The current low prices of stocks occasioned by the downturn of the economy present bargain hunters investment opportunities. CHRIS UGWU writes
A bear market refers to a market-wide decline in stock prices of at least 15-20 per cent coupled with a pessimistic sentiment about the market. Clearly, these times are nothing to look forward to and fighting back can be dangerous. However, according to Investopedia, bear markets can provide great opportunities for investors.
“The trick is to know what you are looking for. Beaten up, battered, and underpriced: these are all descriptions of stocks during a bear market. Value investors such as Warren Buffett often view bear markets as buying opportunities because the valuations of good companies get hammered down along with the poor companies and sit at very attractive valuations. Buffett often builds up his position in some of his favorite stocks during lessthan- cheery times in the market because he knows that the market’s nature is to punish even good companies by more than they deserve,” said Investopedia.
The current development on the nation’s capital market where bears have sustained grip on stocks leaving the bulls with little or no chance in the market activities, calls for investors to take advantage of the current situation and take position on the equity market, as most of the stocks listed on the local bourse are currently trading undervalued.
Current state of the market
The massive depletion in the price of securities in the Nigerian stock market has resulted in most stocks in the market becoming penny stocks even as confidence is climbing gradually. The hardest hit are insurance stocks – most of which have stagnated and now trading at par value of 50 kobo per share. Stocks of companies quoted on the insurance sub sector of financial services sector has defied all regulatory reforms to recover from losses incurred during the recession even as market sentiments for other sectors have slightly turned green, save for the current downswing.
The situation raises concerns in the investment community because the stock market’s key measurement indicators has continued to tilt southwards that between July and November 26, 2016, the market has recorded a loss of N1.445 trillion.
Available statistics showed that activities on the floor of the NSE continued to skew downward, as the market, which opened high at N10.165 trillion in market capitalisation and 29.597.79 in index at the beginning of trading last July closed last Friday, November 25, 2016 at N8.720 trillion and 25,333.39 index points. Consequently, it has earned a loss of about N1.445 trillion or 14 per cent.
Best time for investors
The current low prices of stocks present investors opportunity to respond to experts’ advice that in the event of every meltdown in the prices of shares, what investors need to do to reposition in the face of losses in the prices of shares were to invest in the market despite recurrent losses in the recent time so as to gain at the long run.
The experts believe that the low price of stocks should make any bargain hunter to take position in anticipation of capital appreciation, as well as huge return on investment going forward. Chief Executive Officer, Nigerian Stock Exchange (NSE), Mr. Oscar Onyema, has advised investors to take advantage of the low prices of equities and invest in the market. He said despite the market’s sharp downturn, it is not all doom and gloom for 2016.
“Although many anticipate volatility, some stock prices are at their lowest since the May 2013 sell-off, and some are below book value, thus, presenting domestic investors with no currency risk, an opportunity for cautious longterm investing,” he said. He declared that NSE is unwavering in its commitment to solidify its leadership position as Africa’s foremost securities exchange, and is committed to initiatives that will position the bourse as an attractive listing and investment destination.
The Chartered Institute Stockbrokers (CIS) advised domestic and foreign investors in the nation’s capital market to leverage on the current low prices of stocks of companies quoted on the floor of the Exchange for future gains. President, Chartered Institute of Stockbrokers (CIS), Mr. Oluwaseyi Abe who appraised the current state of the market, gave reassurance to both individuals and institutional investors to take advantage of the current low share prices to beef up their portfolios.
Abe explained that the market had always been a barometer that gauges the mood of the economy, adding that the Nigerian economy would pick up soon as indices of prior uncertainties were fizzling out. He said Chief Executive Officers of quoted companies are working round the clock to ensure shareholder value. Abe stated that due to the lull in the economy and the need to boost disposable income and meet other exigencies, many investors had dumped shares thus inducing bearish trading.
He however, noted that market fundamentals remained strong and share prices of many blue chip companies were trading below their intrinsic values. Abe urged investors to take advantage of the cheap prices to increase their stakes in the quoted companies. A financial analyst also called on domestic investors in the nation’s capital market to leverage on the current low prices of stocks of companies quoted on the floor of the Exchange for future gains.
Managing Director, Crane Securities Limited, Mr. Mike Eze, who stated this in a chat with New Telegraph, said the market was ripe for investment going by the current low prices of stocks. Eze noted that it was obvious that activities will stabilise in the market after the general elections, adding that this was the perfect opportunity for investors to stake their funds in the market.
“This is the right time for investors to take part in the equities market, with the prices of shares at their lowest levels. Brokers are confident that after the elections, the market would begin to stabilise and investors would begin to record significant appreciation on their investments. “Because with the little amount of funds you will buy large quantity of penny stocks or low price stocks, and that enhance your position as a shareholder. If such companies declare dividends, the shareholder will earn sumptuous dividend.
“The likelihood of being adopted a director of the company is also guaranteed. But with the highly capitalised stocks, investors may use enormous amount of funds to buy a little quantity and when dividend are declared, the take home will not be appreciable and then you cannot think of any appointment as a result of your shareholding.
“In terms of capital gain if the price appreciate and you decide to sell, you will smile to the bank with big amount of funds if you invest in low price stocks, but for the high price stocks, if the price appreciate the margin will not be much and you can only recoup the capital invested,” Eze said.
The most important thing to keep in mind during an economic slowdown is that it’s normal for the stock market to have negative years – it is all part of the business cycle. If you are a long-term investor (meaning a time horizon of 10+ years), one option is to take advantage of naira-cost averaging model. By purchasing shares regardless of price, you end up buying shares at a low price when the market is down. Over the long run, your cost will average down leaving you with a better overall entry price for your shares. According to Investopedia, “having a percentage of your portfolio spread among stocks, bonds, cash and alternative assets is the core of diversification.
How you slice up your portfolio depends on your risk tolerance, time horizon, goals, etc. Every investor’s situation is different. A proper asset allocation strategy will allow you to avoid the potentially negative effects resulting from placing all your eggs in one basket.”
Considering the current low prices in the Exchange, it is believed that this is probably the best time to invest fundamentally in sound stocks. This is because the market is assumed to have bottomed out and the only alternative left, every other things being equal, is for the stock market to begin to enjoy some relative stability