SOLA ONI argues that the NGX’s recent decline could be a market reset after months of extraordinary appreciation
The Nigerian equities market is experiencing one of those uncomfortable moments when investors begin to question whether the bull run has finally run out of steam. After an impressive rally that pushed the NGX All-Share Index to remarkable heights, the market has entered a sustained correction, with selling pressure spreading across several sectors.
The numbers tell part of the story. The NGX All-Share Index declined 1.35 per cent in the week ended August 21 to 239,351.16 points, reducing its year-to-date gain to 53.81 per cent. Seventeen of the 20 indices tracked by Proshare closed lower, demonstrating that the selling pressure has become broad-based.
Market capitalisation had earlier crossed the N160 trillion threshold before retreating sharply. By August 19, investors had lost about N5 trillion in market value from the August 10 peak of N160.42 trillion. (The Guardian Nigeria)
But while the immediate reaction may be to panic, the more intelligent response for long-term investors should be to ask a different question: Is the market falling because the underlying businesses have become weaker, or because investors are simply reallocating capital? The answer, for now, appears to be a combination of profit-taking, portfolio rebalancing and the growing attractiveness of fixed-income securities.
A market that has delivered such extraordinary returns will naturally attract profit-taking. Investors who bought substantially cheaper stocks earlier in the year have every reason to lock in gains. There is another powerful force at work: fixed income.
The recent reforms and increased activity in Open Market Operations (OMO), have provided investors with attractive short-term alternatives to equities. The CBN’s recent OMO auction attracted N4.93 trillion in bids against an initial offer of N600 billion, with a 103-day OMO bill allotted at a stop rate of 20.39 per cent. Treasury Bills have also remained attractive, with average secondary-market yields around 18 per cent in August.
It is therefore understandable that some investors, particularly those driven by short-term returns, fondly called speculators, are moving money from equities into fixed-income instruments. Why accept the volatility of the stock market when a government-backed short-term instrument can offer a relatively attractive yield?
But this is precisely where investors must distinguish investment from speculation. The availability of attractive fixed-income yields does not make equities irrelevant. Rather, it creates an opportunity for investors to reconsider their asset allocation according to their risk appetite, investment horizon and financial objectives. For the long-term investor, the current correction may actually be a welcome development.
A bear market can be painful, but it can also create the conditions under which quality businesses become available at more reasonable prices. The important qualification is quality. Investors should not buy stocks simply because their prices have fallen. A cheap stock can become cheaper if its earnings, balance sheet or competitive position is deteriorating.
The right approach is to identify companies with strong fundamentals: sustainable earnings, healthy cash flows, manageable debt, strong brands, competent management, competitive advantages, sound corporate governance and a credible history of rewarding shareholders. Such companies should be viewed differently from speculative counters whose prices are driven largely by market sentiment.
Indeed, the present market mood could provide an opportunity for investors who previously found quality equities too expensive. Rather than attempting to predict the exact bottom of the market, investors can adopt a disciplined accumulation strategy, gradually increasing their holdings as valuations become more attractive. This is particularly important because markets rarely announce when a bottom has been reached. By the time confidence returns and the bull market becomes obvious again, many of the best stocks may already have recovered significantly.
The current rotation into OMO and Treasury Bills should therefore not be regarded as a reason to abandon the equities market altogether. Fixed income has an important role in a diversified portfolio, especially for investors seeking capital preservation and predictable income. But equities remain essential for investors seeking long-term capital appreciation and participation in the growth of profitable Nigerian businesses.
There is also a broader lesson from the current correction. Investors should avoid allowing short-term market movements to dictate long-term investment decisions. The stock market is not a savings account; prices will rise and fall. What matters ultimately is whether the underlying companies continue to create value.
The NGX’s recent decline may therefore represent more than a bear market. It could be a market reset after months of extraordinary appreciation. For investors sitting on cash, this is the time to conduct serious research, revisit watchlists and identify companies whose market prices have fallen faster than their underlying business prospects. For existing investors, it is an opportunity to review portfolios and increase exposure selectively to fundamentally strong companies where valuations have become more compelling.
The smart investor should not ask only, “How much has the market fallen?” The more important question is, “What quality assets can I now buy at a price that offers long-term value?” The bear may not have finished its dance. More volatility is possible, particularly while attractive fixed-income yields continue to compete for investors’ funds. But volatility is not necessarily the enemy of the patient investor.
Sometimes, the greatest investment opportunities emerge when sentiment is weakest, prices are under pressure and everyone else is looking for the exit. For investors with patience, liquidity and a long-term horizon, the present weakness of the NGX may therefore be less a reason to panic than an invitation to accumulate quality. The next bull market will not reward those who waited for certainty; it will likely reward those who identified value when uncertainty was still dominating the market.
Oni, an Integrated Communications Strategist, Chartered Stockbroker, Commodities Broker and Capital Market Registrar, is the Chief Executive Officer, Sofunix Investment and Communications