Declining equities prices are just normal in the stock market environment. As normal as it is, equity prices don’t just fall; just as equities prices don’t also just begin to rise. What should you be doing when the market generally faces south; when the prices of stocks where you have investment keep declining?
When you see that the market is generally down, all you need to do firstly is to sit down, relax your mind, don’t panic, don’t rush to take any decision. Don’t start thinking that the end has come or that the heaven is about to fall on everybody or on you alone or that the Armageddon is near. If you panic when you see the prices of stocks where you have invested coming down, you will sure take the wrong step.
In your calmness, seek to see and know what the factors that are responsible for the decline might be. The process of knowing this might be a little bit clumsy, but then you still should know.
Let me suggest how to scoop your fact to know the reasons as to why the market is down.
- What is happening within the Nigerian economy? For instance, are there fears that the CBN might adjust the Monetary Policy Rate? Such that savings and investment in the money market will become preferable to stock market particularly in the short term. If there are such fears, there are steps to take. And if there are not such fears, then remain calm. As a matter of fact, the outcome of the Monetary Policy Committee meeting last week is favourable to the market in the sense that Monetary Policy Rate (MPR) and other key parameters are retained just like they were before.
- Like I earlier said, equity prices don’t just rise. Forces such as release of good earnings and declaration of impressive dividends and bonus issues do impact stock prices greatly. What if there no such reports hitting the market at an immediate time? Prices will rather move sluggishly or not even move at all. Of course there might be one or two that might be sharp in growth; maybe one major investor or the other might just be interested in it. When there are not any report been released to the market, what we expect to see is natural sluggish movement because there are not expectations; and like I have always said ‘expectation is mother of all investment’.
- A major volume-driving value-investors exiting the market around that time; or that they are not just investing at all; or that they are reshuffling their portfolios. You see, the capacity of every investor in any stock market differ. There are those that are foreign institutional investors; there are also foreign individual investors. There are local institutional investors and there are also High Networth local investors before you begin to talk about the generality of people. The capacity of people that are investing in the market at any point in time are not the same. Of course you need to also group those that are regular market operators managing their own personal portfolio. Could it be that these major volume and value drivers in the Nigerian market are not investing at this point in time? Are they selling? Are they reshuffling their portfolios?
- Could it be that prices have gone up too high, while earnings were being released to the market? May be the rate of response to earnings have been very impressive and have push the prices of some stocks so high. If that happens, stocks naturally will need to relax and shed some points.
- If indeed that prices have gone up too high, how do you know that the price of a stock had gone too high? What I see in this market in some cases are situations whereby somebody will just come and begin to say the price of a stock is too high simply because the stock moved from 20 kobo to N5. A stock might move from N2 to N50 and yet not being overpriced. What are the factors that will lead you to know that the price of a stock is overpriced? Most investors in the Nigerian market don’t even use it; that is the Technical Analysis tool.
- Could there be negative indicators that might be making major investors in the market shed their stocks? Are regulatory issues with major and market leading investors?
- The market could also be down if there is general illiquidity in the economic system of a country. In a country where majority of the populace are complaining of harsh business climate as we do have in Nigeria, stock prices are not expected to move up geometrically.
You see, the reasons why the market could be down are so many. Now that you have a lead, all you need do is to take your time to lay hold on why the market is currently down.
The market is currently down because major investors are simply not investing at this point in time. Foreign Investors, local institutional investors and High Networth Individual investors are not investing. Largely, if they are investing, the market will not be down the way we see it. Why are they not investing?
There is not too much at stake at the moment. There is not much expectation. In other words, there is nothing much to look out for at this immediate time. Besides this, stocks were compensated so well with the release of impressive Q1 earnings; profit taking is only natural.
As position taking against Q2 earnings will soon commence. So technically speaking there are a number of stocks that have gone so high in the recent times. There will be the need for the prices of such equities to come down a little bit.
Whatever the case may be, this is the confidence that we have, the market is not crashing. The market is not collapsing but rather increasing for better and bigger performances.