NAIJA BIZ

Analysis: FUGAZ are back and investors are lapping it up

It’s just one full week of business at the Nigerian Stock Exchange and stocks are already 9.51% up, one of the best performers in the world today. Investors, of course, are lapping it up.

Just a week ago, stocks closed the year with a negative return of 14.6% in back to back losses closing the decade with a paltry return of just 28.9%. It appears we are all set for a blistering decade, going by the bullish return we have experienced this week. But are we?

Before we allow our scepticism to get the better of us, let’s step back to understand just how good stocks have been in 2020. Year to date about 57 stocks are positive out of which 26 are up 10% and above. Only 34 stocks posted positive returns last year most of which are penny stocks.

Out of the 26 stocks with positive returns are our darling FUGAZ, all of which have returned double-digit returns. First Bank’s parent company, FBNH has returned 24.4%, the highest from Nigeria’s top 5 banks. Zenith Bank and UBA have also both returned 18.7% and 16.8% respectively, this year so far.

You need not think too far to discover the driving force for these impressive returns. Firstly, these stocks have been relatively cheap for months trading as low as 2x their earnings per share with an indicative double-digit dividend yield. Also, investors are quickly taking positions ahead of the earnings season, which is when banks start to release their full-year results. With share price at low valuation, multiples dividend yields are in double digits and if priced appropriately could be higher than the inflation rate. It’s hard to pass this one over.

Another major reason is the central bank’s recent decision to ban investors from the Open Market Operations (OMO) window. The decision has sent everyone running towards treasury bills driving yields to multi-year lows of 5.6%. Even at such lows, Treasury bills are now crowded and from what we gather, some banks have started turning investors back.

With nowhere to go, it appears the stock market is now the logical destination of any discerning investor. Once in that market, stocks that are readily available to buy are banking stocks and look no further than the FUGAZ.

Incidentally, we also observe the bandwagon effect. Not only are FUGAZ stocks up, but other banking stocks are also up. Tier 2 banks (in fact all banking stocks are positive this year). Fidelity, Ecobank and even Unity Bank are up double digits.

The wave of green is not restricted to banking stocks. Industry leaders across the broader stock exchange have also experienced significant gains.

For instance, Dangote Cement, MTN, Presco, Flour Mills, and Julius Berger are also posting positive returns year to date. Pension Funds, Fund Managers are obviously in the play and we understand it’s all about forced portfolio diversification

Nigerian stocks are hugely unpredictable and colonialist, as it relies heavily on foreign dominance to maintain momentum. Since 2013, stocks have depended heavily on foreign investment inflows to sustain valuations. Thus, it matters not how cheap stocks are or how much return they post in the interim.

Dead Cat bounces are cyclical and we won’t bet against a revert to status quo. All it takes is for those who have taken positions this week to take some profits and offload next week. It could even be a new CBN circular that’s just enough to torpedo the gains we are currently seeing.

If you’re about to get into this game then brace up as you cherry-pick fervently. Keep your portfolio close to your chest and watch out for the bears. If you prefer to remain on the sidelines then Goodspeed managing single-digit returns or taking a punt on high risk, high yielding investments like forex trading or cryptocurrency.

Someone somewhere has to make money and FUGAZ appears to be the way

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