Determined to answer recurring questions on the most volatile markets in Africa, Lagos-based Coronation Research analysts examined the five (5) principal stock exchanges in Africa –Nigeria, Kenya, Egypt, Ghana, and South Africa – and compared their 60-day volatility, starting on January 1, 2021.
Their examination shows that while the Nigerian Exchange Limited (NGX) All-Share Index exhibits a degree of volatility, taken in isolation, it has been the least volatile of the African exchanges.
In their February 21 report to investors titled “The most volatile markets in Africa”, Coronation Research noted that their clients asked them how volatile the NGX All-Share index is compared with other major exchanges in Africa. According to them, they were also asked question on how volatile are the top stocks listed on the NGX Exchange.
The NGX All-Share average 60-day volatility printed lowest at 10.91percent with capitalization of $61.2billion while Nairobi All-Share stood higher at 13.54percent with capitalization at $20.7billion according to the analysts.
Also, Egypt Hermes average 60-day volatility and market cap was 14.14percent and $19.7billionrespectively; Ghana SE Comp (13.57 percent and $9.7billion); and FTSE/JSE All-Share (15.59percent and $1.271trillion).
“The NGX Exchange has been the least volatile over the past year. In part, this reflects the diversification by sector among its principal index weights, and its low exposure to commodity stocks”, the analysts noted.
“The South African FTSE/JSE All-Share Index shows the highest volatility of the five African indices in our study, most likely to its inclusion of commodity producers,” Coronation Research noted.
“Note that 10 index heavyweight stocks constitute over 78percent of the NGX Exchange All-Share Index, suggesting high volatility for the index overall. However, there is a degree of diversity in this line-up of stocks listed on the NGX Exchange, between telecoms, cement, banks (the big-three sectors), consumer-facing manufacturers and oil & gas.
Read also: NGX to support DMO in deepening capital market
“The more diversified an index is by sector, the less volatile we expect it to be. By contrast, indices with strong exposure to commodity stocks are likely to be volatile. Traders typically favour volatile stocks so long as they are sufficiently liquid to cut their losses when prices fall. Then, when they time their purchases correctly (or luckily) they can realise significant gains.”
It is worthy to note that in line with their clients’ questions, the report was intended as background information for clients of Coronation Asset Management Limited and clients of its subsidiaries and affiliates and was not to be read as a solicitation, approval or advice to buy or sell securities.
They further computed the 60-day volatility of the top-10 listed stocks on the NGX Exchange by index weight (excluding BUA Foods, which was listed this year). The results showed that Lafarge Africa is the most volatile stock and Nestle Nigeria has experienced the least volatility since January 2021.
“It is understandable why traders actively trade the likes of Lafarge Africa, Airtel Africa and Dangote Cement, more so than Nestle Nigeria and banking stocks (at least, during 2021), whose share prices have been somewhat stable over the period under study.
However, and as we explained last week, the high volatility in Dangote Cement, for instance, does not translate into high risk, given its long-term earnings growth and dividend payments. Investors in such companies benefit from maintaining long-term investment objectives, in our view, to obtain the benefits of share price appreciation and dividend payments. Volatility can be a distraction”, the analysts said.
