Market timing in a period of uncertainty
At the normative level, there is negative correlation between an increase in the nominal anchor, popularly called Monetary Policy Rate (MPR) and equity prices in the stock market. When there is an increase in the MPR, speculators hit the panic button, dump their shares and move the money to the market to take advantage of rising interest rate. This often pushes a stock market into bearish trend. As a corollary, when the MPR decreases, speculators withdraw from the money market to take position in the capital market.
Although an analyst can predict the market through fundamental analysis, technical analysis or random walk model, market occasionally takes its own course irrespective of an analyst’s forecast. This played out on the Nigerian Exchange Limited (NGX) in November 2022, when the Monetary Policy Committee (MPC) of Central Bank of Nigeria (CBN) raised the MPR to 16.5 percent as one of the last options to tame the rising import inflation. But contrary to the usual expectation that speculators shall take advantage of anticipated higher interest rate and pull out of the stock market, they defied the new rate and continued to invest in equities of quoted companies with strong fundamentals. Under this atmosphere, NGX gained above 20 percent, a significant performance by global standard against the background of tough operating environment. Top analysts attributed the market’s stella performance to heartwarming corporate earnings and great expectation of a new government after the upcoming Presidential Election.
At the moment, the permutation is that whoever emerges victorious among the three top contenders will be pro-market and operate a private sector-led economy. These and other issues cut across the manifesto of each of the three leading aspirants. As at the period of this writing, NGX is on bullish trend. By the recent development, the market has signaled that a change in MPR does not automatically translate to negative correlation in equity investment. There is nothing esoteric about the market performance. It has only confirmed the perception that the market is imbued with self-correction mechanism.
The Nigerian economy is tailspinning into bleak future everyday. World bank has lowered the Nigerian economic growth to 2.9 percent in 2023 from 3.1 percent in 2022 and also says there will be no growth in 2024. The projections may not be so realistic but they portend weak and slippery economic outlook for Nigeria this year.
The global rating agency, Moody’s Investors Service, has downgraded Nigeria’s rating from B3 to junk bonds and also issued red flags to nine Nigerian banks- Access Bank Plc, Zenith Bank, First Bank of Nigeria Limited, Guaranty Trust Bank, First City Monument Bank (FCMB) and Sterling Bank. External reserve has declined by $ 64 million from $37.08bn to $37.01bn at the end of January 30, 2023. Naira has depreciated to N462 to one United States’ Dollar due to scarcity of Naira amid demand pressure for forex. At a period like this, investors more than ever need strategic investment advice in order not to get their fingers burnt. They need to speak with their stockbrokers.
This is a moment of leveraging market timing to profit from investment in a stock market timing is an act of switching funds between asset classes to maximize returns and minimize risk . It is a predictive method of purchase and sale of securities as a risk aversion method. Market timing is an integral part of active investment management.
It is the opposite of buy-and -hold investment strategy. Professionals that deploy market timing use tools like chart analysis, trend analysis, economic forecasts and even gut feelings to determine the optimal time for transaction.
According to Wikipedia, market timing is good for investors that have short time horizon. It can generate big profits, curtail losses and tame volatility. But some stockbrokers, fund and portfolio managers who shy away from market timing would argue that it is time-consuming and requires paying daily attention to the market. It is subject to higher transaction cost, tax-disadvantaged short time capital gain and risk of determining the time to enter and exit the market.
The investor’s risk tolerance and time horizon as revealed in his Investment Policy can help to determine his appetite for market timing as an investment strategy. Many investors had made fortunes from the market through constant use of market timing. The strategy is close to technical analysis of securities.
Oni, an integrated communications strategist, chartered stockbroker and commodities broker, is the chief executive officer, Sofunix Investment and Communications.