Diversification, secret of harvesting returns from equities – Jolomi

As the equities market turns ‘gold’, new and existing investors are looking for tips and Jolomi Odonghanro, Head, Research and Strategy, Cordross Capital Limited in this interview , offers some entry strategies.

From our study, we have discovered that the All-Share Index recorded large gain in the Q3 Lafarge, Zenith Bank, GTBank, Stanbic IBTC, Dangote Cement, MTN as growth drivers. What could be responsible for this?
The bullish performance in Q3 was a result of (1) local investors chasing positive real returns amidst sub-inflation yields in the fixed income market, (2) reaction to better than expect Q2-earnings, and (3) foreign investors exiting the country by taking advantage of fungible stocks. Additionally, the MPC made it clear at its last meeting that “lower for longer” is the theme for interest rates for the foreseeable future. As a result, local asset managers homed in on stocks they expect will best overcome the onslaught of Covid-19 and be able to distribute attractive dividends to shareholders. The stocks mentioned above that recorded gains mostly fit into this criteria and have expected dividend yields that are more attractive than anything you would find in the fixed income market.

Looking at the Equities, Treasury Bill, Bond and real estate markets, what are the return prospects?
With N4.1trn ($10.7bn) in OMO maturities and bond coupon payments expected to come into the system from now till the end of the year (also consider inflows from monthly pension contributions which have not been included in that amount), the bulk of that belonging to local investors, local asset managers do not have a choice but to seek alpha yielding opportunities in the equities market. Yes, the risks are significantly higher but with the CBN and FG determined to keep interest rates low, positive real returns must be found somewhere. So, equities will continue to benefit. The market is likely to be volatile, with increasing cycles of gains and profit-taking. However, the gains will not be broad-based. Investors will be selective and will go after stocks that fit the criteria mentioned above. Treasury Bill and Bond yields are expected to remain low due to the government’s policies. Real Estate is a sector that has suffered greatly from the effects of the pandemic. The return prospects for most of the sector are not great in the short-to-medium term. However, there are some green shoots in the area of Warehouses, due to the logistics and e-commerce boom and Healthcare, as significant private equity and development finance investment is expected in hospitals and clinics.

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Compared with mature, emerging and other frontier markets, how would you rate the Nigerian market and why?
The Nigerian market ranks low compared to other markets due to its sustained structural challenges which have led to a challenging operating environment for most companies here. Issues from unfavourable policies, poor transport networks, lack of access to power, currency weakness and restrictions on access to foreign exchange, surging inflation and continuous deterioration in purchasing power are just some of the issues that lead to deterioration in profits and returns in Nigeria and also hamper foreign and local investment.

If a prospective investor approaches you for investment advice with regards to choosing between a stockbroker and Fund Manager as a medium of investment, what will you tell him?
For diversification, which is quite important in optimising your investment portfolio, and mitigating risks, we would advise they have both. We would also advise that these investment advisors should be aligned in their investment approach, standards and general way of doing business. This can be achieved by approaching a Financial Services company that has both of these as part of its service offerings. E.g. Cordros, which has both a Stockbroking business and an Asset Management business.

What if the same investor seeks for advice on which sector and stock to enter. What will be your advice?
We would advise investors to look at fundamentally justified stocks and sectors – firms with strong growth prospects, good management, relatively strong earnings potential, that pay attractive dividends, and are well-positioned to bounce back strongly from the effects of the pandemic.

We have seen inflation rise steadily in the last couple of months in Nigeria. What is the impact of this on the economy and stock market?
The surge in inflation has (1) continued to pressure and diminish household consumption and the consumer wallet in general, (2) put upward pressure on input costs for businesses who are now not able to pass on the costs to consumers because of (1). Listed companies are not immune, and also face this pressure on input costs, operating costs and earnings. This impacts their ability to increase or even pay dividends, thereby making these stocks less attractive to investors.

How is the devaluation of the Naira affecting investment in stocks?
The devaluation has negatively impacted foreign investor participation in the stock market, as not only has it eroded returns, the illiquidity of forex has made it very difficult for them to repatriate capital. It’s a case of “once bitten, twice shy” for them, as their confidence in the Nigerian market has been severely eroded and it is likely that many foreign investors who leave now may never return to the market.

With the paucity of funds in the economy, one would expect government and corporate Nigeria to access the capital market for funds. Why is this not happening?
On the contrary, we have observed that this has been happening. Both the government and local corporates have been taking advantage of the low-yield environment by issuing cheap short-term debt. According to FMDQ data, the value of outstanding commercial papers (CPs) has increased by 203% year-to-date. From about 18 CPs listed at the end of 2019, there are now 38 CPs listed on FMDQ. The government has also ramped up borrowing – the DMO’s bond issuances as at Sept-20 (NGN1.72trn) are at about the same level as in the whole of 2019 (NGN1.73trn). Because of the low yield environment, the DMO has sold more in bonds than it has offered six times in the nine auctions this year.

Could you highlight the risk factors investors should watch?
Exchange rate movement, inflation and government policies/policy pronouncements (e.g. trade/fx restrictions/bans)

What are your forecasts for the economy and equities market for year-end 2020? Which are your stock picks and why?
Q3 GDP figures will show that Nigeria has officially entered a recession. Overall, we expect 2020FY GDP growth at -3.3% and do not expect a return to positive growth until Q1 2021. In essence, a U-shaped recovery. With FX issues persisting, inflation is also expected to hit 14.4% by year-end. Barring any shocks, the equities market is expected to close positive for the first time since 2017 on the factors highlighted in previous answers. Stocks picks are GUARANTY, ZENITHBANK, DANGCEM, WAPCO, and MTNN.

Could you tell us more about Cordros?
Cordros is a company committed to growth – the growth of our clients and their assets. We are a leading Financial Services company, licensed as Brokers/ Dealers, Issuing House and Fund/Portfolio Managers, by The Nigerian Stock Exchange (NSE) and Securities & Exchange Commission (SEC).We work with a diversified clientele, consisting of private clients, small businesses, financial institutions & corporations and governments. Every relationship is built on a true partnership and underpinned by Cordros’s growth philosophy. We offer products and services from Securities Trading, Asset Management, Investment Banking & Advisory, Research and Investment Analysis, Insurance Brokerage, Trustee services and Registrar services.