November 20, 2019/InvestmentOne Report
We start this piece with our variation of a Chinese proverb that says, “The best time to plant a tree was 20 years ago. The second best time is now”. We say, “The best time to buy equities was sometime in the distant past. The second best time is now”
The series of CBN circulars released over the past few weeks have proven sufficient to alter the investment plans of investors. Vital of all is the restriction of local investors from participation in Open Market Operations (OMO) at the primary and secondary market. This raises the question: which assets will new funds be invested in now that OMO bills, a favorite of the local institutional investors, are gone?
OMO maturity profile from now until the end of the year shows that, approximately N662billion held by local investors (excluding banks) is set to mature. While some of these funds will be in competition for incoming bond auctions in November and December, the remainder will have to go somewhere.
One would ask, “Wouldn’t some of these funds find their way to the treasury bills market?”. The truth is, probably not much! With inflation coming in at 11.61% in October 2019 and treasury bills yield on 365-day bill declining to 10% levels at the secondary markets, investing in treasury bills today would mean earning negative real return. With yields poised to decline further and inflation set to inch higher, the possibility of a wider negative real return remains high. The bond market is also not excluded from this inevitable decline in yields as the 10yr benchmark bond yield has declined by 140bps since October to 12.91%.
Equities – The Value Today
The dividend yields on some of the stocks on the NSE offers more than you can receive on most fixed income instruments in the market today. For dividend play alone, we believe investors may begin to consider taking position in some fundamental equity names.
Here is a chart of some dividend yield earning stocks on the NSE using the Bloomberg’s 12-months forward estimate compared with the current yield on 364-day T-bill:
Looking at the valuation of the equities market, the NSE-ASI index has lost -32.38% from the beginning of 2018. We wonder if the performance of the companies making up this index have actually been so poor to warrant such loss. The Nigeria equities market currently trades at a P/E (x) of 6.83, making it largely cheap and under-valued when juxtaposed with the MSCI EM P/E (x) of 14.57 and MSCI FM P/E (x) of 9.53. Most stocks on the NSE are under-valued and consensus target prices on some of these stocks present an upside ranging from 10% to 140%.
We believe prices of most stocks on the NSE are compelling and should attract the attention of investors going forward. While we do not expect a sharp transfer of funds to equity assets due to the risk averse stance of fund managers, we believe it is only a matter of time before we begin to see a gradual return to the market.
