By Mike Uzor

The stock market is ruled by times and seasons, which come and go. What time we are in and what season it is matter very much in what you buy and what you sell. A new season calls for a new technique as the ever changing market conditions warrant. What investing and trading technique that direct your actions in the market are determined by the prevailing conditions that rule the equities market.

There was a time when penny stocks were the rising stars. You could invest in almost anything and win. That time is now in the past – when a prospering economy created great opportunities for small and growing companies. Economic prosperity here ended with the financial crisis that hit the economy in 2008.

File photo: The floor of Stock exchange

Since then, the Central Bank of Nigeria has run the financial markets along the path of austerity – squeezing liquidity and hiking the cost of money. This has hurt small businesses more than the others. Will penny stocks rise again, some readers ask. May be some day especially with the present government of change but certainly not foreseeable for now.

Bigger is better

The presnt scenario is that only the big and well established businesses are able to whether the economic storm some how. When the market is tight, it is normal to expect that only the leading names in the business will be able to make a sale. Niche markets, which the small firms come in to serve, tend to dry up whenever market shares are shrinking.

This is exactly the position of the Nigerian economy at the moment. The economy has been slowing down for the past four years and the downturn is accelerating into a possible decline. This means business opportunities are closing in many segments of the economic system. Further stresses have been added by the freezing of the credit and capital markets, which favours money market trading to the detriment of real sector activities.

We are therefore in an economic condition where only the fittest can survive and this applies to all economic units – households and businesses. We now have an economic climate stripped of what normally aids small businesses to survive and to grow. The business sector has been forced into a consolidation mood and the stock market is now following the new direction led by a change in corporate earnings prospects.

Investors in equities will have to understand and follow the direction of the economy and the market. In the consolidation process, only the big and strong businesses appear to have the capacity to become bigger and stronger. The strength for survival and growth is now in the bigness. It’s now ‘the bigger the stronger, the smaller, the weaker’.

Small businesses endangered

Are you looking for small but stronger firms that will be the stars of the future – they are now a rarity; in fact, an endangered specie. This means that the stars you see today are mostly the promising stars for the future. Whether they will keep shining or fade somewhere along the way is not the issue in an economy that is run one day at a time. For now they are the best.

Check the corporate earnings fundamentals and see that the volume drivers – the giant firms across various sectors and industries, are also the leaders in terms of performance quality. The banking sector is a typical example of the changes operating climate. Small banks used to lead in terms of performance quality. Now, the bigger banks are the better banks. They are leading not only in terms of absolute numbers but also in terms of profitability, efficiency and risk asset quality indices.

The highest profit margins in the banking sector in 2014, for instance, came from GTB, Zenith Bank, FBN Holdings and Access Bank. The small- and medium-scale operators, that are normally the high growth drivers, have become distant followers.

As it is in the banking industry, so it is in the rest of the sectors. The small and medium-scale businesses, the informal sector operators and even highly indebted big companies are presently being crushed. Only the giants have the capacity to stand and defend market share in a tight market. These fundamental changes in the economic and market structures have far reaching implications for the equities market. Even if the authorities are to begin right now to take the right policy actions that will inject new lives into the ailing small and stunted medium companies, the results will take many years to come.

The market is clustering

For now, it can be expected that investors and traders in the equities market will continue to cluster around the blue chips and industry leading stocks just as the consumer market is now crowding around leading market brands. Why, because these are the only companies that are able to maneuver through the operating hurdles and give profit to shareholders.

Only the corporate giants are able to attract prime lending rates and minimise the impact of high interest charges in the high interest rate situation. They are again in a good position to reduce their borrowing needs by using their market leading brands to attract significant supplier credit.

Taking a lot more supplier credit than is given is now the trend in the business with much positive impact on cash flow. Besides, the big corporate entities can afford to spend less on sales and marketing to promote products that are essentially household names. There is no surprise therefore that the big companies are coming out with better profit margins than the small operators.

Viewed from many angles, the leading corporate names are comparatively better positioned  in the current market situation than the small and medium companies. They have also seized this opportunity to plug in the economy of scale benefits to their operations. Consequently, they represent the hopes for consistent and improving dividend pay-out to investors. The best of them are again the growth leaders that we can see now. They show the highest possible growth in revenue and profit in their respective industries.

Go for the giants

You want to know which company stocks will move up in price: go for the corporate giants. If you are already in the giants, stay with the winners. If the stock was a winner for you last year, it can win again for you this year. The winners appear to retain what it takes to keep winning while the losers seem to keep lacking what it takes to become a winner. This is the state of the stock market now and this position isn’t likely to change very soon.

You think the price of the stock is high; it will rise further as long as it is creating new value. The stock market is able to keep recognising companies that keep creating new values for shareholders.

To be able to play the market along the lines of the current trend, a change in value perception is quite important. A stock is not expensive if it merits the price at which it trades neither is it cheap if it is worth the low price it sells. Whether a stock is cheap or expensive needs to be considered not just in terms of the price it sells but in terms of where it is likely to be headed next.