‘Invest in stocks with long-term sustainability’

By Taofik Salako, Deputy Group Business Editor

Amid concerns that the stock market may suffer more decline due to the effect of COVID-19 pandemic, market analysts have advised investors to take advantage of the bargains created by the slowdown to invest in stocks with strong fundamentals and favourable long-term outlook.

In their mid-year outlook released Tuesday, analysts at CardinalStone, an investment banking group, said the twin evils of COVID-19 and oil price shock would likely cause a deterioration in the domestic economy in the year, with a potential spillover into the first few quarters of 2021.

Analysts noted that the viral spread came at a time when budgetary space to absorb shocks is limited by weak oil prices pointing out that COVID-19 threatens to overwhelm domestic healthcare infrastructure, upend livelihoods, cripple social conditions, and distort business activities.

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The report pointed out that the scale of measure adopted by Nigeria to absorb the impact of COVID-19 appears insufficient to prevent significant distortions to domestic macro variables in the current year.

“In the equities market, we expect investors to take advantage of bargain hunting opportunities in fundamentally strong names and hold for the long term. Investors could gravitate towards stocks with track records of high profitability, low financial leverage, and less margin volatility amidst the current macro vulnerabilities,” CardinalStone stated.

Analysts said the monetary policy bias could remain largely dovish, with administrative measures set to leave system liquidity at elevated levels and yields mostly lower in third quarter 2020.

Experts expected yields to slowly reverse trajectory in fourth quarter of this year due to a halt in OMO maturities that cannot be rolled-over as a fallout of CBN’s OMO restrictions.

“Thus, investors are likely to stay short in the fixed income space. The government could also use some domestic borrowings to augment any budgetary shortfall that may arise after concessionary funding options have been exhausted,” CardinalStone stated.

The report indicated that global equities delivered broadly negative returns in first half of the year against a backdrop of weakening growth and declining trade interactions. It noted that the Nigerian market was affected by the differing sentiments of domestic investors and foreign portfolio managers in first half.

“On the former, CBN’s restriction of local non-bank financial institutions and individuals from participating in OMO programs resulted in a significant increase in idle liquidity, some of which eventually flowed to equities with the allure of fixed income market reduced by expansionary measures of the apex bank. While the lack of viable options forced some domestic investors into stocks, foreign interest in Nigeria’s market waned on the back of credit ratings worries, oil price weakness, currency concerns, and potential earnings tail off,” analysts stated.

According to analysts, despite some recent resurgence, Nigerian stock market could close the year in the red if deployed stimulatory measures fail to compensate for macro setbacks.

“By our estimates, the cumulative fiscal and monetary response to tackling the ongoing coronavirus-induced economic slowdown in Nigeria amounts to only 3.0 per cent of GDP. This stimulus pales in comparison to that of South Africa, 10.0 per cent and Brazil, 6.5 per cent even though both countries were not as exposed to the equally dire strait of falling commodity prices. The grimmer outlook for Nigeria reflects the additional strain that weaker oil economics can impose on its mono-product economy. Besides, there are genuine concerns that a full resumption of CBN dollar sales to foreign portfolio investors could see renewed foreign selloffs overrun the bullish strides from domestic participants. In a word, if you take away the few opportunities for tactical positionings, the equities market may struggle to attract significant buying interest for the rest of 2020,” CardinalStone stated.

Analysts noted the difficulty in accurately predicting the depth or duration of the current economic downturn due to the high volatility of macro variables, but advise investors to brace for near-term declines in stock markets as second quarter company scorecards are released.

“In this environment, we expect investors to gravitate towards stocks with track records of high profitability, low financial leverage, and less margin volatility. Such counters could provide critical buffers for portfolios in the current year. Specifically, retained earnings from prior successful years could support current dividend payments, which could, in turn, augment portfolio returns during market downturns,” CardinalStone stated.