Election: Finance expert tasks investors on long-term investment strategy

Investors in the Nigerian Equities market have been advised to take a longer-term perspective as the second half (H2) of the pre-election year is a good time to take positions in undervalued stocks.

 

A former Commissioner for Finance in Imo State, and currently Professor of Capital Market at the Nasarawa State University Keffi, Uche Uwaleke gave the advice while speaking as a guest lecturer at the July 2022 monthly forum of the Finance Correspondents Association of Nigeria (FICAN).

 

Uwaleke gave insight into what to expect in the fixed income and equities market for the remaining part of the year.

 

The July forum which was held virtually had as its theme: “Impact of Electioneering on fixed income and Equity markets in Nigeria.’* 

 

Professor Uwaleke stated that “the impact of electioneering on equity and fixed income markets is mostly felt in the second half (H2) of a penultimate election year and such pre-election years in Nigeria are characterised by tension and uncertainties ahead of the general elections with adverse consequences for the economy and the equities market in particular.”

 

Rising inflation

 

He said that the next six months would be characterised by a rising inflation rate as the impact of the Central Bank of Nigeria’s (CBN’s) tight monetary policy would be insignificant in taming inflationary pressure.

 

“The Second half, of 2022 will also witness rising Exchange Rates due in part to the exit of foreign investors as well as increased demand for forex by Politicians and rising yields in the fixed income market. Indeed, the Debt Management Office (DMO) third quarter (Q3) Calendar shows bonds to be sold at coupon rates of between 12.5per cent and 13.5per cent,” he explained.

 

Debt servicing

Professor Uwaleke also stated that the cost of debt servicing on the part of the government would increase, and there would be a bearish stock market and a negative real rate of return.

 

Professor Uwaleke further predicted that there would be Portfolio rebalancing away from equities to fixed income securities, even as this period has been associated with the exit of foreign investors.

 

He said “Domestic Investors’ sentiment is usually weak as they seek to reduce their market exposure when elections draw closer. The intensity of the impact is usually a function of the degree of political tension and uncertainty generated by political activities. While the ASI depreciated in September for all penultimate election years, it appreciated in January for all election years except 2015. The outlier, January 2015, was the election year that ushered in the present administration characterized by high tension and uncertainty, compounded by the fall in international crude oil price and the rumored break-up prediction of Nigeria in 2015 by the United States National Intelligence Council.”

 

According to him, the bearish run experienced in the stock market in H2 of 2014 (largely on account of the tension) lingered into January 2015.

 

Professor Uwaleke said “To identify mispriced stocks, the application of ‘Tobin-Q’ or ‘Kaldor’s V’ and Price/Earnings ratios is advised. Ultimately, the best strategy to shield the headwinds is to stay with securities that have solid fundamentals and ensure a well-diversified portfolio of investments, particularly during electioneering periods.”

 

Citing his article titled, ‘Crystal-Gazing the Nigerian Stock Market in 2022,’ Professor Uwaleke said that the tight monetary policy meant to rein in inflation would result in higher fixed income yields and make equities investment less attractive.

 

To overcome the headwinds that characterize the H2 investment climate, he advised investors in the Nigerian Stock market to follow the time-honored cautious investment path of asset allocation, risk management, and portfolio diversification.