In the last few weeks, the stock market has turned bearish and the falling prices are getting the attention of investors and non investors alike. The falling prices, which had been attributed to a number of reasons from the falling oil prices to the insecurity and raging insurgency in the North East of Nigeria, and of course the coming elections, which all combined, creates uncertainty, a feature that the stock market does not like and usually quickly expressed in the way investors react. That is, sell their positions in the stock market and either stay on the sidelines to get more clarity, or move into other asset classes with less perceived riskiness.
The predictability of the human behaviour in these circumstances is always the same, we all react in a herd mentality and act in the same way, sell when others are selling and buy when others are buying, not withstanding whether we have the same situation or not.
There is a peculiarity about the stock market we all never seem to note. The daily price movements that we never pay attention to, unless it becomes extreme, bullish when it goes up and bearish when it goes down, are part and parcel of a trading stock market.
The daily stock market index graph shows this movement so clearly that overtime we have all come to recognise it as a uniquely stock market representation. No market index graph, ever stay the same, as long as the market trades. Yet, when these extreme price movements come in what I call the “yo yo” season, more appropriately called volatility, the human behaviour is always the same, we panic and make decisions that are emotional, with consequences we sometimes come to regret.
Every extreme movement in the market is usually an unusual event that tends to correct itself. If prices goes too high, at some point, those holding stocks instinctively starts to feel that the prices have become unrealistic and they want to sell. So, also is the opposite, when prices fall too low, those who do not have those stocks start to feel that the bargain is too good to ignore and they jump into the market to buy. In both cases, the best time to pay attention to the stock market is when there are extremes. The opportunities are there and if you do the right things, you may just be lucky and become very very rich. But the majority who go by this will be at least well off, enough to live a comfortable life, everything thing after that is excessive, you are free to earn it if you give it what it takes.
The current market situation at the Nigerian Stock Market presents tremendous opportunity to make money if you are the investor type with plenty of patience. By the way, there is an Edo saying that “Patience and Contentment will see you through life.” You also need that in the stock market. It is a case of “the patient investor eats the fattest meat.”
For one, the current prices are fantastic entry points. You are not likely to see this entry points for sometime to come. Any investor who buys now will almost always make money. And the longer he holds it, the more money will be made.
Take stocks like Dangote Cement and FBHN, they are trading several multiples below their intrinsic value. The current stock market valuation provides hugh opportunities, those who have the money to invest in the medium to long term should take advantage of the current prices.
Dangote Cement recently cuts its retail prices on its cement to take full advantage of its excess capacity. The move was seen as a very smart one. It will work to take a larger share of a market where it already controls over 60 percent. You don’t put capacity in place to leave them idle. You work it to your advantage. The stock has long-term demand potentials and will go the way of the rapid development, going on in the economy. Building and infrastructure will be in high demand for sometime. Dangote Cement is well place to reap bountifully from this very rosy trend for years to come. Building materials will remain for several years, a growth story. So, the highly priced stock has a good entry point and will make money for investors in the long run. Its sound governance and the several synergies that the stock has, recommends it.
On the other hand, FBHN shares was last issued for N10 in 2005/2006. Any investor buying into this franchise will find value over the medium to long term.
A conglomerate discount was already at play for the FBHN stock, before the recent stock market bearishness. The stock has good potentials in the medium to long term.
For those who are afraid to invest because they think another 2009 Stock Market is here, they should be reminded that the circumstances are very different. The market has better regulation and the banks are clean to a large extent. And more importantly, there are now local institutional investors in our Pension Companies and a growing number of private equity companies, insurance companies with large balance sheets that have appetite for risk and the resources to underwrite profitable positions. These local institutions are there to take up the vacuum left by foreign investors who are very sensitive to currency devaluation.
Devaluation blues… right for the economy but came a bit late…
Devaluation seriously affects returns for foreign investors. What they gain in capital appreciation will vanish in a devaluation of the of the naira. That is why they are very sensitive to devaluation. Those investors, who are in naira have nothing to worry about, make as much naira as you can, when the market and the economy recover, there will be plenty of profits to use to adjust your portfolio against currency devaluation.
I personally feel devaluation at this time is a good thing, but a bit late. Chukuemeka Soludo, then governor of the Central Bank of Nigeria, during the last crisis of the stock market, also made the same mistake. We ended up having a massive devaluation, which dislocated the markets and the economy. He delayed in taking action to devalue when the effect would have been minimal.
The market will have to be monitored more closely. The CBN should set up a monitoring group to advise it on any stock market sign of weakness, and once we think the bearishness will have legs, we should immediately devalue the naira to preserve its value. It is better to have a series of minor adjustments to our exchange rates than the massive one-time action that tends to dislocate the markets.
Gradual adjustments will create good trading opportunities that may in future make the naira an international trading currency. We have the demographics to support it. We just need to push for the development of our infrastructure to move the economy to realise its full potentials.
The railways are the next revolution waiting to happen in Nigeria…
Unless we fix our railways, we will not be able to really reach our potential. Railways through out the country will move people around and integrate the people of this country. Ask all those who did their National Youth Service outside of their areas. All that is required to make it work like our telecom industry did, is to privatise it. Break up the businesses and create several regional units to be sold to investors/technical partners. It will create jobs with incredible economic activity in the country.
Can you imagine the opportunity for a Maiduguri resident to put his goods on a train and go to another region of the country to sell for better prices. The train can bring him to Lagos to sell and return the next day in comfort and shorter time. That will make labour mobility through out the country possible, labour mobility is always a good thing, not to talk of the tourism potentials and all that comes with it. This will be a hugh step in creating linkage opportunities in the economy.
The government should put its railway modernisation plans for bids for different routes and require bidders to have at least one international technical partner with a good track record. The revolution will be twice more impactful for Nigerians. The funding gap to develop our railways to achieve its goals is too wide for government to think that it can do it by itself. There is plenty of private money to fund it.
Make present Nigerian Railways, the regulator, and let them develop a very robust regulatory framework to grow the industry, and sell all its assets to private investors and use the proceeds to reinvest and de-risk the sector, to attract investors. The benefits will show immediately.
We all talk about the lack of interest in developing the solid minerals sector, people forget that no matter what you have in the ground, if you can not get it out and and get it to where it is needed, it is not valuable. This was the observation made by my good friend, Kunle Elebute of KPMG, at the recently concluded Capital Market Committee Retreat. The economy is waiting to be unleashed, once the right moves happen.
The market will be there to take those investors with faith, to the promised land. It is for these reasons that we think the stock market represents the best value right now.
Victor Ogiemwonyi is the CEO of Partnership plc in Ikoyi, Lagos.
