The inflation figure just released by the National Bureau of Statistics, NBS, showed a declining inflation but rise in food inflation, which could affect the investible income of retail investors and their willingness to participate in the capital market. In this interview, Mr. Samson Amedu, Managing Director/CEO, Alangrande Securities Limited, said that food inflation as a single factor cannot determine the direction of the market. He also provided insight on how best investors could manage their portfolio to reap maximum benefit.
By Nkiruka Nnorom
IS the impact of the rising food inflation not capable of reversing the progress made in the equities market already?
First of all, there are a number of factors that influence the prices of shares in the market. A number of times, it is a combination of factors that affect the market. Sometimes, some factors could be so significant at a particular time that they may move the market either up or down. Factors that influence share prices include what is called company’s specific factors. This includes the likes of earnings per share, which measures the profitability and how well a company is doing, price earning ratio and debt equity ratio. Another thing that affects share price include domestic factors. Here you talk about regulations and government policies. Regulations may include monetary policy, inflation and the rest of it. It also include regulations that regulators come up with. There are also other factors like industry specific factors. Some sectors will be more affected by some specific factors that are related to them. For example, textile and airline. Due to some certain factors that are specific to textiles, almost all the textile companies are dead today and the same for the airline. There was a time the banking sector was faced with certain challenge that almost all the banks were declaring losses and that affected the performance of the banking index before the Asset Management Corporation of Nigeria, AMCON, was set up. Now, there is also the demand and supply factor and investors’ perception of the companies. When investors perceive that the share price of a particular company is too high or the earning per share is too low, before you know it, the impact will start showing in the share price. There are other factors like the geopolitical factor, things like terrorism, natural disaster and globalisation. Part of the geopolitical factors also include inflow of capital from foreign portfolio investors. Where is there is an influx of foreign capital into a particular market, it affects the prices of stocks generally. So, rise in food inflation as a single factor cannot decisively determine comprehensively the direction of the market; it is only a combination of factors that can do that.
What are some of the things that have shaped activity in the equities market this year?
The sudden positive performance of the market as witnessed today is actually as a result of two major factors. Initially, you can say the foundation of it was fundamentals; companies were churning out good results during the earning season. If you look at it, even as at March ending and early April, the market was still at a loss, but immediately the Central Bank of Nigeria, CBN, came up with the NAFEX window, it became very easy for foreign investors, who before the introduction of the new window could not take out their money, to resume investment in the market and also take out their money with ease. So, suddenly, there was a huge increase in portfolio investment. So, that inflow that came in led to a sudden rise in the market . From the moment the CBN made that pronouncement up till now, over $1.9 billion dollars has entered into the market. So, that had a huge impact and lifted the market to what you see today. The second factor has to do with Morgan Stanley Capital International, MSCI. Due to the perception of the market, Morgan Stanley removed Nigeria from its frontier index to stand alone start-up. Once we were on that start-up, a number of foreign investors could not invest because they make their decision based on the index. But immediately the NAFEX window was introduced, Morgan Stanley came up with reclassification and increased Nigeria’s weighting to about 7.9 percent. So, once that reclassification was done, there was increase in investment of about 17 stocks the index track and that led to the sudden rise you saw in the market.
Now, that we have seen significant rebound in the market, how best do you think investors should approach the market to reap maximum benefit from their investment?
For those who just entered the market, probably earlier in the year, depending on the sectors and the stocks, they are making money. Investors that have not yet exited the market are making money. First of all, the best strategy will depend on how an investor sees the market. Is it going up?
Objective of the investment
If not, if the understanding is that the market may not really go up between now and end of the year, depending on the objective of your investment, if you are short term investor, you can realise your profit and keep the money in the money market. But if the traditional behaviour of the market comes to play, then it makes sense for short term investors to reduce the extent of their exposure in the market and wait till December or early November to reinvest.
For long term investors who entered the market longer than now, the downturn may not really affect them much. For those long them investors, if the explanation I gave about the asset reclassification by Morgan Stanley is going to be positive, it makes sense to still buy. This is because if that happens and it is positive, we will still see more foreign portfolio managers still investing because they need to increase their weighting on some of those stocks tracked by MSCI and in the course of doing that, it will move the market further up.