For Value-Investors, Covid-19 Unleashes New Season Of Wealth Creation, Transfer On NGSE

The global pandemic, Coronavirus now popularly referred to as Covid-19, has virtually afflicted many stock markets and devastated economies across the globe, whether developed or developing.
However, this Covid-19 driven bear market has provided new opportunities for value investing among intelligent investors, which is as old as the stock market. Value investors look for juicy margins of safety in equity investment as a result of which they seek to buy value, while at the same time protecting their capital by avoiding poor decisions and market downturns. In summary, this is a situation when a stock is worth much more than its market value.

Before the onset of this ravaging virus, the global markets carried a positive momentum into the New Year, amidst trade tensions between the world’s two largest economies- the U.S and China, a situation that had dominated market trends for most of 2019, and eased, following the signing of phase one trade deal by both parties.
This was, nonetheless, short-lived following the spread of the Coronavirus from Wuhan in China to other countries beginning from the middle of January that saw markets tumbling, eroding early gains made earlier.
The commodities’ market was not left out, with the price of crude oil falling sharply and remaining depressed at around $26.35 per barrel on the expectation of lower demand after factories in China, the largest consumer began to shut down as a result of the ensuing lockdown. Also, the infectious disease gave way to concerns amongst global investors as appetite for risk declined, while they sought safe havens in instruments like government bonds.

The last week of February 2020 happened to coincide with one of the worst bear markets in stocks as shareholders worldwide lost an estimated US$6tr in market capitalization between just February 24 and 28, 2020, according to reports.
With the economic impact of the Coronavirus rising, global and country growth forecasts are being revised downwards with little optimism, given the shutdown of manufacturing factories and disruption in trade-flows around the world. Investors and businesses are urging policymakers to introduce or increase stimulus packages in the form of palliative measures to cushion the financial impact of the pandemic on businesses and households.
Uncertainties remain in the global economy even though market indexes’ showed a little recovery from last week, as investors see opportunities for long-term positioning on the expectation of positive market turnaround. This optimism is seen against the backdrop of a possible containment of Covid-19 to a large extent across the globe soon, followed by the resumption of full-scale economic activities, supported by fiscal stimulus and continued implementation of trade talks between the US and China.

Wealth Creation
Wealth creation through the stock market is more of an art, rather than a science. Anybody can create wealth by intelligently investing in equities through seeking to buy value at some discount that represents a high margin of safety that lowers your investment risk, despite the high risk associated with stock market investing.
In our drive to make money, many of us try to exchange time with money, forgetting that we only have a limited amount of time to generate wealth by investing our hard-earned income so as to attain our short-term goals. In the process, we often forget about long-term wealth creation investing, as Warren Buffet rightly said:” if you don’t find a way to make money while you sleep, you will work until you die”.
Back home, the Nigerian Stock market, has over the years, created wealth for discerning investors who understand the dynamics of the equity market and its mantra of “buy low and sell high.”

It is obvious that before the ongoing global pandemic induced bear market, the Nigerian stock market had suffered many setbacks, at the least, since early last year, owing to factors such as uncertainties related to the 2019 general elections, especially the Presidential poll. Others included policy summersaults on the part of government, regulators, the lack of depth in the nation’s equity market, poor corporate governance, the urgent need for investor education, and low confidence level.
The Nigerian Stock Exchange’s All-Share index, which gives a general overview of the market performance, has so far taken a deep-dive, falling by 18.55% year-to-date, while market capitalization has lost almost 12.12%, closing at N11.39tr on March 27, 2020.
To put it in context, these economic indicators mirror business activities and company performances in the country.

Correspondingly, when the performance of the stock market is weak or poor, it means investors are losing value as the worth of quoted companies contract, given that the performance of any stock market is determined largely by the well-being of its quoted companies which are generally affected by cycles or disruptions in the economy.
Today, most companies whether global or domestic, are already feeling the impact of the coronavirus outbreak and this is one of the reasons for the decline in oil prices and stock market performance.

However, creation or transfer of wealth occurs at a time like this when the composite NSEASI is at its 11-year low, indicating that prices of most listed companies are coming cheap for wise investors to latch onto. This is considering that the Covid-19 driven down-market is a first of its kind and way different from the 2008/2009 global financial meltdown. It is, therefore, heartwarming that so much intervention is being packaged by the public and private sectors, in addition to measures already announced by central banks to curtail the spread and cushion the effect of the pandemic on the economy and some sector that are more exposed to the risk of the virus than others.

Other Factors
We recall that there are other factors that impacted the nation’s financial market, long before the onset of the outbreak, particularly the Central Bank of Nigeria (CBN) directive restricting domestic investors (whether institutional or retail) from participating in its Open Market Operations (OMO), in the fixed income market.
This led to the subsequent crash in rates across fixed income instruments leading to the continuous drop in treasury bills, with the 91-day, 182-day and 364-day rates tanking to as low as 2.49%, 3.78%, and 5.3% respectively. Similarly, bond rates have fallen as of the last Federal Government Bond auction which settled at 9.85%, 11.125% and 12.56% for the five-year, 10-year, and 30-year maturities respectively, thus limiting investors’ investable options for short-dated instruments.

With Nigeria’s inflation rate currently above returns on investment, investors are earning negative real returns on their fixed-income investments.
Following the developments in the fixed income market in Q4 2019, the equities market got a boost from the situation as investors diverted their funds to the stock market in search of higher yields.
Consequently, the Nigerian bourse witnessed positive price movements leading to a bull-run throughout January 2020, after which it closed with a 7.46% month-on-month growth in the All-Share Index, while market capitalisation recorded 10.38% return.
The tea-party could not be sustained, in the month of February as sell-off began, with investors harvesting profits on positions held since 2019 through January 2020. There was also investor reactions to the CBN’s decision to adjust Cash Reserve Requirement (CRR) at its January meeting of its Monetary Policy Committee (MPC), which investors were still grappling with before the market was further hit by Covid-19 impact, pushing the year-to-date loss to 18.55% as mentioned earlier.

Valuations have become cheap with average Price Earnings Ratio of the Nigerian stock market at around 6.12x, well below its peers in frontier and emerging markets which shows that Nigerian stocks are trading at a great discount. We expect policy changes in the fixed income market, particularly the FGN bonds, given the government’s shaky revenue profile due to the low oil price that has forced a N1.5tr cut in the 2020 capital spending plan.
This may, however, offer some respite to the equities market prompting a stable rally from the over N2tr maturing fixed-income investments in 2020, as investors look for an asset class capable of offering a positive real rate of return to deploy their funds into. Only the stock market can offer such positive real returns desired by investors, and we expect to see long-term bargain hunters taking opportunities of high yields and low valuation.
We advise investors to start accumulating on fundamentally strong stocks whose valuations have fallen so cheap and hold in anticipation of a market recovery in the long term as the Nigerian market remains one of the most attractive in emerging markets.

KEY TAKEAWAYS
• Stock prices to oscillate in Q2 on fear of panic selling and the challenging economic situation.
• NSE-listed companies will see no earnings growth in 2020.
• Investdata expects the NSE’s benchmark index to slide farther down, but recover by year-end.
• We recommend that investors should look the way of defensive stocks and sectors that will be favoured by the CBN interventions.

For information about quality stocks to invest in and make more than 40% return in 364 days, contact:

Ambrose Omordion
CRO|Investdata Consulting Ltd
info@investdataonline.com
info@investdata.com.ng
ambrose.o@investdataonline.com
ambroseconsultants@yahoo.com
Tel: 08028164085, 08032055467

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