New Telegraph

Stocks to watch for positive investment returns

Some sectors still have strong potential to provide good returns for investors in the New Year. CHRIS UGWU writes

The Nigerian stock market ended the year 2020 on an impressive note, as investors increased their buying pressure, especially on blue-chip stocks. The equities benchmark index in Africa’s largest economy recorded its highest return, rising 50.02 per cent this year to become the world’s best performing stock market year-to-date.

Available statistics showed that activities on the Nigerian Stock Exchange, which opened the trading year at N12.958 trillion in market capitalisation and 26.842.07 in index at the beginning of trading on January 2, 2020, closed on December 31, 2020 at N21.056 trillion and 40,270.72 index points, hence earned a year to date gain of about N8.098 trillion or 50.02 per cent year to date.

The growth in market capitalisation during the year was due to positive sentiments by investors following sustained activation of business continuity process and other innovations by Securities and Exchange Commission and the Nigerian Stock Exchange amidst COVID-19 crisis ravaging the country.

Also is the sharp drop in fixed income yields following further monetary easing by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN). MPC had voted to reduce the Monetary Policy Rate (MPR) from 12.5 per cent to 11.5 per cent.

This was disclosed by Governor, CBN, Godwin Emefiele, while reading the communique at the end of the MPC meeting recently. Market analysts believe the renewed sentiment in local bourse has also grown following crave to increase capital gains on the back of low prices of stocks owing to upset in the financial market arising from the Widespread of the pandemic and sharp drop in oil price. However, following the impressive performance of the local bourse, 2021 is expected to be attractive for the equities market as most of the stocks are still undervalued.

Factors that will shape the market

in 2021 Abiodun Keripe, Managing Director, Afrinvest Research, in a report, spoke on his expectations of the best performing stock market in Africa for next year as he dug deeper into the macro, giving Nigerian equities an edge. “The equities market presents attractive opportunities for investors in form of capital appreciation and dividend return given the low yield environment in the fixed income space.

Nigerian stocks are currently undervalued and present an opportunity for growth in the short to medium term. The current ROI in the equities market is positive with a YTD return at 44.6 per cent compared to the inflation rate at 14.9 per cent. “We believe stocks in the financial services (mostly banks), ICT, and the industrial sectors present strong prospects for growth given their resilience to the economic recession.”

Abayomi Oyeti, an insurance expert at NLPC Pension Fund Administrators Limited, said: “The trending thing in the pension industry is the RSA transfer, which commenced on November 16, 2020. The first week in January 2021 will be when the first transfer of the pension assets will be done and the successful and seamless transfer of these pension assets will trigger the furry of activities in the industry.

“Pension Fund Administrators will lay emphasis on rendering quality service delivery and ensuring wise investment decisions to retain their RSA holders amidst competition from other PFAs, this will be the focus for PFAs in 2021.” Keripe elaborated on the current situation at Nigeria’s debt market not forgetting that most Nigerian institutional investors were still actively involved amid an ultra low-interest-rate environment as lacklustre yield prevails in the Nigerian treasury bills market, on the consideration that the present one-year treasury yields trade at 0.65 per cent. Yields are currently very low in the domestic fixed income market due to the policy actions of the CBN, which restricted local investments in OMO securities, inducing huge demand for Treasury bills.

“Investments in domestic bills and bonds will earn a negative real return when compared with the inflation rate. For emphasis, the five-year and 10-year bonds currently trade at 5.2 per cent and 6.3 per cent respectively and the 1-year Treasury bill trades at a 0.65 per cent yield. The sub-Saharan Africa Eurobonds market presents opportunities for attractive yields and serves as a currency hedge at current pricing,” he said.

Furthermore, he opined on the second wave of COVID-19 impact on Africa’s largest economy amid increasing caseloads prevailing at record levels. “There are risks to our outlook on SSA instruments due to the susceptibility of commodity prices to global economic uncertainties. A prolonged new wave of the pandemic especially in developed countries and delay in deployment of vaccines may adversely impact commodity prices and drive sell-offs in SSA instruments,” he added.

To analysts at Cordros Capital, “this has been a truly exceptional year in, and outside of financial markets. The performance of the fixed income market outstripped that of all traditional asset classes, as a combination of market dynamics and policy actions resulted in yields paring to record low levels. Also, Nigerian equities sank to eight-year lows as investors ran to safety due to the pandemic but also saw a rapid recovery to two-year highs as the hunt for yield intensified.

“We believe that the performance in the fixed income market will be a tale of two halves. We expect yields to remain in the low single-digit territory through H1-21, with a moderate uptrend to account for reduced market participation as investors seek yields in other asset classes. However, in the latter part of the year, we believe that a combination of weak market participation, revision of monetary policy to a tightening cycle, widening fiscal deficit, and fragile macroeconomic environment will lead to an increase in yields over 2021. “Similar to the fixed income market, we also expect it to be a tale of two halves for Nigerian equities in 2021, with the market delivering further upside in the first half of 2021 before retracing slightly in the second half on an expected reversal in fixed income yields. The sources of risks remain plenty, the macro story remains uninspiring, and valuations are elevated. However, we think the mix of elevated liquidity, low interest rates, attractive dividend yields, and earnings recovery argues in favour of an extension of the equity bull market into 2021. A stockbroker and Chief Executive Officer, Sofunix Investment and Communications Limited, Mr. Sola Oni, said that investment in money market instruments and fixed income securities were not attractive because of their negative returns due to low yield and double-digit inflation. “Investors would naturally opt for where they can generate optimal profit. “At the moment, equities are about the major option that can meet investment objectives of many discerning investors. Our stock market is forward looking. Investors have realised that third quarter (Q3) results of many companies have signalled better performance for the year end results, which will begin to roll in as from early 2021. “Therefore, sustained massive demand for equity is not unconnected with investors’ anticipation of higher dividend payout and possible declaration of bonus shares. Portfolio re-alignment is going on in favour of equity investment. “We should also appreciate that investment in equity can be used as a hedge against inflation,” Oni said.

Stocks to watch

On sectors to watch out for in 2021, Mr. Mike Eze, Managing Director, Crane Securities Limited, said the financial, consumer goods, building materials, telecomms/ICT would be the most sought after by investors. “The financial sector is more marketable, consistent in dividend payout and if the economy finds its feet in 2021, the banks will benefit more,” Eze said.

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