October 23, 2018/Cowry Asset

Executive Summary

It is no longer news that foreign portfolio investors (FPIs) are leaving our shores to pitch their tents with developed markets, especially the United States, given that investors’ return on money loaned to advanced economies has become increasingly attractive. Just in September 2018, the U.S Fed Reserve inched up its benchmark rate again by 0.25% to range between 2.00% – 2.25%. The repatriation of funds abroad by FPIs was initially triggered by political uncertainty, which seems to have become the norm in Nigeria during election periods, and then further accelerated by the increasing yield on fixed income asset in United States.

The huge foreign capital outflows resulting from the aforementioned factors – namely local political uncertainty and higher yields in foreign markets – chiefly contributed to the dwindling external reserves (see figure 01) which started moderating virtually every week from June 2018 to date; it dropped w-o-w by 1.06% to USD43.84 billion as at October 5, 2018 and by 8.42% from USD47.87 billion in May 10, 2018, the highest it has touched this year,

In order to halt the declining foreign reserves, CBN at the last Monetary Policy Committee (MPC) meeting in September 2018, retained the Monetary Policy Rate at 14% and signaled the use of other rates, such as stop rate, as part of its strategy to keep the participation of the FPIs in the capital market.

Against the backdrop of the afore-mentioned unfavorable conditions which have significantly depressed the market price of most corporates on the exchange, we opine that investors should pitch their tents with dividend-paying companies or cash cows. We expect most corporates to maintain their respective dividends per share paid in 2017 as hinted by some banks which paid higher interim dividends in 2018.

Nevertheless, we do not lose sight of the possible downside risk associated with equity prices in the near term, even after 2019 general elections, given the expected further increases (2 to 3 times) in U.S Fed rates in 2019 and possible elongated slower local economic growth amid recent episode of flooding in about fourteen states.

In conclusion, we opine that the bear markets can avail value investors the opportunity of building a collection of great stock portfolios which continually yield dividends and tend to exceed annual inflation. Thus, the key to optimizing the benefit from the stock market lies in the strategy of buying the dip in order to benefit from growing dividend payouts and capital appreciation.

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