Uncovering hidden stocks values in an era of COVID -19 crisis

The global pandemic has virtually afflicted many stock markets and devastated economies across the globe, both developed and developing countries.

Before the onset of this ravaging virus, the global markets carried a positive momentum into the new year, amidst trade tensions between the world’s two largest economies- the U.S and China, a situation that had dominated market trends for most of 2019, and eased, following the signing of phase one trade deal by both parties.

This was, nonetheless, short-lived following the spread of the Coronavirus from Wuhan in China to other countries beginning from the middle of January that saw markets tumbling, eroding early gains made earlier.

The commodities’ market was not left out, with the price of crude oil falling sharply and remaining depressed at around $26.35 per barrel on the expectation of lower demand after factories in China, the largest consumer began to shut down as a result of the ensuing lockdown.

Also, the infectious disease gave way to concerns amongst global investors as appetite for risk declined, while they sought safe havens in instruments like government bonds.

The last week of February 2020 happened to coincide with one of the worst bear markets in stocks as shareholders worldwide lost an estimated US$6 trillion in market capitalization between just February 24 and 28, 2020, according to reports.

With the economic impact of the Coronavirus rising, global and country growth forecasts are being revised downwards with little optimism, given the shutdown of manufacturing factories and disruption in trade-flows around the world.

Investors and business are urging policymakers to introduce or increase stimulus packages in the form of palliative measures to cushion the financial impact of the pandemic on businesses and households.

Uncertainties remain in the global economy even though market indexes’ showed a little recovery from last week, as investors see opportunities for long-term positioning on the expectation of positive market turnaround.

This optimism is seen against the backdrop of a possible containment of Covid-19 to a large extent across the globe soon, followed by the resumption of full-scale economic activities, supported by fiscal stimulus and continued implementation of trade talks between the US and China.

Analysts and operators believed that Covid-19 unleashes a new season of wealth creation on the Nigerian Stock Exchange (NSE).

They argued that Covid-19 driven bear market has provided new opportunities for value investing among intelligent investors.

This is because value investors look for juicy margins of safety in equity investment and at the same time protecting their capital by avoiding poor decisions and market downturns.

For instance, the Chief Executive Officer of Investdata Consulting, Ambrose Omordion said despite the high risk associated with stock market investment, investors can create wealth by intelligently investing in equities and buying value at some discount that represents a high margin of safety that lowers investment risk.

“In our drive to make money, many of us try to exchange time with money, forgetting that we only have a limited amount of time to generate wealth by investing our hard-earned income to attain a short-term goals.

“In the process, we often forget about long-term wealth creation investment, as Warren Buffet rightly said: ‘ If you do not find a way to make money while you sleep, you will work until you die’.

The Nigerian Stock market has over the years, created wealth for discerning investors who understand the dynamics of the equity market and its mantra of ‘buy low and sell high.’

Although, the NSE All-Share index, which gives a general overview of the market performance, has so far taken a deep-dive, falling by 18.55 per cent year-to-date, while market capitalisation has lost almost 12.12 per cent, closing at N11.39 tr on March 27, 2020. Presently, most companies whether global or domestic, are already feeling the impact of the Coronavirus outbreak and this is one of the reasons for the decline in oil prices and stock market performance.

However, analysts believed that creation or transfer of wealth occurs at a time like this when the composite NSEASI is at its 11-year low, indicating that prices of most listed companies are coming cheap for wise investors to latch onto.

This is considering that so much intervention is being packaged by the public and private sectors, in addition to measures already announced by central banks to curtail the spread and cushion the effect of the pandemic on the economy and some sector that are more exposed to the risk of the virus than others.

Recall that there are other factors that impacted the nation’s financial market, long before the onset of the outbreak, particularly the Central Bank of Nigeria (CBN) directive restricting domestic investors (whether institutional or retail) from participating in its Open Market Operations (OMO), in the fixed income market.

This led to the subsequent crash in rates across fixed income instruments leading to the continuous drop in treasury bills, with the 91-day, 182-day and 364-day rates tanking to as low as 2.49 per cent, 3.78 per cent , and 5.3 per cent respectively. Similarly, bond rates have fallen as of the last Federal government bond auction, which settled at 9.85 per cent, 11.125 per cent and 12.56 per cent for the five-year, 10-year, and 30-year maturities respectively, thus limiting investors’ investable options for short-dated instruments.

With Nigeria’s inflation rate currently above returns on investment, investors are earning negative real returns on their fixed-income investments.

Following the developments in the fixed income market in Q4 2019, the equities market got a boost from the situation as investors diverted their funds to the stock market in search of higher yields.

Consequently, the Nigerian bourse witnessed positive price movements leading to a bull-run throughout January 2020, after which it closed with a 7.46 per cent month-on-month growth in the All-Share Index, while market capitalisation recorded 10.38 per cent return.

The trend could not be sustained, in the month of February as sell-off began, with investors harvesting profits on positions held since 2019 through January 2020.

There were also investor reactions to the CBN’s decision to adjust Cash Reserve Requirement (CRR) at its January meeting of its Monetary Policy Committee (MPC), which investors were still grappling with before the market was further hit by Covid-19 impact.

Notwithstanding the aforementioned, stakeholders still believed that stock valuations have become cheap, urging investors to start accumulating fundamentally strong stocks in anticipation of a market recovery.

The Chief Executive Officer of Investdata Consulting Limited, Ambrose Omordion said: “With average price earnings ratio of the Nigerian stock market at around 6.12x, well below its peers in frontier and emerging markets showed that Nigerian stocks are trading at a great discount.

‘We expect policy changes in the fixed income market, particularly the FGN bonds, given the government’s shaky revenue profile due to the low oil price that has forced a N1.5 trillion cut in the 2020 capital spending plan.

“This may, however, offer some respite to the equities market prompting a stable rally from the over N2 trillion maturing fixed income investments in 2020, as investors look for an asset class capable of offering a positive real rate of return to deploy their funds into.

“Only the stock market can offer such positive real returns desired by investors, and we expect to see long-term bargain hunters taking opportunities of high yields and low valuation.

“We advise investors to start accumulating on fundamentally strong stocks whose valuations have fallen so cheap and hold in anticipation of a market recovery in the long term as the Nigerian market remains one of the most attractive in emerging markets.”

The President of Ibadanzone Shareholders Association, Eric Akinduro said: :The situation will not remain Like this forever, those that have cash to invest this period is an accumulation period because most of the stocks are selling for 52weeks low.

” However investors should not buy for buying sake but buy stocks that are cheap with good fundamentals and dividend policies.”