Capital markets are by their nature indicators of the economic landscape of their host countries, and in an increasingly interconnected world, capital markets are exposed to the impact of prevailing global macroeconomic trends.
Before now, the Nigerian capital market has experienced volatility in equity trading resulting from the declining oil prices at the international market and foreign exchange challenge in the country.
Taking a cue from a year 2019 that ended on a bearish note, Jude Chiemeka, Divisional Head, Trading Business, the Nigerian Stock Exchange, stated that whilst the present market reality might seem volatile, “it provides a good opportunity for investors who take a portfolio management approach to investing”.
He stated that “taking a portfolio approach to investing provides the best risk adjusted alternative for participating in the capital market. As such, we want to ensure that the NSE will continue to provide a repertoire of products that will allow investors to create well diversified portfolios of uncorrelated asset classes.”
Chiemeka also advised that investors carefully build strong portfolios that a take a long term view on returns, as he highlighted that while equities often present the highest potential for gains, investors in this market need to explore the risk adjusted alternative by taking a portfolio approach. In light of the current performance of the equities market, he implored investors to explore risk adjusted alternatives in their portfolio building, stating that “It is, therefore, essential that investors explore other safer investment instruments such as ETFs, bonds, mutual funds, etc., which are all available in the market.”
The year 2019 saw the equities market close on a bearish note with the Nigerian Stock Exchange’s All Share Index (NSE ASI) in negative of circa -15percent. However, this is not different from present global trends, as a recent analysis by Mathias Althoff, Portfolio Manager at Tundra Fonder, shows the current state of the equities markets presents an opportunity for forward-thinking investors to come into the market with stocks trading at price-to-earnings (P/E) and price-to-book (P/B) ratios at 10-year lows.
A careful analysis of historical performance will show that while a bear market is upon us now, the tide will turn. When it does, only proactive investors will be ready to ride the waves. Consequently, it is important that investors in the equities market are careful to neither hit the panic button nor sell when stock prices begin to decline, nor go on a buying spree in the euphoria of rising prices.
While it may appear counterintuitive, the notable investor Warren Buffet advises that as an investor, it is wise to be, “fearful when others are greedy and greedy when others are fearful.” The rationale is simple: a bear market is characterised by declining prices. It is more profitable to buy a stock when it is cheap at say, N2.50 then sell when the price increases to N4, than to wait till the price rises to N3.80 only to sell at the same N4.
For investors who are averse to trading equities in a bearish market, The Nigerian Stock Exchange offers an array of asset classes for portfolio building.
In 2011, The NSE introduced Exchange Traded Funds (ETFs) into the market to allow retail investors to diversify their portfolio, minimise risk and optimise returns. Much like mutual funds, ETFs can be made up of stocks, bonds, commodities, or even a mix of securities. The fundamental difference is that ETFs can be traded live on The Exchange just like regular stocks.
There are presently9 ETFs listed on The Exchange – 2 thematic ETFs providing access to Pension-compliant and Shariah-compliant stocks, 2 broad equity market ETFs tracking the NSE 30 Index, 3 sector-based ETFs, 1 commodity ETF, and 1 bond ETF tracking exposure to benchmark FGN Sovereign Bonds. The beauty of the ETF, therefore, lies in its capacity to accommodate various risk appetites, investment objectives and strategies, and industry preferences. Furthermore, ETFs listed on The Exchange have a history of paying dividends which generates income for the investor.
The diversity and accessibility in today’s capital market also affords investors the option of fixed income investments. In 2017, the Debt Management Office in collaboration with The NSE introduced the FGN Savings Bond allowing investors to come into the market with as little as N5,000. This product has helped to debunk the primary myth that investing is the preserve of the affluent by opening up the market to all income classes. The FGN Savings Bond can alsobe traded in the Secondary Market on the trading platform of The NSE.
Chiemeka also highlighted the efforts of The Exchange to deliver value to investors. He said, “The NSE on its part continues to deploy initiatives that maintain the highest level of regulation and protect investors’ interests including the: Investors’ Protection Fund (IPF) that will compensate investors with genuine claims of pecuniary loss against dealing member firms. Listed companies are also required to undergo the Corporate Governance Rating System (CGRS) that measures listed companies against the highest levels of governance and anti-corruption standards.”
In its efforts to enhance market activities and increase access to information, the Exchange has no doubt made some noteworthy advancements.
