significant amount representing more than 14% of the current market capitalization. To put it in context Guaranty Trust Bank had N365 billion deposit liabilities as at 29th February 2008. So taking out N1.5 billion (this does not include funds raised through private placements) from the banking deposit system is bound to create a strain on the system.
Therefore unless something happens to accelerate the replenishment of funds in the pockets of Nigerians and Institutional investors, the liquidity squeeze will continue for another couple of months. Perhaps even till the implementation of the 2009 budget.
The banks off course can help accelerate the replenishment by offering cheap credits to consumers using the capital they have raised. This might take some time as some of the banks have expensive deposit liabilities raised during the “desperation” period.
My outlook for August and September remain the same. I don’t expect any significant upward movement in the ASI.
As is the usual trend, October might offer some respite buoyed by the policy reversal, gradual improvement of liquidity and year end positioning.
I hope so.
Sunday, August 3, 2008
July
I welcomed July with a lot of optimism. Unfortunately, July turned out to be the second worst month of the year as the NSE All Share Index lost 5.1%.
There were a lot of corporate announcements as expected. However, they failed to lift or excite the market as value of transactions at N191 billion was the lowest for the year. In fact some stocks lost ground despite announcing positive results and dividends. E.g. Access Bank which started the month at N17.64 closed at N15.98 ex div.
Traditionally, the values of transactions in August and September have been low. However, the Index has shown no consistent pattern. In 2007, the Index went down in August compared to July but it went up in 2006 and 2005.
In my view, the 5.1% loss we experienced in July might not be repeated in August. However, I don’t expect a gain of more than 5% as well. In fact 5% or more will be a major surprise. This is because the only major announcement expected is from Zenith, otherwise it will be mostly quite. Furthermore, the liquidity squeeze might still continue despite the postponement of the common year end to December 2009. Unless liquidity suddenly improves I don’t expect any major rally.
In August as has been in the last 2 months, my strategy is that of wait and see. Purchases could however be made if the opportunity presents itself e.g. GTB at N23 and FBN at N27 (post bonus and ex div).
I hope we get some respite in August despite my lack of optimism.
There were a lot of corporate announcements as expected. However, they failed to lift or excite the market as value of transactions at N191 billion was the lowest for the year. In fact some stocks lost ground despite announcing positive results and dividends. E.g. Access Bank which started the month at N17.64 closed at N15.98 ex div.
Traditionally, the values of transactions in August and September have been low. However, the Index has shown no consistent pattern. In 2007, the Index went down in August compared to July but it went up in 2006 and 2005.
In my view, the 5.1% loss we experienced in July might not be repeated in August. However, I don’t expect a gain of more than 5% as well. In fact 5% or more will be a major surprise. This is because the only major announcement expected is from Zenith, otherwise it will be mostly quite. Furthermore, the liquidity squeeze might still continue despite the postponement of the common year end to December 2009. Unless liquidity suddenly improves I don’t expect any major rally.
In August as has been in the last 2 months, my strategy is that of wait and see. Purchases could however be made if the opportunity presents itself e.g. GTB at N23 and FBN at N27 (post bonus and ex div).
I hope we get some respite in August despite my lack of optimism.
Sunday, July 20, 2008
Gems
The recent market turmoil has forced me to spend more time reading and reflecting on my investing philosophy. I have re-read a few of my old books and some new ones. I have found some very useful ideas in these books and I decided to reproduce the most thought provoking and most relevant to our current situation here.
These 15 Gems are from: One up on Wall Street – Peter Lynch; Survive and profit in ferocious markets – John Rothchild; Stock market wizards – Jack Schwager; Trading for a living – Alex Elder; and How to make money in stocks- William O’Neil. My comments are in italics.
1. Force yourself to buy on extreme weakness and sell on extreme strength. Although a fairly straight forward advice it is very difficult to implement as I recently found out. Buying on extreme weakness requires a lot of guts and self belief. My target entry price on Dangote Sugar has recently been met but I have been agonizing whether to buy. I finally decided to buy half of my initial plan on Monday. I will complete the trade depending on the direction of the marker in the next few days.
2. Market declines are great opportunities to buy stocks in companies you like. Supports the first gem. With this in mind it becomes a bit easier to implement the first advice.
3. Be patient. When the fundamentals say a stock is under priced but the market does not respond, stick with it. The market will respond.
4. Buying a company with mediocre prospects just because it is cheap is a losing technique.
5. Ignore the short term. True but easier said than done.
6. Think trades through. Including profit/loss exit points before you commit. It is essential to have an investment plan. Performance can then be compared to the plan and necessary decisions can be taken from a sound basis.
7. When you invest, ask yourself what is the worst that can happen. Consider the risks before the rewards.
8. Bear markets can last for 6 months or in rare cases 2 years. Don’t let them diminish your long term resolve. I hope the current bear run doesn’t go beyond 6 months. If it does, my resolve will be severely tested.
9. Bear markets are more compressed in time, more sharp in movement and more dramatic.
10. To come out ahead you don’t have to be right all the time or even majority of the time.
11. Cut your losses short. 10 and 11 work together. You can’t expect to be ahead if you don’t cut your losses short.
12. When it comes to mutual funds, select a good one and stick with it for 10 or more years. Automatically reinvest the dividends. True especially in our market that has been positive for 9 years running.
13. Concentration is critical to superior performance. The greater the number of stocks you hold, the more market like your performance becomes.
14. Hold no more than 10 stocks because your top ten ideas will always perform better than your top 100. Another difficult to follow advice in our market especially with regard to banking stocks. I need to prune down my holdings in banks but which do I keep?
15. Never make a bet you can’t afford to loose. True. You will sleep much easier if you apply this.
These 15 Gems are from: One up on Wall Street – Peter Lynch; Survive and profit in ferocious markets – John Rothchild; Stock market wizards – Jack Schwager; Trading for a living – Alex Elder; and How to make money in stocks- William O’Neil. My comments are in italics.
1. Force yourself to buy on extreme weakness and sell on extreme strength. Although a fairly straight forward advice it is very difficult to implement as I recently found out. Buying on extreme weakness requires a lot of guts and self belief. My target entry price on Dangote Sugar has recently been met but I have been agonizing whether to buy. I finally decided to buy half of my initial plan on Monday. I will complete the trade depending on the direction of the marker in the next few days.
2. Market declines are great opportunities to buy stocks in companies you like. Supports the first gem. With this in mind it becomes a bit easier to implement the first advice.
3. Be patient. When the fundamentals say a stock is under priced but the market does not respond, stick with it. The market will respond.
4. Buying a company with mediocre prospects just because it is cheap is a losing technique.
5. Ignore the short term. True but easier said than done.
6. Think trades through. Including profit/loss exit points before you commit. It is essential to have an investment plan. Performance can then be compared to the plan and necessary decisions can be taken from a sound basis.
7. When you invest, ask yourself what is the worst that can happen. Consider the risks before the rewards.
8. Bear markets can last for 6 months or in rare cases 2 years. Don’t let them diminish your long term resolve. I hope the current bear run doesn’t go beyond 6 months. If it does, my resolve will be severely tested.
9. Bear markets are more compressed in time, more sharp in movement and more dramatic.
10. To come out ahead you don’t have to be right all the time or even majority of the time.
11. Cut your losses short. 10 and 11 work together. You can’t expect to be ahead if you don’t cut your losses short.
12. When it comes to mutual funds, select a good one and stick with it for 10 or more years. Automatically reinvest the dividends. True especially in our market that has been positive for 9 years running.
13. Concentration is critical to superior performance. The greater the number of stocks you hold, the more market like your performance becomes.
14. Hold no more than 10 stocks because your top ten ideas will always perform better than your top 100. Another difficult to follow advice in our market especially with regard to banking stocks. I need to prune down my holdings in banks but which do I keep?
15. Never make a bet you can’t afford to loose. True. You will sleep much easier if you apply this.
Sunday, July 13, 2008
Are we Immune?
Capital Markets the world over have been in a state of turmoil and uncertainty for most of 2008. Most markets are in the red zone for the year including our own NSE. US markets entered official bear territory last week as major indexes closed 20% off the record high.
The NSE All Share Index is 17.6% down from the record high achieved on 5th March 2008. While we don’t have an official definition of a bear market, the mood among regulators and investors is that we are in a bear market.
From the comments of regulators of the NSE and investors, it appears most are perplexed as to why we should be on this bear run. That in my view is to ignore the strong positive run we have had in the last 9 years and the state of the world economy and financial markets.
Since last year when the credit crises surfaced in the US and Europe, the financial industry has not been the same. Record write offs by financial giants Citigroup, Merrill Lynch, UBS etc have followed. The crisis has slowed world economic growth and has pushed the US economy and other European economics onto the brink of recession. High oil and commodities prices have acerbated the situation.
Commentators the world over are predicting gloom. One that caught my eye was a comment by Peter Kenny, “the bottom line is that we are in the middle of a financial tsunami. This is a storm the likes of which this country (US) hasn’t seen”. With Fannie Mae and Freddie Mac (backbones of US mortgage market) facing a meltdown of their share price in the last few days, let’s hope Kenny is wrong. History has shown us that when all are predicting doom and gloom, chances are that recovery is just around the corner.
So what about us in Nigeria, are we immune to the turmoil? In my view we are not and our regulators should start acting that way. The high oil price has helped Nigeria more than hurt but even our manufacturers are groaning under the weight of high diesel price. More importantly, it appears liquidity in the capital market has gradually declined. Although we are told foreign portfolio money only accounts for 12% of the market, I am betting it can only get lower. Foreign money managers have bargains in their backyards and therefore have no incentive to come to Nigeria shopping. Add that to the fact that our own market is also on a bear run and therefore not as attractive as it once was. The liquidity has to come from within.
Regulators of our market need to acknowledge we are not immune to the state of global economic health. We investors need to also acknowledge that and stop worrying. After all our banks are in the best state of their lives unlike those in the US and Europe.
This bear run will surely come to an end like all things in life. Considering all the gloom around us, it might be sooner than we think.
Exchange.........YTD July 10th %
NSE.............(5.5)
Cairo...........(5.3)
JSE.............(6.6)
S & P 500.......(15.2)
DJIA..............(16)
FTSE.100........(16.5)
CAC.40..........(24.8)
BSE 30.(India)..(31.1)
Source: FSDH weekly report
The NSE All Share Index is 17.6% down from the record high achieved on 5th March 2008. While we don’t have an official definition of a bear market, the mood among regulators and investors is that we are in a bear market.
From the comments of regulators of the NSE and investors, it appears most are perplexed as to why we should be on this bear run. That in my view is to ignore the strong positive run we have had in the last 9 years and the state of the world economy and financial markets.
Since last year when the credit crises surfaced in the US and Europe, the financial industry has not been the same. Record write offs by financial giants Citigroup, Merrill Lynch, UBS etc have followed. The crisis has slowed world economic growth and has pushed the US economy and other European economics onto the brink of recession. High oil and commodities prices have acerbated the situation.
Commentators the world over are predicting gloom. One that caught my eye was a comment by Peter Kenny, “the bottom line is that we are in the middle of a financial tsunami. This is a storm the likes of which this country (US) hasn’t seen”. With Fannie Mae and Freddie Mac (backbones of US mortgage market) facing a meltdown of their share price in the last few days, let’s hope Kenny is wrong. History has shown us that when all are predicting doom and gloom, chances are that recovery is just around the corner.
So what about us in Nigeria, are we immune to the turmoil? In my view we are not and our regulators should start acting that way. The high oil price has helped Nigeria more than hurt but even our manufacturers are groaning under the weight of high diesel price. More importantly, it appears liquidity in the capital market has gradually declined. Although we are told foreign portfolio money only accounts for 12% of the market, I am betting it can only get lower. Foreign money managers have bargains in their backyards and therefore have no incentive to come to Nigeria shopping. Add that to the fact that our own market is also on a bear run and therefore not as attractive as it once was. The liquidity has to come from within.
Regulators of our market need to acknowledge we are not immune to the state of global economic health. We investors need to also acknowledge that and stop worrying. After all our banks are in the best state of their lives unlike those in the US and Europe.
This bear run will surely come to an end like all things in life. Considering all the gloom around us, it might be sooner than we think.
Exchange.........YTD July 10th %
NSE.............(5.5)
Cairo...........(5.3)
JSE.............(6.6)
S & P 500.......(15.2)
DJIA..............(16)
FTSE.100........(16.5)
CAC.40..........(24.8)
BSE 30.(India)..(31.1)
Source: FSDH weekly report
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