The term market volatility is arguably one of the most misunderstood concepts in investing and this is because investors who are not accustomed to losses, see the first sign of sell-offs after short days of bull run as a sign of trouble.
Market volatility is the statistical measure of a market or security’s tendency to rise or fall sharply within a short period of time. It is measured by standard deviation and can be caused by the imbalances within trade orders in one direction or another and is also characterised by wide price fluctuations and/or heavy trading.
It is no secret that the bears have continued to strengthen hold on the Nigerian stock market due to the political jitters which has continued to unsettle investors and as a result, confidence in the market seems to be waning.
As at Tuesday 18, 2018, bargain hunting by investors in highly capitalised stocks had triggered the NSE rebound by 0.55 per cent, while the market capitalisation gained N65 billion to close at N11.821 trillion from N11.756 trillion recorded in the previous trading session.
But at the close of trading on Wednesday 19 2018, the Nigerian Stock Exchange All-Share Index (NSE ASI) dipped by 0.02 per cent to close at 32,375.12 points, representing about 28 per cent from its peak in January which is the worst performance recorded globally.
The Month-to-Date and Year-to-Date losses inched up slightly to -7.10 and -15.34 per cent, respectively, aggravating the anxiety among some investors who have short term focus while market capitalization ended at N11.819 trillion, representing a N1.8 trillion loss from N13.619 trillion at the beginning of the year.
The Insurance (-1.26 per cent) and Consumer Goods (-0.63 per cent) indices closed negative, while positive returns persisted in the Oil & Gas (+1.06 per cent), Industrial Goods (+0.40 per cent), and Banking (+0.39 per cent) indices.
The total volume and value of trades declined by 29.45 and 33.17 per cent to 190.35 million units and N2.65 billion respectively, exchanged in 4,705 deals.
According to analysts at Cordros capital, while some of the factors that have pressured the performance of the market in recent times have dissipated, risk factors such as, increasing incidences of trade protectionism, rising treasury rates in advanced economies and systemically important central banks as well as emerging market (EM) frailties still linger and are impacting negatively on the Nigerian market. Apart from these external factors, the political uncertainties are major internal factors affecting the market.
“The absence of a one-off positive trigger and political concerns ahead of the 2019 election guide our conservative outlook for equities in the short-to-medium term. However, stable macroeconomic fundamentals remain supportive of recovery in the long term.”
Corroborating, analysts at Afrinvest said, “In line with historical trend, investors tend to reduce exposure to risky assets in the year leading up to general elections and this is similar to the situation in Nigeria. The one thing investors detest is “uncertainty” and as such, this downside risk is expected to worsen as 2019 general elections draw closer.” However, for investors whose strategy is long term, the current state of the market is a very good opportunity to buy more stocks and await the rebound.
Firstly, markets tend to move up and down in the short term, and volatility should not be the deciding factor as to whether or not investors should immediately exit. This is a case of strong understanding of volatility and its causes in which investors potentially, can take advantage of investment opportunities resulting from volatile markets.
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Secondly, the prices of stocks are currently attractive to buy and given that capital appreciation is hard to come by, increasing the investors’ position at a discount can be a very powerful strategy. In effect, the investor is lowering his or her average cost per share of that particular security.
Speaking to Daily Sun, Chief Executive Officer, Highcap Securities, David Adonri said, “any investor who is buying stocks now that the bears have continued to strengthen hold on the market, will have cause to smile when conditions change. But the issue is that few investors have the money but they have refused to come”
He added that the stocks to invest remain viable and cut across the sectors of the market but advised investors to meet with their stock-brokers to be properly informed and guided for selection purposes.
For his part, Chief Executive Officer, Crane Securities Limited, Mike Ezeh said that the current situation of the market presents a good opportunity for existing shareholders, new entrants, high net-worth individuals, Institutional and retail investors to take advantage of the low prices.
According to him, prices cannot get this lower all the time because the market has a self-adjusting mechanism and so after a certain time, the market will start being bullish and since the market is information driven, volatility in the market is down to the coming elections which as a result made shareholders to be sentimental and started dumping their shares.
Ezeh said, “the Banking sector is a good opportunity as at now, Banks like First Bank, shares of GT Bank was N50 before depreciated to about N30 and N29 thereafter, Zenith Bank was about N30 is now N19 now, FCMB, Diamond and Fidelity Bank are also selling at N1.50 and so the banking stocks present a good opportunity for investors.”