The Capital Market in 2019, what should we expect in 2020?

In 2019, we wore the poverty capital of the world tag with hope and unflinching will, we lived daily in an economy that continues to be tamed by global economic headwinds, erratic economic policies, aggressive fiscal policies, unconventional regulatory directives and pronouncements.

In 2020, we do not expect the headwinds and ‘policy gymnastics’ of the previous year to disappear overnight but ‘we move’ with tact and experience, hoping the momentum garnered in the previous year will come in handy to ensure a more productive year.

Topic by topic, let's review the key headlines that shaped the Capital Market in 2019 and share insights on lessons to grow your wealth in 2020.

The Equities Market (‘the Market”)

A Farmer rejoices when his crops blossom with green leaves, green is an indication of bounties/gains to come but when it’s red/brownish, he mourns in fear of heavy losses because his farm is most likely on fire or the crops are dying. In the equities Market, green and red carry the same message like the farm.

From the chart, the equities market opened for 246 days in 2019, stocks blossomed in green for 100 days, and for the most part - 146 days, the Market was on fire, ravaging most stocks and leaving Investors with heavy losses on their investments.

More technically, the equities market started 2019 on a high with an All Share Index (ASI) of 31,430.50 and peaked at 32,715.20 on 15th February 2019. In the course of the year, political, economic, and global turbulence drove the market up and down until it nosedived to close the year at 26,842.07.

ASI is a parameter used to measure how well a stock market is performing. You can view it as the daily ‘jamb score’ or ‘CGPA’ measuring the combined daily performance of all stocks in the equities market. The higher the score, the better the performance of the stock market. Comparing first day in 2019 score of 31,430.50 with a last day score of 26,842.07, you will be right to conclude that the market performed poorly, suffering a decline of -14.60%.

Like the ASI, all other market performance indicators were in the red zone except market capitalization, which gained not necessarily because of better performance but because of the listing of new companies like MTN, Airtel etc.

Here is the list of top gainers and losers for the year:

If you invested N500,000.00 in the shares of CI & LEASING on 31st December 2018, by now you will be on the millionaire’s list in your village at N1,657,303.37. Even if you had invested your funds equally between the top gainer and loser, you still would have been better off at N906,520.64, about 70% premium above inflation, that’s the beauty of the equities market.

What should we expect in 2020? We expect the market to enjoy some green moments in the early days of the year considering the excess supply of funds beyond the pipeline of attractive investments in the money market.

Eventually, the lethargy that we have come to know the market and players for will soon set in and burn the green moments. It will be difficult to fault the Market or blame the energy of Players since the Market is usually a reflection of the economy, you cannot have a sustained bullish market in a bearish economy with erratic policies, regulatory directives and pronouncements, along with global headwinds that we can only accept at best.

Be that as it may, there are always decent undervalued companies and penny stocks waiting to be hunted, waiting to be spotted, waiting for the next millionaire/billionaire. Imagine if you had bought penny stocks like CILEASING, CORNERSTONE, CHAMS etc in 2018 and play the waiting game? Patience is a virtue, right?

Double-digit Inflation Rate

Inflation! a subtle weapon of theft even more devious than tax at times. Like a burglar in thick darkness, inflation robs you of your wealth without you having a clue.

When the Government proposed an increase in VAT from 5% t0 7.5%, we all jumped into a royal rumble of comments and analysis. Check the records, the inflation rate was 8.2% in January 2015 and now 11.85%. Put simply, it is an additional VAT of 2.5% and what feels like an additional inflation tax of 3.65%.

While the effect of tax is clear and intuitive because we can actually feel the negative emotions of our cash moving to Government. In contrast, a higher rate of inflation does not generate an equivalent negative emotional reaction because it’s not intuitively felt.

Here is the implication of the current rate of inflation at 11.85%, if inflation were to stay at that rate for the next 12 months and you invest N100,000.00 in a fixed income security to earn 12% annually, after 12 months, your precious N100,000.00 will effectively worth N100,150.00 instead of N112,000.00, inflation just robbed you off N11,850.00.

Outlook for 2020: most certainly the next inflation figure will hit 12% and cross it in the coming months. Falling interest rates, potential VAT increase, Border closure along with the implementation of the new minimum wage, inflation won’t be declining soon.

The Lesson: To grow your wealth in 2020, the return on your investments and business ventures must give you some reasonable premium above the inflation rate.

Question: What can you invest in ‘to beat the thief called inflation rate’?

Treasury Bills and Crashing Yields

Treasury Bills used to be an answer to the question above, not anymore, it’s no more a Haven for Banks and Fund Managers. The tables below tell the story:

Outlook for 2020: it doesn't appear the crash is stopping any moment, here is the result after the first auction in 2020;

At an average yield of 12.83% in January 2019, you will conveniently beat inflation. Fast forward one year after, at the current average yield of 4.533% and inflation rate at 11.85%, the return on treasury bills will come in negative at -6.541%, clearly, you cannot grow your wealth with T-bills.

External Reserves and Oil Prices

Nigeria continues to suffer from overreliance on crude exports to grow its external reserves. In the last six months, the reserves have declined by $6.46bn from $45bn in June 2019 to $38.6bn as at year-end 2019.

“At an investor meeting in London, Godwin Emefiele, governor of the Central Bank of Nigeria (CBN), told foreign investors that the apex bank would meet all foreign exchange demands so long as the nation’s external reserves are above $30 billion and the international prices of crude oil do not go below $45 per barrel” BusinessDay

If you own a company or have anything to do with strategy in any company, please print the statement above and paste it where you can see it on a regular basis, most importantly, factor it into your scenario modeling. At the current rate of depletion, circa $1 billion monthly, we may hit that alert point in September 2020.

In the coming months, the re-energized hostilities between Trump and Iran may just turn out to be the tailwind that will fuel the confidence of Investors in our external reserves and douse all speculations.

Despite the headwinds, the opportunities in the land are boundless, strategize, explore, execute brilliantly and be confident of a positive outcome.

Cheers to more wins in 2020.