By A. Eze Nwagbaraji
Markets are consumer driven and theÂ Â beauty of free market economies isÂ in the level of confidence that consumers and investors repose in the system. The most conclusive economic lesson of the 20th century is that command economies do not work and it is only when free markets thrive that economies expand. Successful democracies are those that understand the intricate workings of the free market and the role of government as a market participant, even though market regulatory authority is vested on the government.
Market participants create wealth when they pursue market opportunities with commanding returns. Legendary investor, Warrant Buffet, is the wealthiest man alive (according to Forbes Magazine rankings) because he understands when to enter the market and seize the moment to expand his wealth.
Those who have followed the life of the Oracle of Omaha (Warren Buffet operates out of Omaha, Nebraska, United States), understand that his investment philosophy is simple and direct. â€œBe fearful when others are greedy, and be greedy when others are fearful.â€ In other words, the Oracleâ€™s maxim is to avoid the herd mentality â€“ buy when others are abandoning their holdings in the market and sell when they are rushing to buy.
Consumer Sentiments & the Economic Meltdown
2008 and 2009 were undoubtedly the roughest years in living memory for most Nigerian investors and several market participants that witnessed the monumental loss in equity valuations are still shocked or remain concerned and fearful of market trends and conditions.
The causes of the market down turns were external. Because all markets are now connected with a common thread of mutuality and the brazen advancements in technology have created enormous cross boarder investors, market sentiments in North America, easily affected consumer and investor sentiments in the Nigerian market.
Since October 2008, the United States and several European and Asian countries have also responded with enormous stimulus packages to cushion the effects of the global economic down turns. The United States alone has witnessed an unprecedented government intervention in support of the markets.
Funds were made available for commercial banks, several leading corporate debts and bonds were guaranteed by the government, government intervened in the automobile manufacturing industry, bailed out General Motors Corporation to avoid its collapse and have come to the rescue of Chrysler Motor Corporation (up to arranging for orderly US Chapter 11 bankruptcy for Chrysler). Washington has also declared that none of its leading banks (nearly 150 commercial banks) will be allowed to fail.
The mind set within the Nigerian monetary and fiscal circles is also to intervene and assist in the avoidance of a panic within the financial institutions. Our monetary authorities through various avenues have continued to give reassurances of sound and viable financial and banking environments.
The global meltdown have not gone away, however, it has been checkmated. Economic indicators within Nigeria and our West African region combined with indicators from leading economies of the world show that what we have after six months of the global economic meltdown is actually a market slow down or a recession in some of the emerging markets, not a depression.
Consumer confidence in North America, Europe and Asia are on the upswing and markets have ticked up from the lows we recorded in Nigeria in the last and first quarters of 2008 and 2009, respectively.
-Time to Buy
A long term investor should borrow a leaf from Warren Buffet. He began buying equities in October 2008, when signs of market dislocation was obvious. What he saw was the herd mentality, i.e. several investors rushing out of the market at the same time, the downward trend created by the market panic opened a window for him to begin his forays into juicy companies whose stock prices had tumbled. He did not wait for the market to bottom, because, it is very difficult to identify a bottom in the market.
A stock market bottom is a trend reversal – the end of a market downturn and the beginning of an upward moving trend. Market bottom is more than just a recent low in a stock market index. It is also a reversal of the primary trend. A â€œbottomâ€ may occur because of the presence of a â€œcycle,â€ or because of â€œpanic sellingâ€ as in reaction to an adverse financial developments or the collapse of the US Housing Market with its rippling effects across global markets.
Economists and market analysts traditionally caution against delving into the market during these periods, however, it is during these periods of market despair and frustration that investment legends are made. Great investors respond to market opportunities, not react to market conditions.
Numerous sectors of the Nigerian equities market are intertwined with our national economy that failure may not be an option. These sectors and some of the companies within them are part of our national economic survival The surviving 24 commercial banks in Nigeria may have come to stay. Though their stock prices have come down from their 52 week highs, however, if a stock has shed 85 percent in price, it also implies that the investor is buying the same stock at 85 percent discount from the 52 week high. Other vital areas of the national economy such oil (gasoline) distributors and retailers, technology, telecommunications, etc. are vital parts of our nationhood.
Beyond the deep discounts in stock prices and dividend yields, some of these companies have other values such as real estate values. Commercial banks in Nigeria over the past three years have become some of the most valuable occupiers of choice properties and locations across the country. The same go for some of the gasoline retailers. Location provides the opportunities for effective managers to create value for the company and increase corporate income. For the long term investor, the ability of invested capital to be part of an increasing value results in greater returns on the capital.
Winners Survive Hard Times
There is no better time to measure or research the strength of a corporation than during hard economic times. A corporation that can reiterate its earning capacity and stand on itsÂ managementâ€™s predictions over a 12 months period during hard times is unquestionably a company in command of its destiny.
Investors nibbling into the market during these times need all the care and due diligence necessary to safeguard their investments. Great investors see what others do not see. Usually, these are market participants that go against the well known and over orchestrated advice of investment experts. These future legends are men and women, like Warren Buffet, who do not listen to the pundits, but take advantage of market opportunities not react to market conditions.
Price-Earning Ratios (P/E Ratio) is one of the strongest measures of any companyâ€™s soundness, especially when P/E is looked at from a historical stand point. Though it is not a timely indicator and may not give you performance over the last month or two, however, P/E provides context for an investor focused on the long term. P/E Ratio over a historical range provides the opportunity to compare a corporationâ€™s performance against industry performance and with other corporations within the same industry.
Following the â€œbig moneyâ€ is also a formidable measure of future corporate performance and longevity during recessionary times. The US for example, vowed that none of its big banks will fail. It then pumped funds into these banks, not as giveaways, but as stimulus funds that will be repaid by the beneficiaries when the companies come back. The US government took equity interests in some of the companies. When it infused funds into Chrysler Corporation it called it repayable loans that will be repaid by the company or those who may acquire the company in future.
The government took nearly 45 percent equity interest in Citigroup, nearly 30 percent in Bank of America, etc. These acts unquestionably provided the companies the funds needed to continue business, and are irrevocable statements of confidence in the companies and to an avid investor with a long term horizon, partnering with the US government by investing where they put their money may the best hedge against failure or market uncertainty.
Some of Nigeriaâ€™s major corporations in the past have attracted large institutional investors and multi-lateral organizations such as the International Monetary Fund and the African Development Bank. For the individual investor such votes of confidence should be viewed as opportunities to buys the stocks when they are down because the IMF or the African Development Bank would definitely not invest in companies that are not sound.
The presence of such large institutional investors also provide an added check on management and ensures that management is engaged in best business practices.
There is an end to each recession. The tough act for investors is when to come back to the market and be part of the upward trend. Leading market indicators across some of the worldâ€™s larger markets have began showing a trough in the current global recession.