Breaking News
Translate

Managing equity investments during market downturns — FDC

By Emeka Anaeto, Business Editor

Nigerian Stock Exchange rebounded last week after previous week’s reversal of the four-week stretch bull-run, validating some analysts’ position that last week’s loss was nothing more than a dead cat bounce.

Since the launch of the Investors’ and Exporters’ (I&E) Foreign exchange window, the Nigerian equities market has appreciated on 24 of the 28 trading days. The generally positive sentiment in the bourse was evident in trading activities last week as the benchmark index advanced on all trading days of the week. Notably, on Friday, the largest daily gain since May 2016, was recorded as the All Shares Index (ASI) grew 3.5%. Consequently, the Nigerian equities market appreciated 7.9% week-on-week to close at  31, 371.63  points while year-to-date (YtD) return strengthened to +16.7%

Many analysts believe that the market fundamentals is still very strong, particularly in light of the improved stability and liquidity in the foreign currency market and the reported stability in the macro-economic environment, as the Monetary Policy Committee (MPC) of the Central Bank of Nigeria, in line with consensus expectations, retained the Monetary Policy Rate (MPR) at 14% previous week.

However, it appeared investors were less swayed by the recently published first quarter 2017 (Q1’17) gross domestic products figures which revealed that the Nigerian economy was beginning to reverse the steady decline, though the GDP contracted for the fifth consecutive quarter and still remains in recession. Consequently, the equity investors’ community remained enticed by the usual sectors, the banking and consumer goods stocks.

Again, though the National Bureau of Statistics (NBS) revealed that the total value of capital imported into Nigeria in the Q1’17 declined by 41.36% to USD908.27 million, driven by a fall in other investment, notably, portfolio investment was the only category to record an increase from the previous quarter. This gave the impression of a returning of the overseas’ capital into the stock market despite the persisting macro-economic challenges.

Stockbrokers have been recording increased patronage from the section of the investing publics who had abandoned the stock market in recent years due to the long-drawn bear run and the attendant huge losses. Their return followed a return of confidence and near recovery in the market in the past few weeks.

However, bears resurfaces intermittently in the stock market despite the positive sentiments pervading the entire economic spaces and the stock market. Though many analysts attributed the development to profit taking after almost five weeks of bullish trading, some observers believed the re-emergence of bears may signal cautious optimism.

At the backdrop of the development which many analysts believe would heighten this week we bring you the in-house advice of Financial Derivatives Company Limited, a Lagos based investment house, headed by one of the leading Nigerian economists, Bismarck Rewane.

Exerpts;

 

In this time of economic slowdown investors may be asking them-selves if they have the appetite to stay in the market.

Periods of recession or economic downturn are rife with uncertainty, dampened appetite for investments and heightened risk.

The natural response in such periods may be to delay investing until conditions improve. In extreme cases, investors may pull out of the markets all together.

The financial crisis/global recession in 2008 left a bad taste in the mouth of investors. Some vowed never to return to the stock market while others reduced their participation to the barest mini-mum.

The Nigerian stock market was not exempt. Between 2008 and 2009, investors witnessed significant erosion in the value of their investments as the market lost N7.24trn from a high of N12.64trn.2 This saw reduced participation in the stock market for both foreign and domestic investors.

As the current economic slowdown shows its ugly head, investors will be less likely to make the same mistakes as those made in 2008/2009.

As the old saying goes: once bitten twice shy. Investors are likely to remain on the sidelines until there is some semi-blance of recovery. While accepting that this approach (which is purely risk averse) is understandable, there are approaches to investing that can be used when transacting in the stock market especially during downturns. Most importantly, investors must respond strategically rather than react to market developments in periods of slowdown. With a bit of pro-activity and flexibility, investors can still participate in the market, despite the economic downturn.

 

Here are a few ways on how to stay invested:

1.)Take advantage of lower stock prices to increase their holdings especially if they have a long term outlook. By purchasing ad-ditional stocks, investors also reduce their average unit cost of purchase. Another good strategy is identifying oversold stocks to purchase (i.e buying into a stock that has seen a lot of selling and is ripe for a turnaround).

2.)Invest in dividend paying companies with consistent paying policy or defensive stocks with good dividend history.

3.)Manage losses – Markets exaggerate themselves in the direction of losses. Therefore losses have to be minimized. This can be done by setting and adhering to price limits. Stop loss orders, usually executed by brokers, are designed to limit investors’ loss on a position in a security. With a stop loss order, a market order to sell is triggered when the stock trades below a certain price and it will be sold at the next available price.

4.)Be ambivalent about bear markets – adopt the right mental approach, knowing there are opportunities also in Bear markets.

5.)Diversify across asset classes and investment types to reduce risk. Having a percentage of your portfolio spread amongst stocks, bonds, cash and alternative assets such as real estate assets, is the core of diversification. A proper asset allocation strategy will allow you avoid the potentially negative effects resulting from placing all your eggs in one basket.

6.)Invest in assets that help preserve capital.

7.)Avoid increasing your borrowing especially to invest in the stock market. This is clearly not a time to increase leverage.

8.)Consider Inverse ETFs. Investing in ETFs is similar to using a combination of advanced investment strategies to profit from declining prices. Even though these are instruments which are not available in the Nigerian investment space, they are read-ily available in developed markets.

9.)Play safe. Playing safe means putting a larger portion of your portfolio in money market securities such as fixed deposits, treasury bills and other instruments with shorter maturities and acceptable yields

Investment strategies have to be dynamic. Different strategies should be adopted in periods of boom and bust. The best advice one can give during a recession is to take the time to revisit long-term goals, and adjust overall asset allocation to protect assets.

It is important to note that in spite of all the strategies out there, nothing is entirely foolproof. It is expected that investors proceed with caution and also seek the services of professionals who would offer guidance.

 


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.