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.
Saturday, July 18, 2009
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.
Thursday, March 26, 2009
Capping of Interest Rates
The Central Bank of Nigeria (CBN) issued a circular on 23rd March 2009 on bank interest rates. The CBN was concerned that interest rates have gone out of hand and something needs to be done. To address this, the Bankers Committee met on 21st March (a Saturday) to discuss. The circular was to communicate the decisions taken. The key ones were:
1) Henceforth, banks will not seek deposit at rates exceeding 15%
2) The lending rate of banks will not exceed 22% plus a maximum of 2% in fees
3) The CBN will lend to banks at a rate that is not higher than 5% above the Monetary Policy Rate (MPR).
The question is why are interest rates high in both the retail and interbank markets? Probably because there is a liquidity crisis and the banks don’t trust each other. Hence require higher rates to compensate them for the risk they are taking by lending to each other. The next question then is how will fixing rates solve the liquidity crisis?
In my view, fixing the rates will not solve the underlying crisis, which is lack of cash by banks. We have seen the effect of trying to force the market with the 1% downward rule of Nigeria Stock Exchange (NSE) and the recent closure of the Interbank Foreign Exchange market. Both measures ended up eroding confidence and had the reverse effect.
I would have thought the first thing CBN will do is to reduce the MPR. With the MPR at 9.75% the CBN is in an enviable position as it can cut rates. Some central banks have lost this option long ago. Why not drop the rate to say 7.75% and the maximum spread for lending to banks to be 3% above MPR? This should help reduce cost of funds as some banks will decide it makes financial sense to access the expanded discount window rather than access the interbank market.
Perhaps another thing that can be done is to inject more money into the economy. An idea is for the Federal Government, States and Local Governments share some more from the excess crude account. The money was saved for the rainy day. Now is the time to use it. The Federal Government can use its share to pay off the billions owed to contractors. They can also use the money for needed capital projects such as completing fast some of the Power Plants already in progress. With this more cash will flow into the banks and reduce the liquidity crisis.
The CBN has been very market oriented in the last few years. However, it has shown in the last 6 months that it is running out of ideas. Perhaps the CBN needs to work with the executive and legislature to find a way out the of the liquidity crisis that has been lingering on for over 9 months. The capping of rates can be interpreted as a cry for help. The Executive and Legislature should step up and offer help before it is too late.
1) Henceforth, banks will not seek deposit at rates exceeding 15%
2) The lending rate of banks will not exceed 22% plus a maximum of 2% in fees
3) The CBN will lend to banks at a rate that is not higher than 5% above the Monetary Policy Rate (MPR).
The question is why are interest rates high in both the retail and interbank markets? Probably because there is a liquidity crisis and the banks don’t trust each other. Hence require higher rates to compensate them for the risk they are taking by lending to each other. The next question then is how will fixing rates solve the liquidity crisis?
In my view, fixing the rates will not solve the underlying crisis, which is lack of cash by banks. We have seen the effect of trying to force the market with the 1% downward rule of Nigeria Stock Exchange (NSE) and the recent closure of the Interbank Foreign Exchange market. Both measures ended up eroding confidence and had the reverse effect.
I would have thought the first thing CBN will do is to reduce the MPR. With the MPR at 9.75% the CBN is in an enviable position as it can cut rates. Some central banks have lost this option long ago. Why not drop the rate to say 7.75% and the maximum spread for lending to banks to be 3% above MPR? This should help reduce cost of funds as some banks will decide it makes financial sense to access the expanded discount window rather than access the interbank market.
Perhaps another thing that can be done is to inject more money into the economy. An idea is for the Federal Government, States and Local Governments share some more from the excess crude account. The money was saved for the rainy day. Now is the time to use it. The Federal Government can use its share to pay off the billions owed to contractors. They can also use the money for needed capital projects such as completing fast some of the Power Plants already in progress. With this more cash will flow into the banks and reduce the liquidity crisis.
The CBN has been very market oriented in the last few years. However, it has shown in the last 6 months that it is running out of ideas. Perhaps the CBN needs to work with the executive and legislature to find a way out the of the liquidity crisis that has been lingering on for over 9 months. The capping of rates can be interpreted as a cry for help. The Executive and Legislature should step up and offer help before it is too late.
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.
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