Investing

Why You Should Start Investing In Stocks Now

A reader of this blog once asked to know what alternative instrument he should be investing in, giving that yields are falling in the fixed income market. My answer was that he should consider investing in stocks if he wasn't already doing so. In the same vein, for those of you who are not investing in stocks, I am giving you the same piece of advice.

Why should you start investing in stocks now?

Also Read: Your Best Investment Options in Nigeria in 2018

Market Rebound

The first reason is that the Nigerian stock market has rebounded after four years of depression.

Supported by positive corporate releases as the economy began to gain traction, the launch of the Investors and Exporters forex window by the Central Bank of Nigeria in the second quarter of 2017 generated huge buying interest in the Nigerian equities market. Thus, Investors took advantage of the relative stability created by the new forex policy to mop up stocks which had remained relatively under priced as a result of the long bear sentiment.

Consequently, the stock market was upbeat for three out of the four quarters of 2017. With a return of 42 percent and the highest Year on Year index return in 10 years, the Nigerian stock market finished 2017 as the second best performing in Africa and was in the first 11 in global stock market ranking.

Historic Trend Analysis Support Upward Movement In Prices in 2018

The Nigerian stock market has a history of maintaining two years of bull run after a period of prolonged bear reign. Between 2012 - 2013, the periods following the global financial crisis, sentiments in the domestic market strengthened, driving the NSE ASI to 35.4 percent and 47.2 percent respectively.

Again, as the economy picked up after a slump in 2014 to 2016, the market kicked in 2017. In line with historic trends, analysts expect that sentiment will be stronger in 2018. Already, the All Share Index is positive at 11 percent. It was 17 percent at end January. Less than two months into the first quarter some stocks have returned as much as 70 percent in capital appreciation.

As the 2017 Financial Year End numbers of Corporates start turning in from end of March, buy interest will drive the market further up especially in the active sectors like financial services and consumer goods.

Declining Yield On Fixed Income

Another reason I am investing in stocks now and I believe you should, is the declining yield in fix income securities. In 2018 overall yield is anticipated to moderate to 12℅ or below especially on short term instruments like Treasury Bills. Similarly, given the plans of the Federal Government to reduce pressure on domestic borrowing, it is anticipated that yields on FGN long dated bonds will also moderate. In addition, it is generally anticipated that the Monetary Policy Committee will review benchmark interest rate downward in line with improving macroeconomic indices.

Though, the rate of inflation is coming down but not down enough to instigate a positive effective yield. In a low yield environment such as we have now, fund will naturally flow where the return is higher. Stocks provide that alternative.

Attractive Valuations of the NSE

Despite the rally, Nigerian equities remain attractively valued relative to their pears in the frontier market. The trailing P/E ratio and the P/BV of the Nigerian market still lag behind MSCI Frontier market and pears.

The Nigerian market has outperformed the MSCI index on the basis of EPS which grew at a CAGR (cumulative Average Growth Rate) of 12.2 percent in a 7 year period to 2017 as against 2.1 percent decline for the MSCI index for the same period, according to an Afrinvest report. This points to a sustained investor interest in the domestic market which will help to drive stock prices up. Moreover, technically, the benchmark index remains in the ascendency zone inspite of the rally witnessed in 2017.

Also Read: How to Open A CSCS Account and Trade Stocks In Nigeria

No matter how down a stock price is now, it will always go up

Well, not with all stocks but quality stocks with strong fundamentals will always go up in price no matter how down they are now. Take GTBank for instance.  In 2006, this stock traded at N9 but this year (as at January), it has traded for as high as 57.  Do the math and see how much you could have made if you had invested in GTBank in 2006.  This is excluding dividend and bonuses that you must have earned and received over the this eleven year period. In the long term, investment in shares always outperform other asset classes.

The quality of a stock is not in not having a decline in its price but in its ability to get up again after every fall.  When I invest in a stock I have my eye on earnings capacity of the company.  If the stock is going down and the earnings of the company is going up, I know that it is but for a while, the price will go up again and even surpass its previous high. Rather than sell because of temporary price decline, I will buy more to reduce my average price.

Investing in stocks is a long term activity.  Do not be led by price gyration but rather let time enrich you.  If you look out for value and invest for value you will definitely win in the stock market.

Other Drivers

The performance of the stock market in 2018 will be largely driven by the earning fundamentals of the Corporates, stability in the forex exchange market - as long as the I&E window policy is not adjusted, increased funds flow to frontier and emerging markets and the implementation of the 2018 budget which is expected to catalyze industrial growth.

But

A major downside to the positive expectations is that 2018 is the eve of an election year. Political campaigns will peak this year and depending on the character it takes, investors may take cautious decisions. If the campaigns create panicky atmosphere, there may be massive sell off as funds look for safer environment. This will halt the party.

Again, development in crypto currency will continue to take interest away from stocks as more and more people get attracted to invest in Bitcoin and other emerging digital money. However, the impact on the Nigerian stock market will be insignificant because this market is driven by institutional investors who are still taking a cautious look at cryptos due to the plethora of imponderables associated with digital currency as unconventional asset class.

Very importantly, development in international financial market may have a significant impact on the domestic market as the year progresses. A major factor in this regard will be the rate environment in the United States. A rate hike in US will encourage foreign portfolio investors to exit from Nigeria given the level of uncertainties that may follow electioneering activities, to a more stable US fixed income market with a promise of fair returns.

In Which Stocks Should I Invest

If you have read this far, you probably will ge willing to start investing now.  I guess your next question will be in what stocks should you invest. i shall be giving my recommendation shortly free of liability of course.

Since the second quarter of 2017 till the time of writing this blog post,  Nigerian stock market performance has been broad based. As at the end of 2017, the banking sector outperformed the broader market index with a return of 73 percent. Fidelity Bank witnessed the most buying interest and returned 196 percent to investors, this was followed by UBA 128 percent, Access 78 percent, Zenith 73 percent and GTBank 64 percent. Performance of the banks remained upbeat and the sector will continue to drive market activities this year.

Banks' earning remain upside inspite showing how resilient Nigerian banks can be in spite of difficult operating environment. However, the recent directives by the CBN that banks that are carrying huge nonperforming loans should not pay dividend may mute buying interest in many of the banks, especially the tier-2 banks.

Yet the banking sector will continue to have strong investor sentiment. Investors will be focussing on the tier-1 banks like Access, GTBank, UBA, Zenith and FBN Holding. In the tier-2 banks, Fidelity, Diamond, FCMB, Stanbic IBTC will be showing strong investor sentiment.

With improving access to forex, relative peace in the North East and improvement in the purchasing manager's index (PMI), earnings of companies in the consumer goods sector will enhance demand for their stocks. Dangote Sugar, Flour Mill and UACN are showing strong buy interests. If you invest in these stocks now you will reap bountifully from their upside potentials all things being equal.

Final Words

As I have always advised, investing in stocks requires knowledge. Spend sometime reading about and studying the market.  If you are desirous of succeeding in stocks investing, devote sometime every day to study about the capital market and equity investing; spend some money to attend seminars and workshops, interact with people who are experienced and have made visible progress in equity investing, buy books, read books, journals and articles. 

Develop interest in the financial press and acquint yourself with what is happening in the economy and the business community.  With time you will see that you are talking like a guru and investing like a pro.  It is sound knowledged that will equip you with the level of confidence required to invest successfully in stocks.

And when you do decide to start investing, make sure you chose a credible stockbroking firm to move your trade and try to establish a personal relationship with the stockbroker such that you can discuss the market issues freely.

Also Read: How to Choose A Stock Broker And Have A Wonderful Investing Experience

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