Baron Rothschild is said to have advised that the best time to buy is when there is “blood in the streets,” that is when the markets have fallen drastically and investor sentiment is extremely negative.
Today, many stock investors still anticipate losses in Nigeria’s stock market as stocks selling continue and pessimism only grows.
Many stock market analysts have used different words to describe today’s market condition. They have also tried to link today’s stock market condition to particular causes. Yes, some say the bears have taken over, while others prefer to call it a correction.
But a bear market should not be confused with a correction, which is a short-term trend that has duration of less than two months. Corrections are often a great place for a value investor to find an entry point, bear markets rarely provide great entry points, as timing the bottom is very difficult to do.
The scenario gives us a clue on the situation we are today… the causes aside. Whether bear or the correction, one thing is still very sure for an answer… the stock market must one day bottom-out for us to see a real uptick.
A market bottom is a trend reversal, the end of a market downturn, and precedes the beginning of an upward moving trend (bull market). In every market, there is trend, but what is still difficult to ascertain is the duration of this trend we see now in the stock market.
Though, it is very difficult to identify a bottom (referred to by investors as “bottom picking”) while it is occurring, the risk facing most investors in this period is that most upturn following a decline is often short-lived and prices might resume their decline. This happened recently in our market and it only succeeded in bringing on board more loss for the investor who purchased stock(s) during a misperceived or “false” market bottom.
For the bears, while there is no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20 percent or more over at least a two-month period.
The cause…
Developments in the international oil market have intensified the risk on how long this episode will last. In addition to its contagion on the local currency, another risk relates to speculations around upcoming the election and possible risks to the outcome.
All these among others are weighing on investors’ appetite for Nigerian equities.
Till date, many analysts remain conservative on equities, as they foresee further price weakness ahead. Contending the pressure at forex market (naira against the greenback) is another issue.
High demand for forex continued unabated with limited greenback to support this demand. Current downturn in oil price, which puts pressure on naira, appears to be permanent.
The decline in oil price has considerable reduced accretion to Nigeria’s external reserve. The pressures in forex market were aided by excess liquidity conditions in the banking system.
This has led to upward pressure on forex while banks continuously exercise cautious approach to lending. These were among the issues raised at the recently concluded MPC meeting.
MPC… the decisions
The shocking revelation was that rather than give loans to the private real sector, banks preferred to advance credits to their customers for the purchase of dollar that fuelled pressure in the forex market. The MPC has taken the bull by the horns with its decisions.
At least, about N400 billion will sterilised with the apex banks – a decision aimed at taking the liquidity off the banks who have been frontloading the forex market. The implication now is that the carrying cost of the dollar will now become very expensive with the CRR increase.
Past experiences… an investor’s hope in today’s market
Some of the celebrated markets across the globe today once had their black periods. This implies that the Nigerian Stock Exchange (NSE) benchmark performance indictor – All Share Index (ASI) currently below 34,000 psychological level having lost about 17.91 percent year-to-date (ytd) must surely reroute. Here are some examples of market bottoms in terms of the closing values.
READ ALSO: Fixed income market loss is equities gain as domestic deals hit six-month high
The Dow Jones Industrial Average (DJIA) hit a bottom at 1738.74 on October 19, 1987, as a result of the decline from 2722.41 on August 25, 1987. That day was called Black Monday. The situation has long changed. A bottom of 7286.27 was reached on the DJIA on October 9, 2002, as a result of the decline from 11722.98 on January 14, 2000. This included an intermediate bottom of 8235.81 on September 21, 2001 (a 14% change from September 10), which led to an intermediate top of 10635.25 on March 19, 2002.
Also, the “tech-heavy” Nasdaq fell a more precipitous 79 percent from its 5132 peak (March 10, 2000) to its 1108 bottom (October 10, 2002). A bottom of 6,440.08 (DJIA) on March 9, 2009, was reached after a decline associated with the subprime mortgage crisis starting at 14164.41 on October 9, 2007.
Iheanyi Nwachukwu
