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Home Spotlight

One Reason Why Nigerian Stocks Could Remain Depressed For A Long Time

Nairametrics by Nairametrics
March 14, 2016
in Spotlight, Stock Market
One Reason Why Nigerian Stocks Could Remain Depressed For A Long Time
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For investors in the Nigerian stock market frustration is currently the order of the day. Investors have seen share prices plummet to historical low price to earnings levels indicating that we are in a period of lack of demand.

To make matters worse, some of the companies have actually declared impressive returns and rewarded shareholders with surprisingly juicy dividends. Despite this the market remains in a depressed state. Last week we experienced a glimmer of hope as the bulls took control for all but one day. This week though, it appears the bulls have lost steam.

Currently, analysts attribute the reason for the loss of steam to the exit of portfolio investors in the market, nevertheless that they still have over $2 billion locked into equities. However, there might be a far more plausible reason for all this. Investors are hardly long on stocks preferring to invest for the short term rather than for the long term. For the few who are still in it for the long term, they probably do not have a profitable window of exit so they remain locked in.

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It’s hard to blame investors here, particularly when you look at the corporate governance level of most Nigerian companies. These companies are poorly run and are often a proxy for the controllers. The Nigerian Stock Exchange has failed to properly introduce stringent sanctions against corporate recklessness. This lack of deterrence has made everyone see this market and one to play short term with very little faith in the potential of financial growth of some of these companies.

The controversial 50 kobo floor placed on stocks also gives companies a false value floor even when it is obvious they should be worth much less. In addition, shareholders with controlling shares of these companies refuse to step down or handover the management of the company to more competent hands and will rather see the company die than relinquish control.

Investors are watching and will rather steer clear than have any long term stake in these stocks. If you have a market were most investors are short term then you expect to liquidity marked with volatility. Share prices will initially rise before retreating immediately short term buyers flood the market with their hoard.

Unfortunately, there are no signs that things will change at least in the short to medium term. So long as foreign investors continue to avoid the equities market amidst capital controls and the US Reserves continues with its gradual rate increases, this trend will continue. The local market which should be taking advantage of cheap stocks does not trust the capital market and will rather continue to invest in real estate despite single digit yields.

So what should a long term investor do in this market? We reckon that focus be placed on companies with sound corporate governance records with sound fundamentals. They are not many but the few around are intrinsically cheap and also have good dividend yields. GTB, Zenith Bank, Dangote Cement, Dangote Sugar, Nestle, Mobil are part of the very few that comes to mind. Just remember that the current share price is more likely to be cheaper than price “appropriately”.

Tags: Real Estate News
Nairametrics

Nairametrics

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

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