By Sola Oni
Equity Investors across the global markets are embattled. Securities markets are plummeting, prompting many investors to flock out of risky stocks to take position in fixed income securities. Central banks worldwide are under pressure to tackle rising inflation. Their multifaceted models to operate fiscal and monetary policies are fading. Miffed by the rising inflation, which has hit 20.5 percent in Nigeria, on Tuesday, September 27, Central Bank of Nigeria (CBN), raised the Monetary Policy Rate (MPR) by 150 basis point to 15.5 percent from 14 percent. The apex bank, also moved the Cash Reserve Ratio (CRR) to 32.5 percent from 27.5 percent. The announcement is the latest in the nexus between government regulation and investment opportunities in the Nigerian capital market.
“ The raising of MPR will push up interest rates in the Nigerian economy. It will further moderate transactions in the equity market because there is an inverse relationship between interest rate and investment in the securities markets. Speculators always take advantage of rising interest rate by dumping shares, thereby creating bearish market. But when the interest rate is unattractive for savers, speculators move their funds back to securities market .
“ Increasing the Cash Reserve Ratio to 32.5% is expected to be an antidote somewhat, putting pressure on banks to go out and attract deposits. However, with insecurity still a major challenge in the country, supply side inflation remains the real problem, and this has to be addressed through a combination of policy actions, not just monetary. With full scale electioneering campaigns about to begin, there will be further pressure on the Naira. It is therefore a season for investors with high risk appetite to seize the opportunity and buy low, with a real prospect of a bullish run in the medium term.”, says Oluwole Adeosun, President, Chartered Institute of Stockbrokers (CIS).
Adeosun is right. But MPR is an ambivalence monetary tool. When it increases, investors in fixed income securities smile to their banks while their counterparts in the equity market watch depletion of their investment. Speculators play pivotal role in the securities market because they account for significant part of market turnover. But they usually hit the panic button and exit equity market whenever there is an increase in interest rate and stage a comeback back to equity market during a low interest rate regime
Speculators are investors with short term horizon. They want to profit on a fast lane, unlike investors that seek long-term gain on a consistent basis. Some speculators are called a day trader as they can buy shares at the beginning of trading and sell on or before the end of trading. They hinge their stock valuation on technical analysis which thrives on trend of share price movement. Much as speculators are usually responsible for bearish trend, every securities market needs them to provide liquidity. Their ultimate goal is to realize capital gain.
Whether expressly stated or not, what is on the lips of many individual investors globally, is the options available in the equity market in the wake of the protracted volatility and diminution of share prices in recent time. But, regardless of the level of volatility in the secondary market, some stocks are as constant as the northern stars. They generate significant capital appreciation and pay dividend during economic boom and recession. Companies that own the shares produce essential products and services that are always on demand. in all seasons. The companies are well-established. Their sales and profits are less affected by economic downturn. A fall in the real Gross Domestic Product (GDP), will translate to an insignificant drop in the profit of such companies. The companies operate in the sectors such as Food and Beverages, Utilities, Healthcare, discount retailers and Telecom. Their shares are called defensive stocks. Malaysia is reputed to have some stockbroking firms that specialize in defensive stocks. Investors that are risk-averse should contact their stockbrokers for defensive stocks in the portfolio. These are stocks for all seasons. Defensive stocks protect portfolio against losses during recession or prolonged bear market. They serve as safe haven for conservative investors and those whose investment objective is capital preservation. Due to its steady return, a defensive stock can be used to predict the future of an investment. The stocks outperform others during economic decline as they are imbued with low volatility.
Defensive stocks are not without limitations after all . They can be overvalued in a period of economic decline due to massive demand. As low growth stocks, though they ensure stability of portfolio, they rarely experience rapid growth when other stocks are soaring during economic boom. Defensive stocks have a low beta which is generally less than 1. This is a double -edged sword. Much as this can protect the stocks during volatility, it will also stifle growth in bull period when cyclical stocks are rising. Defensive stocks are desirable in every balanced portfolio but they should co-exist with other stock’s for optimal returns in all seasons.
Oni, an Integrated Communications Strategist, Chartered Stockbroker and Commodities Broker, is the Chief Executive Officer, Sofunix Investment and Communications