- Factors responsible for disparity in economic growth & market return
- Guide for investment decision
- Stocks to watch
The correlation between economic growth and stock market returns is a recurring question amongst analysts and investors alike. While many claim that ‘theoretically’ both figures should be the same, others believe that there is no correlation at all.
Using Nigeria as a case study, we saw a wide variation between the GDP and capital market performances as GDP returned in the negative while the stock market grew in the second quarter of 2020.
According to the reports released by the National Bureau of Statistics, Nigeria’s Gross Domestic Product (GDP) declined by 6.10% in the second quarter of 2020, ending the 3-year trend of low but positive real growth rates recorded since the 2016/17 recession.
The decline was largely attributable to significantly lower levels of both domestic and international economic activity during the quarter, which resulted from nationwide shutdown efforts aimed at containing the COVID-19 pandemic. The domestic efforts ranged from initial restrictions of human and vehicular movement implemented in only a few states to a nationwide curfew, bans on domestic and international travel, closure of schools and markets affecting both local and international trade. The efforts, led by both the Federal and State governments, evolved over the course of the quarter and persisted throughout.
Assessing capital market performance in relation to the current GDP report of the National Bureau of Statistics, Mallam Garba Kurfi, Managing Director of APT Securities and Fund Limited gave in-depth insight on why the market performed well in Q2 despite the lock down and drop in GDP of the Nigeria.
According to Mallam Kurfi, Nigeria’s GDP decline by 6.10% is not bad compared to what was reported in other advanced countries. He cited that GDP in U.S.A declined by 33% and in U.K it declined by 20%. In France, Germany, Italy, Canada and Japan, GDP declined by 14%, 18%, 12.4%, 12.0% and 8% respectively.
As regards impressive market performance despite obvious economic reality that could go against the market, Mallam Kurfi stated thus:
“Our market pro-acts. The market look at the future and based on the prediction of what the future is likely going to be, it reacts accordingly. If you look at it, our market is very sensitive. When there was economic recession in 2016 even before that time, the market was already down.
In 2018 and 2019, the market was in the negative (double digit). When covid-19 came, the market went as low as 24%. So if you look at the 2 years, we were in the debit of over 30%, plus 24% decline that appeared in March this year, we were already down by more than 54% collectively. That gave opportunity for the bargain hunters and long term investors started coming into the market”.
“In March and April Nestle was traded as low as N760. Today it is trading at N1,175. That is almost about 55%. Nigerian Breweries went as low as N24, it went as high N45 during the lockdown. It currently trading at N40”.
“When the impact of the covid-19 was so obvious on the market, it attracted bargain hunters to come and take position; and that is one of the reasons why our market recovered. If you look at it, since we entered July and now we are rounding off August, the index is no longer going down. Most of the time week on week the market closed marginally up. It is so because people are looking at alternative ways of investment. Money market is between 6 to 7%. With inflation of almost 13%, are you not investing in the negative? So who will invest in the negative term? Treasury bill is about 3-4%, when inflation is about 13%, will you invest in Treasury bill? So where do you go? If you cannot invest in the money market, you cannot invest in Treasury bill, the only option available for you is bond. When the federal government Sukuk bond came, it was oversubscribed by more than 400%. People get only 10% of what they applied for. So in this kind of environment what do you do? You look at the alternative way to invest your money, which is the stock market”.
“Most of this stocks, even dividend wise, you can get much as 20%. For instance United Capital gained more than 50 kobo, it was trading as low as N2.50. For large capital appreciation, if you buy a stock at N2.50 and gives you 50 kobo, that is 20%. Are you not better off where even the dividend yield is better than the inflation? That is what attracted most people into the capital market. And that is why you see the capital market is marginally improving week on week. Because other alternative are not better than the capital market, that is why people come to the capital market. And that is the reason why the capital market is going up”.
“There is inflation. Official rate for dollar was N306, now it is N381 per dollar. If you go to the parallel market, from N360, dollar is now N470. So in this kind of environment, it is not good to keep money. If people want to convert their asset into money. Many properties are getting low patronage. No rentals. So people will not want to tie there their money into real estate. Rather, they prefer to go into the capital market. That is why the market is coming up. And we are expecting this to continue till the end of the year”.
“Reason for GDP decline is very obvious. When you lock down, you go down. GDP decline is not only Nigeria. In USA, GDP declined by 33%, UK declined by 20%, Japan declined by 8%. At that, you will see that ours is not bad at 6.10% decline. Don’t forget that some of the index for GDP started going down right from first quarter. GDP is Q1 is 1.87%, now we are talking of -6.10%. And the economy has started opening up. So by the end of third quarter, we expect to go lower than what was declared in Q2. By the end of the year, we can go even less than -3% which is not bad compared to what is happening globally. So we are not in a bad situation”.
Addressing the fear of pending major market crash, Mallam Kurfi, pointed out that there is nothing to fear, rather investors should take position in fundamentally sound stocks.
According to him: Market crash occur where there is mass liquidity and other trading instruments such forward contract, futures contract and security lending. All these instruments are not available in Nigerian market. Even though security lending is allowed, what is the percentage of security lending in our market? Very insignificant. Derivative is not yet in place in our market. In such market with several trading instrument, they really influence the price movement of the market. But in our own case, we are trying to develop. We have not yet reached there. Therefore, we still have more room to manage ourselves.
“If you are an investor, that means you are willing to wait for a long term. I will advise you take position in stocks that have very good fundamentals. Stocks that have dividend yield of more than 10%; those that we have seen their results and they are not doing badly. We believe the market will not do badly because of the inflation and the scarcity of alternative investment option”.
STOCKS TO WATCH
- Access Bank: Access Bank declared25 kobo interim dividend to its shareholders. The proposed dividend pay-out will obviously push the share price of the bank forward. Week to the date, the price of the stock grew by 0.78% to N6.45 from N6.40. Investors can take advantage of the interim dividend as Qualification date is on Thursday, 17 September, 2020.
- Zenith Bank: Upon the arrival of the Bank’s Q2 result embedded with interim dividend of 30 kobo, the share price of Zenith Bank has been up beat as it grew by 3.26% WtD to N17.40 from N16.85. Qualification date for the interim dividend is on Wednesday, 16 September, 2020
- Guaranty Trust Bank: Guaranty Trust Bank proposed interim dividend of 30 kobo for half year 2020. Week to date, the share price grew by 4.35% to N26.55 from N25.4. Qualification date for the dividend is is Tuesday September 15, 2020.
- UBA: United Bank for Africa declared an interim dividend of 17 kobo to shareholders. Currently trading at N6.45, the share price of the Bank grew by 1.57% WtD from N6.35. Qualification date for the interim dividend is Tuesday, 15 September, 2020.
- Stanbic IBTC: Stanbic IBTC proposed 40 kobo interim dividend to shareholders. Week to date, the share price of Stanbic IBTC has moved from N36.05 to N38.00 upon the arrival of its Q2 earnings. Qualification date for the interim dividend of 40 kobo is on Tuesday, 15 September 2020.
- Nestle: The market is anticipating interim dividend from Nestle. In March and April Nestle was traded as low as N760. Today it is trading at N1,175 which is about 55% growth. With 52 weeks low of N764.9 and 52 weeks high of N1,469.9, the share price of Nestle has 79.94% growth potential.
- Airtel: Interim dividend information for Airtel expected to soon hit the market
- Neimeth, Glaxosmith and May & Baker are pharmaceutical stocks to watch. In view of their relief package, they are not doing badly.
- AXA Mansard has notified the market that they have sold their pension fund. When this reflects in their financials, it will drive the price of the stock upward.
- AIICO Insurance is planning to sell their pension funds. So definitely they will make gain and it will reflect in their financials. Therefore their price will be better than what they are currently trading.