Thursday, January 28, 2016 7.58AM / CardinalStone Partners
It is no longer news that emerging market equities performed poorly in 2015 and that the capitulation has continued into 2016 - with the Nigerian All-Share Index down 18.54% in just few weeks.
The investment terrain at the moment is at best uncertain as investors are scurrying into cash and money market investments to remain liquid; not minding the negative returns and erosion of value due to rising inflation. I dare to propose a more logical alternative....
I see three key issues here:
• A devaluation or re-pricing of the Naira: I believe stock prices have fallen as foreign investors who account for over 50% of the stock market have priced in the effect of an anticipated devaluation into the equities market. For example, to a foreign investor, the share price of Guaranty Trust Bank Plc at
N20 with the interbank rate at N200/$1 is equivalent to a share price of N15 if a devaluation to N250/$1 eventually occurs. This imminent devaluation of the Naira has been priced in, hence the impetus for the foreign investor to sell.This is the same view on the impact of exchange rates on dividend later in the year.
• Slump in oil prices: Nigeria's primary source of foreign exchange is down over 50% in the last one year. The monetary policy of the Central Bank has failed to effectively manage the supply and demand gap for foreign exchange and there is growing anxiety and heightened expectation of a correction of the Naira exchange rate. The CBN has introduced numerous policies including reducing the daily FX withdrawal limit, stopping and restarting cash payments into domiciliary accounts, and recently, discontinuing funding to Bureaux De Change and the rationing of foreign exchange sales to banks.... all to no avail, as the demand for FX still persists.
• Government policies: There is a strong focus on stamping out corruption and beefing up security which is very vital for creating a thriving investment climate; thus encouraging local and foreign direct investments. However, this has been done to the detriment of portfolio investors who are vital for short to medium term stability of the exchange rate. For example, portfolio investors have pulled out over $5 billion in the last 6 months.
Any Bright Spots?
The distinguishing mark of a savvy investor is to see the silver lining in the midst of a raging storm. These low valuations present unique opportunities for wealth creation.
In my view, considering a cash return strategy in the form of dividend within the next three months, I am a buyer of seven top companies that will likely pay decent dividends that will outperform money market returns. These companies have been substantially oversold primarily due to exit by foreign investors but have robust upside potential in the coming months.
The table below shows the dividend yield and upside potential of my select stocks.
While I agree that no one can call the bottom and the macro issues are still very much in play, I believe that opportunities to buy abound at current valuations even far beyond my top seven stocks. The last time share prices were this low; these companies were only paying on average, 50% of current dividend. With the current low valuations and dividend yields getting juicier by the day...the Nigerian investor with limited or no foreign exchange risk should be willing to buck this sell-off trend and invest in quality names that potentially offer unique dividends and upside potentials.
Please click here for our FY'16 outlook on the Nigerian economy, financial markets and our coverage universe - In Dire Straits