New Telegraph

Bull Run: Mass hysteria spurs herd syndrome for penny stocks

Rhoda Ogunseye For the second week in the year, rallies in the equities market have continued as the frenzy bullish movement gains momentum. In the last nine trading sessions (January 2 to 12, 2023) investors have gained N4.53 trillion as the NGX AllShare Index appreciated by 11 per cent or 8,269 basis points year‐todate.

Frenzy bullish run

In his analysis of the market trend, Chief Executive Officer of Cowry Asset Management Limited, Johnson Chukwu, said: “I don’t know when the bullish trend will stop or when it will get to a stand level, but I expect that some day it will start self correction process. “The development is that we have seen a lot of liquidity going into this market and we have seen rallies, NGX Benchmark Index gains 45.9 per cent in 2023, we have seen continued rallies since far this year. So it is difficult for anybody to speculate the extent the bullish movement would be sustained. I don’t think it will be sustained indefinitely.”

Contributory factors

Chukwu said virtually all investable liquids going to the equities market because the Returns on Fixed Income were quite low and unattractive. “So, a lot of liquidity is going to the equities space and then it is now fueling further market rallies,” he added. According to a Bloomberg report, the Nigerian benchmark index has appreciated, placing it second in the world behind Argentina. This is as Nigerian equities surpassed their European, Middle Eastern, and African counterparts in 2024, driven by pension funds and institutional investors anticipating record profits from lenders booking revaluation gains. The report said compared with a less than two per cent advance for the MSCI Emerging Markets (EMEA) Index over the same period, the NGX rose almost 60 per cent in the past year. It indicated that banking stocks had driven gains, with the banking index up 16 per cent this year and 138.09 per cent over the past 12 months.

Herd syndrome

“The rallies have gotten to a point where the herd syndrome has set in. People are now buying stocks because they have seen gains earned by their friends and contemporaries. They are buying not necessarily because they are looking at the fundamentals of the companies but because they have seen gains made by those counter (stocks),” Chukwu said.

Over-valued stocks

The concern about stocks prices growth beyond their value has continued to linger. According to Chukwu, some stocks’ fundamentals do not support their current prices. Speaking in the same vein, Professor Uche Uwaleke, Nigerian first professor of capital market and the Director of the Institute of Capital Market Studies at the Nasarawa State University Keffi, advised NGX to designate banking stocks as Systemically Important Stocks (SIS). Uwaleke said this became necessary to make the stock market more resilient, curb the current speculative frenzy, and dampen any extraordinary volatility swings on the share prices of banking stocks in particular.

Daily price limit

Uwaleke called on NGX to proceed to narrow their daily price limit from 10 per cent to five per cent in the meantime while the price limit for other regular stocks is left at 10 per cent. ”To make the stock market more resilient, curb the current speculative frenzy, and dampen any extraordinary volatility swings on the share prices of banking stocks in particular, the NGX is advised to designate banking stocks as Systemically Important Stocks (SIS) and then proceed to narrow their daily price limit from 10 per cent to five per cent in the meantime while the price limit for other regular stocks is left at 10 per cent,” he said.

Chinese example

Uwaleke said if the NGX finds a reason to adopt this recommendation, it would not be the first to apply differentiated price limits as a market stabilization mechanism. “In China’s Shenzhen Stock Exchange (SZSE) for example, this limit is set as 10 per cent for regular stocks and five per cent for stocks designated as special treatment (ST) stocks. “Studies have shown that by constraining prices, wild intraday price swings are prevented from occurring, which, in turn, translates to lower market volatility,” he said. He stated that against the backdrop of the likelihood of limited forex gains on the part of quoted banks following exchange rates unification as well as downside surprises in the stock market in 2024, investors would be well advised to follow the time-honoured cautious path of diversification, hedging, and long-term (DHL) approach to investments. The professor noted that the Nigerian stock market had been exceptionally bullish recently with share prices soaring since the start of 2024. According to him, few believe that this momentum in stock price is correlated with the fundamentals of quoted companies. For instance, he said in just one trading day on January 9, 2024, the benchmark NGX All-Share Index (ASI) soared 2,867.31 (3.57%) points to close at 83,191.84, representing a 1-week gain of 9.48 per cent, and an overall year-to-date gain of 11.26 per cent. FBN Holdings led the gainers with a 10 per cent share price appreciation closing at N28.60 per share. ”Indeed, Banking stocks, influenced by FOMO (fear of missing out) appear to be leading the charge not least because of the impending banking sector recapitalisation announced by the CBN. Surprisingly, this sector has been invaded by speculators resulting in all the tier-1 banks in Nigeria namely First Bank, UBA, GTBank, Access Bank, and Zenith (popularly referred to as FUGAZ) crossing the N1 trillion market capitalisation mark. Just this year alone, as of January 9, Accesscorp had gained 28.3 per cent, FBNH 21.4 per cent. GTCO 19 per cent, UBA 27.1 per cent and Zenith 22.5 per cent,” he said.

Ripple effect of banking stocks

Uwaleke pointed out that the bounce in banking stocks may be pushing the share price of many listed companies beyond their intrinsic values. “Against this backdrop, the question that comes to mind is: are banking stocks in particular currently overvalued? The news of banking recapitalisation offers a theme to build investors’ hopes and dreams thereby creating a platform for a stock bubble. But reality often differs from dreams. “There is an old saying on Wall Street that ‘no one rings a bell at the top,’ which means that only in retrospect does it become obvious for most market players that the market has peaked. “Much as there may be no bell at the top, discerning investors recognise that while the promised benefits of banking sector recapitalisation may ultimately arrive, they tend to take a lot longer than a bullish market would suggest,” he said.

Penny stocks

Penny stocks like that of insurance companies, Sterling Financial Holdings Company Plc and JapaulGold, among others, have been projected to have a positive performance on the Nigerian Exchange Limited this year. According to the FY’23 Review and 2024 outlook report compiled by financial services holding company, Afrinvest, the stocks included in this projection were those whose stocks are below or around N5 per unit. The projection on the stock of Sterling Financial Holding Company Plc was on the back of its partnership with the African Export-Import Bank. “It is expected to benefit from its partnership with Afreximbank to boost non-oil exports and outside Africa and sustained operation efficiency,” the projection on the lender said. Sterling has signed a $75 million agreement with the African ExportImport Bank to foster non-oil exports in Nigeria. The agreement was signed on the sidelines of the just concluded Intra-Africa Trade Fair in Cairo, Egypt. Also, insurance stocks are expected to perform robustly this year. The report said: “Following the move by NAICOM to spur sector growth and elevate the global competitiveness. The chances of a risk-based capital framework in 2024 would be a catalyst for further advancement.” JapaulGold and Ventures Plc, the projection partly read: “JapaulGold posted post-tax-profits for the first time in seven years, buoyed by a 215 per cent increase in topline revenue. The proposed acquisition of a 50 per cent equity interest in H&H mines and full ownership of Covenant Gems and Gold minerals, if completed would strategically reposition the company as a market leader. ks of Honeywell Flour Mills were included in the projection on the basis that the company produces an essential product and has the chance to boost revenue via an increase in pricing and volume. UPDC, was also not left behind. The report said: “Following interventions by the FGN to enhance growth in the real estate market via expansion in the capital market.”

Advice for investors

In his advice to investors, Chukwu said anybody, who wants to invest in the equity market, should approach an expert to advise on the valuation of each of the stocks. He daid: “The valuation should be in tandem with the Returns and the sector which the Counter belongs to. “They have to do top-bottom approach, look at the micro economic environment, look at the sectoral attribute look at the individual entities or the corporate performance.”

Last line

“So I will advise any investor to engage a consultant to make sure you carry out a thorough analysis of what to buy. It will not be appropriate to start mentioning the ideal stock to buy without specifically looking at investors objective and their risk appetite,” he added.

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