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Investors are having a hard time taking decisions on which stock to pick as risks associated with Covid 19, recession expectation and other socio- economic challenges grow. But AYODEJI EBOH, Managing director, Afrinvest, in this interview with Businessday offers some tips.
From our data analysis, we noticed that the All Share Index has been a mix of gains and losses in 2020. Could you give us your opinion on the general Stock Market and factors responsible for the trends?
The stock market started off with optimism following a 7.5% gain in January as investors hunted for high dividend yield stocks. However, this positivity was short lived as COVID- 19 outbreak tapered economic activities following lockdown measures to curb the spread. Consequently, the benchmark index lost 9.1% and 18.8% in February and March respectively following investors exit, especially FPIS. The market rebounded in April and May following renewed interest by local bargain hunters (accounted for about 70.0% of trades) amidst low interest rate environment in the fixed income market, gradual reopening of economies and crude price recovery. Positive momentum was not sustained in June as the ASI fell 3.1% due to weak investor sentiment, FX illiquidity and concerns over a second wave of coronavirus. We saw an uptick again as the ASI gained 0.9% in July through August as investors repositioned ahead of interim dividend while also cherrypicking stocks with impressive results.
Read also: How insecurity, Covid-19 concerns deny Nigerian students joy of Independence
We have seen an uptrend and decline in some stock prices in different sectors. In your opinion, what is driving this trend?
These trends have been largely driven by bargain hunting activities, investors repositioning in high dividend yield stocks as well as stocks that show resilience despite economic activities downturn and harsh operating environment. In the Banking sector, stocks like Zenith, Guaranty, Stanbic and UBA are expected to report impressive H1:2020 earnings despite unfavourable conditions and are projected to declare interim dividend. Meanwhile, stocks in the Industrial goods and Oil & Gas sectors have taken a beating due to poor prospect for earnings growth as oil prices crashed and economic activities remain poor. Corporates in the Telecommunication sector, MTN and Airtel have shown resilience and recorded strong earnings growth thus spurring interest in the sector. For the Consumer Goods sector, the narrative has been mixed as some corporates have enjoyed buying interest due to positive results while others like the Brewery segments have suffered consistent sell pressures.
Developed countries like Europe and America are dropping interest rates to almost zero. How could this affect portfolio investment in Nigeria?
Normally, accommodative monetary policies in Advanced Economies should see funds flow to emerging markets as investors search for higher yields. Although, there was an initial outflow of funds to the tune of $97.0bn from emerging markets at the peak of the pandemic, we have since witnessed the return of foreign investors as economies reopen and commodity prices improve. However, Nigeria is not poised to benefit from the expected flows due to FX challenges. Currently, Foreign Portfolio Investors (FPIS) are trapped in the country and foreign investors are unable to repatriate their investments due to FX illiquidity. This situation leaves a bad taste in the mind of the FPIS, hence needs to be addressed to stimulate foreign portfolio investments in the country.
Nigeria’s trading partners like Britain are going into recession. What impact would this have on the Nigerian economy and stock market?
As a result of the economic impact of the pandemic, many economies are experiencing economic recession and countries in Advanced Economies (AES) are the hardest hit. Although, Britain is not Nigeria’s main trading partner going by the latest trade data from the NBS (Britain accounted for only 3.6% of import and 2.1% of exports), the expected recordlevel economic recession across major countries and region in 2020 would significantly affect trade. Aside from trade, in 2017, the US ($6.2bn or 28.1%) and UK ($4.2bn or 19.1%) accounted for a large proportion of remittances to Nigeria. However, the significant economic weakness in these countries would affect inflows and economic activities in Nigeria. The lack of access to foreign exchange in Nigeria would also discourage available foreign investment.
Could you give us your views on the effects of Naira devaluation on foreign portfolio flow into Nigeria?
In 2020 alone, the domestic currency has been devalued at the CBN segment by 19.5% from N305.00/$1.00 to N379/$1.00 and this continues to discourage foreign investors as the value of their investments depreciate over time. Already, FDIS are very low at $214.2billion, representing a paltry 3.7% of total capital inflows as at Q1:2020. About 73.6 percent of the inflows represented portfolio investments. With the devaluation and the illiquidity in the FX market, we expect capital inflows to be weak in Q2 (upon release of the data) and for the rest of the year. Currently, the pent-up demand for FX is estimated at $5.0billion and the external reserves has depleted by 7.8% yearto-date, despite the $3.4billion loan from the IMF in April. We believe the CBN is waiting on the delayed $1.5bn World Bank loan to fund this backlog. However, this is becoming a heavy cross to bear for foreign investors.
How could the amended CAMA affect the Nigerian capital market?
The amended CAMA is expected to better shape Nigeria’s corporate landscape by setting corporate operations in line with global best practices, enabling ease of doing business and reducing regulatory hurdles. Areas as such directorship, shareholder’s protection, share capital requirement, derivatives based on the netting rule and digitalisation of processes were amended and will affects capital market participants. Digitalisation of meetings, filings of returns and transfer of shares have also been entrenched in the new act.
For directorship, directors in public companies are prohibited from doubling as Chairman and CEO, holding director position in more than 5 public companies and companies are required to have at least 3 independent directors under S.265, 307 and 275 respectively. The aforementioned will improve corporate governance and give directors room to make meaningful contribution to the affairs of the company.
To protect shareholder’s interest, the Act introduced shareholder approval of transactions exceeding 50% of book value of company’s asset at the annual or extraordinary general meeting in Section 342. Similarly, Section 119 requires that persons with significant control are expected to disclosure their shareholdings to boost transparency and prevent hostile takeovers.
Could you assess the performances of SEC and NSE as regulators?
The SEC and NSE have been cooperating to create a stronger market and improve the competitiveness of the exchange in comparison with global peers. The NSE increased stakeholder engagement by partnering SEC to streamline listing processes for companies on one hand and increasing engagements with investors on the other. We have witnessed the launch of a series of initiatives aimed at boosting investor confidence (especially retail investors), increasing transparency and improving investor education and participation. Similarly, the ongoing demutualization of the exchange is in a bid to ensure increased efficiency, competitiveness, and adherence to a higher standard of corporate governance by the NSE
Although the SEC and NSE are working towards building a better bourse, we believe there is room for improvement especially in terms of on boarding process for retail investors with the use of Biometric Verification Number (BVN), National Identification Number (NIN) and registered phone number. Also, dividend payment should be automated by obtaining full information of investors at the KYC level with the CSCS and this would reduce the burden of unclaimed dividends. There is need for increased investor education and awareness on the various products offered by the NSE. Finally, the NSE should create liquidity for retail fixed income investment in a similar manner to that of equities investors.
How do you rate the level of local and foreign investor participation before and during COVID 19?
Foreign investors have maintained a risk-off approach towards Nigerian assets since 2019 as their stake in the equities market waned from 50% in December 2019 to 48% in February 2020. Meanwhile their local counterpart improved their stake by 1% to 52% in February. The pandemic, oil price crash, FX illiquidity, low yield environment and lacklustre macroeconomic environment further fuelled sell-offs by foreign investors reducing their stake to around 44% in June while local investors stood at 56%. Huge participation from domestic investors creates stability in the market as there is lesser dips when they exit the market compared to foreign investors. Thus, we reiterate the need for increased participation by local investors specifically PFAS as investment in equities stood at c.5% as at June 2020.
There has been little or no activity in the Primary Market with regards to IPOS. What is responsible for this and what should be done?
Currently, investor sentiment in the equities market is quite weak and this is reflected in the pricing of stocks. The macroeconomic environment is unsupportive of positive corporate earnings and this continue to sour sentiments. The current valuation of stocks is not attractive to prospective companies and we are not optimistic of new listings on the Nigerian bourse in the near term. However, the insurance sector is currently undergoing recapitalization and we may see increased Rights issuances as companies seek to meet the September 30, 2021 deadline set by NAICOM.
What is your forecast of the market for the year end 2020 and which are your stock picks?
Events that have occurred so far has cautioned an overly optimistic outlook for the market in 2020. This on the back of the absence of a vaccine for COVID-19, cyclical oil prices, unattractive macroeconomic environment in Nigeria, continued FX illiquidity and weak earnings growth. Hence, we forecast a base case return of -2.8% and -11.8% for worse case. However, a better-than-expected Q3: 2020 results, improved macroeconomic landscape, increased participation by local investors majorly PFAS and higher dividend yield compared to rates in the fixed income market could spur positive sentiments in the market. Our stock picks would be stocks in the Tier-1 banking space and telecommunication sectors due to dividend paying potentials and prospects for earnings accretion. We also see value in selected stocks in the Agricultural, Consumer Goods and Industrial Goods sectors.
