Taking Advantage of Falling Stock Prices
Goddy Egene writes that as stocks prices plummet, it is high time investors looked in the direction of the equities market
The analysts said portfolios will need to be timely assessed and rebalanced while preventing major losses and also taking advantage of possible market swings
The stock market has been bearish for the past two years, having declined by 16.1 per cent in 2014 and 17.4 per cent in 2015. This implies that the market has dipped by 33.5 per cent within two years. So far this year, the market has declined by over 16 per cent. This level of decline is not only scary and discouraging but also reminds investors of the stock market crash of 2008 and 2009.
However, the Nigerian stock market is going through challenges that are not uncommon with other markets especially the automated markets, which most times, response to variables in the macro economy and within the market itself.
Besides, given the fact that the economy and markets have become globalised with geographical barriers broken down by the internet, markets react to happenings in other various economies and markets.
The Nigerian market is currently suffering from the impact of adverse macro-economic situation largely due to a drastic drop in the price of oil, negative public sentiment which is related to the state of the macro-economy and exit of foreign portfolio investors in reaction to the Central Bank of Nigeria (CBN) on policy on foreign exchange.
Taking Advantage of Low Prices Stakeholders believe that the bear run in the market has opened entry opportunities for investors to acquire many of the stocks at discounted value. The Chief Executive Officer of Nigerian Stock Exchange (NSE), Mr. Oscar Onyema is one of such stakeholders. He has therefore, advised investors to exploit the opportunities of the current situation in the stock market and invest more.
“This is the best time to invest in the Nigerian capital market,” he stated, saying, however, investors need courage and money to participate.
“A lot of people don’t have the courage, neither do they have the money to invest. If you have the two, then you are good to go. But those who have money don’t have the courage and those who have courage, don’t have money. There are very few people that have both. So, you need the two Cs, which is courage and cash to play in the stock market at this time,” he stated.
Similarly, an economist investment adviser, Dr. Biodun Adedipe is among those who have equally encouraged patronage of the stock market now.
Adedipe, who is the Chief Executive Officer of B. Adedipe Associates Limited said there is no better time to invest in stocks than now.
“Most of the prices have hit the bottom. Happily, the economy has started on recovery, based on Q3 2015 data from the National Bureau of Statistics released early in December 2015. And given the a clear linkage between this year’s budget and the economy and what is required to get it working, the economy will become stronger and by then the market will began upward movement. So for any wise investor, this is the beast time to invest and wait for the upward movement in prices,” he said.
Adedipe noted that the market should be looked at on longer term perspective rather than short term.
Speaking on the impact of the 2016 budget on the capital market, CEO of Nextnomics, Dr. Temitope Oshikoya, said consumer goods sector of the market should benefit from welfare stimulus spending in the 2016 budget while construction sector will benefit from infrastructure and capital spending.
He, however, noted that the banking sector will face regulatory headwinds and rising non-performance loans. While oil and gas sector performance will depend on oil prices and subsidies issues.
In all, Oshikoya declared that investors should not throw in the towel yet, saying that the economic cycle that is headed south will eventually head north.
“Avoid the merchants of fear and their avalanche of apocalyptic pessimism . The oil and capital markets bear sentiments suggest that most of the juice has already being squeezed out. The growth story may have tempered, but the demographic drivers and entrepreneurial spirit are still intact. Leverage on the power of diversity, entrepreneurial spirit, the dynamic market, emerging opportunities. Be greedy when others are fearful; be fearful when others are greedy,” he stated.
What to Do in Bearish Market While it is advisable to play the market now due to the highly discounted prices, market analysts believe that are also some basic steps to take when market turn bearish.
Embrace volatility – You will never know when the market is going to drop and neither will anyone else. Corrections in the market like we are having today are inevitable and should be treated as opportunities. It is therefore good to embrace volatility as a reality.
Rebalance your portfolio – There is no doubt that everyone will be over weighted in fixed income now that their stocks have shrunk. However, it will not be a bad idea to reduce fixed investments and buy equities to get back in balance.
Get a second opinion – Hire a professional adviser to review your investment strategy and current holdings. Ask them specific recommendations and the reason for making them. It is always a good idea to have a fresh set of eyes critique your investment strategy.
Some Basic Investment Strategies According analysts at Afrinvest investors should be guided by five basic strategies in 2016. These they said should include: timing the market entry, optimizing asset allocation, rebalancing portfolios, arbitraging on the market, and being overweight on fixed income assets.
“Investors will need to be active in timing the market entry so as to optimize their portfolios across investment asset classes. We believe there will be opportunities to ride on market cycles, buying at low prices while exiting when prices trend upward. Our strategy is premised on optimal asset allocation across asset classes while factoring in the various peculiarities of instruments. We have designed portfolios that will weather the storms of market volatilities and help optimize return within the defined investment horizon. We suggest an active strategy throughout the year given the uncertainties of macroeconomic conditions and the arbitrage opportunities we believe will emerge in both equities and fixed income market,” they said.
The analysts said portfolios will need to be timely assessed and rebalanced while preventing major losses and also taking advantage of possible market swings.
“This in our view will be achievable by adopting a largely active investment strategy. We opine that equities will still be mired by macroeconomic and monetary policy concerns; hence, our investment strategy is overweight on fixed income securities. We propose 70 per cent weighting on fixed income over other asset classes for 2016,” they said.
The Afrinvest analysts noted that Nigeria’s investment landscape at this time calls for a critically thought-through strategy that can help deliver alpha, given the precarious macroeconomic conditions and the gamut of uncertainties surrounding the investment landscape.
“We have analyzed a dicey investment terrain for 2016 from the perspective of tapered global growth and market conditions, soft domestic growth propensities, inflationary pressures, oscillatory monetary policy responses, fiscal expenditure skepticism and the overall impact on the domestic financial market,” they added.
They explained that investment strategy for 2016 should be ‘smart’ to optimize returns on the back of their outlook for the Nigerian capital market.
“In 2016, our bullish, base and bearish case projections for equities market suggest 1.2 per cent , -5.9 per cent and -9.4 per cent respectively against 2.0 -3.0 per cent average increase in bond yields. In our conviction, we generally opt for a strategy that totally deviates from the extreme cynicism often attributed by domestic investors to active investment strategy given the peculiarity of the Nigerian investment scenery,” they said.
According to them, against the backdrop of their weak expectation of a capital loss in the market in 2016 and a probable reduction in dividend pay-out by companies, they advise clients to significantly underweight equities in 2016 over other asset classes.
“Yet, to paraphrase Aristotle, investors could also focus to see the light in the midst of the difficult terrain and pessimism to spot opportunities by utilizing our investment strategies already outlined. “We reason that if the needful is not done now, by Q2:2016, we largely expect policy makers would be forced to reassess their strategy and take the hard choices when the adverse macroeconomic conditions overwhelm political considerations excusing some of the weak policy responses seen so far.
This could signal a new dawn for the market in H2:2016 depending on how far macroeconomic conditions deteriorate before the policy actions are taken and the extent of the policy adjustments to the low crude oil price dynamics. In between the present weak status of macro & market variables and the inflection point (pro-market policy responses) lies a chasm, a period of uncertainty where market condition could fluctuate between “worse” and “less badly.”