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Dead end or growth opportunity? You decide

Recently, I made it a point to ask, anyone I meet, what investment options they are interested in.

I usually get answers along these lines;

I want to invest and make money from a side business‘ (These are the hustlers)

‘Err….maybe treasury bills?’ (These are the risk-averse)

Real estate for the win!’, (The ‘Visioneers’)

or this ‘hmm…a really fast growing tech company’ (I call this group ‘the dreamers’)

What’s interesting is. I hardly ever meet anyone interested in investing in the Nigerian stock market.

and when I ask why this is the case, I get these answers

I don’t understand how it works

It’s too easy to lose money, I bought some shares a while ago and the value dropped so fast, I couldn’t believe it’

It’s not really interesting right now, every one is losing money

Until recently, I would give the same answers; I don’t understand how the stock market works (Check). It’s too easy to lose money when you don’t know what you’re doing (double check).  It seems like it’s in the doldrums right now (Triple fat check)

So, when I got invited to a meeting with the MD of a renowned and leading stockbroking firm in Nigeria, I thought it was a great opportunity to understand what’s going on the Nigerian stock market today.

He shared an interesting perspective and I quote;

When an investor does not understand that the stock market works in cycles, and also does not understand that what goes up may crash, and what falls may eventually rise, that investor is probably sabotaging his/her ability to earn decent returns in the stock market.

That means when you invest in the stock market, you have to be prepared for the high points and low points. It’s an inevitable cycle.

So I asked, why should  anyone consider the Nigerian stock market as an investment option today, especially with the recent slump?

He gave the following reasons;

The major reason for the economic slump in 2016 was predominantly a function of negative growth in the economy which had a negative impact on consumption and overall economic activities.

However, there are indications Nigeria is gearing up to exit recession and return to positive growth later in 2017.

Some of these indications include;

  • Declining inflation (Dropped to 17.24% in April  from 18.72% in January)
  • Easier access to foreign exchange (As a result of the new CBN foreign exchange policy)
  • The federal government is finally about to approve the 2017 budget!
  • Local banks are beginning to raise funds in international markets (Eurobonds)

Generally, economists say once an economy begins to experience growth, company earnings are set to grow which will lead to positive movement in stock prices.

Let’s take a look at some figures

The Nigerian Stock Exchange (NSE) All Share Index (ASI) attained a year low value of 24,581.99 specifically in March, 2017. However, it has picked up since that time and closed at 28,286.43 on the 24th of May, 2017.

Coming from a year high of over 43,000 points in 2014, he believes there is considerable opportunity for new and returning investors to take a position now.

Specifically, the banking sector has experienced the most growth this year.

No. Stock Year low Year high % Change
1 Guaranty Trust Bank Plc (GTB) 22.90 33.60 45.24%
2 First Bank holdings (FBN) 2.96 4.44 35.83%
3 United Bank of Africa (UBA) 4.44 7.30 76.57%
4 Zenith Bank plc (ZBN) 13.30 18.22 39.01%

Source -Bloomberg

The growth, experienced by these banks, was largely influenced by growth in their reported earnings, in spite of the difficult macro economic environment.

I decided to seek a contrary opinion to provide a balanced view.

Contrary opinion states that the Nigerian stock market remains shallow and the growth experienced recently was due to the surge in foreign direct investment in some particular stocks in the banking sector.

They believe the stock market is vulnerable due to the high percentage of foreign investors relative to local investors. The foreign investors invest speculatively and can move their funds out at anytime. This may cause a slump in the stock market again.

Specifically, they advise anyone, considering investing in the stock market, to have a long term horizon (minimum of 12 months) because we may not experience a significant surge in stock prices for a while.

So, taking all of these points into consideration, Is the stock market a dead end or a growth opportunity?

While you try to decide, my advice remains, invest only in what you understand or seek expert advice

Also, do an opportunity cost for the amount you want to invest in the stock market before you invest i.e. Can you earn better returns investing in something else?

The fundamental way to earn returns in the stock market remains buying low and selling high. If your stock broker can explain why a particular company will keep making profit, then go ahead and invest.

Only ensure you invest with the understanding that the stock market will always experience cycles but if you invest in the right stock, you’ll be fine in the long run.

I hope this helps.

P.S. To take advantage of the growth opportunity in the Nigerian stock market, all you need is an account with a good stockbroking outfit and some cash.

 

2 Comments

  1. Good Saturday night read. Thank you for the advice, I totally agree with your points. Shares are medium to long term investments, not short term unless you are one hell of an agressive speculator in the stock market. I think that on some level, humans don’t want to go through a ‘waiting period ‘ for their investments to grow. It seems far easier to snap up a job that pays millions in net pay or be a big supplier with millions in profit from LPOs.
    I know some stockbrokers only cater to highend clients. Can you please recommend stock brokers who cater to retail investors?

    Thank you for the work you do.

    • Thanks Seyi. You’re fast becoming one of my favorite people…Lol.

      I agree with you on the ‘waiting period’. We’re in the Microwave age where most of us want high returns immediately. I guess we all have to decide what works for us.

      I’ll send you a contact via email.

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