Price performance of equities on the floor of the Nigerian Stock Exchange in the month of May was quite impressive as the market returned positive with the All Share Index and Market Capitalisation both appreciating by 9.76% respectively.
The Pharmaceutical Companies significantly outperformed others in terms of price appreciation as they all emerged on the gainers list with significant growth. Their performance being premised on the fact that the market is expecting them to be net beneficiaries of any Government action on providing vaccine to covid-19.
In a chat with Aruna Kebira, Chief Dealer of Global View Capital Limited, the capital market guru shed light on the cause of the recent market vibrations, with projections of what to expect going forward. Excerpts:
The market in the month of April and May experienced unprecedented price rally. June being the last month in the second quarter, what should we expect in price performance?
At the advent of the covid-19 pandemic late 2019, there were so many doomsday predictions that most economies will shut down and half of the world population will be lost in a single month. Though there were tremendous death cases associated with the pandemic but it was a far cry from the ex ante.
During the period mentioned above, we saw listed companies releasing their 2019 Year End financials and dividends with commensurate dividend yields were declared and paid.
The price of oil was hitching up gradually culminating in the price of Brent crude at $36.06, Nigeria external reserves was reported by the CBN to have risen 7% in 21 days.
All these are happening amidst lock down. As far as this information is still at the market place, we should still expect an upbeat in the market in the near terms.
What is your projection going forward for the market?
June is marking the end of the Q2 2020 and it is predicted that the nations GDP will contract and lead to recession.
If my memory serves me well, a country’s economy will enter into depression when it suffered two quarters negative growths in its GDP back to back.
The GDP growth for Q1 was just a decline from 2.55% to 1.87%, so even if the economy witness a negative growth in Q2, that will not qualifies it to enter into recession.
I still believe as mentioned above, except there is a sudden change in information before the end of the month, that we may not see that much predicted effect in the market.
Granted that the first two month of this quarter was spent observing safety under covid-19, but the resultant effect will not be as grievous as predicted.
What should be the entry strategy for trading for now?
The trading strategy to be adopted hasn’t changed. Taking position in fundamentally sound stocks and stocks of Pharmaceutical Companies that may likely be the net beneficiaries of the production of any antidote to the Covid-19 virus.
It is worthy of note that the rally we saw in both April and May was heralded by the leaders and fundamentally sound stocks like Zenith, MTN, Dangote Cement, Guaranty Trust Bank and the likes.
These are stocks that even if they succumbed to bad market situation have the potential of quick recovery in favourable market condition.
What is the possible performance of quoted companies in their Q2 earnings?
I cannot be too optimistic about this, because we have seen two months out of three gone with the lock down which have hampered productivity across boards. Definitely we should not expect these results to outperform those of the corresponding previous periods.
One thing that I know is that the market is expectant of that and the reaction might not be as sharp as when the market is expecting something different. Market may seem to understand and as such may not punish prices so badly.
What is likely to happen to performance of equities in the in 3rd quarter?
Q3 has always been a reference quarter for analysts making projections against Q4. Since we may likely experience full three month of full blast economic activities, it now depends on the after effect of the pandemic on individual companies.
If all is well and that companies are able to discount fully the effect of the pandemic in their operations, things might return to normal.
How will CBN rate reduction affect the market?
When interest rate is reduced, cost of fund and nay investment will become cheaper than before. The production and supply side of the economy will be enhanced. A decrease in rate will cause investment demand to rise with an accompanying rise in demand for goods and services, regardless of the level of output.
The increase in investments brought about by the reduction in the interest rate brings a rise in output (income) which in turn results in a rise consumption and investment. Thereby leaving the economy better off ex post.
It is a good step for the CBN to assist the real sector to boost production whose multiplier effect will boost the entire economy
We learnt of recent intention of borrowing by the Government. What will be the effect of more debt on our economy?
In simple investment terms, borrowing is not a sin. When the Return on Asset outweighs the cost of debt, then debt is desirable.
The country is facing serious budget deficit as per the decline in the crude oil benchmark in the 2020 Budget. And Government expenditure has a huge multiplier effect on the GDP and GNP at the end of the day,
Most Government expenditures are grossly financed by Taxes, you and I know that the rate of tax default in this clime is alarming.
Governance cannot be stagnated because it is illiquid, so borrowing to sponsor Budget deficit is not a crime but as far as we have the ability to redeem our debt appropriately I don’t see any issues with it.