Emeka Ucheaga Advisory

Dear Speculators, It is no longer news that CBN has liberalized the interbank foreign exchange market in Nigeria. This new fx policy will allow exchange rate for bank to bank transactions to be determined freely by market forces as against the previous fixed rate of N199. The CBN has also permitted foreign currency deposits in deposit money banks and discontinued the sale of foreign currencies to Bureau de Change in Nigeria. CBN has also promised to intervene periodically and in unpredictable fashion to clear up backlogs of foreign exchange demands whenever the need arises. Since Nigeria has still not devalued her currency, CBN intervention in this market may present an arbitrage opportunity for the primary dealers. In other words, any day could be Christmas for the banks. Obviously, the Central Bank now believes that the amount of dollars and other foreign currencies in circulation can provide much needed liquidity to satisfy the country's fx demands, thereby bring...

Dear Speculators, After 40 years of being in the European Union, the United Kingdom will no longer be a member nation of the EU after the exit plans have been finalized. The gloomy market prediction by top notch investors and analysts has now become a reality. The British pound has been "pounded" in the foreign exchange market, falling significantly against virtually every currency on earth. Pound sterling currently sits at a 30 year low against the dollar after shedding a record 11% in just one day. The equity market is a mess all over UK and Europe, banks have suffered the heaviest beating. $2 trillion has been wiped off global equities. At this point it will take a miracle and much more than $345b promised by the Central Bank to save the economy from entering a financial  recession by 2017. Several market players were positioned for a stay in accordance with the opinion polls on Brexit even when the polls showed that a vote to remain wasn't significantl...

Dear Hollywood, Hollywood has enjoyed decades of undeniable success. Actors and actresses are household names and the stories told are classics that have penetrated deep into our hearts. Hollywood seems to have lost the act of storytelling. This beauty has been replaced by big budget remakes of old classical movies. Every time you go back to tell a story, you say it differently and change a lot of things. This is getting very annoying! It makes me wonder if Hollywood has lost its creativity. Well a piece of advice is to stop celebrating criminals and lousy celebrities at every chance you get and start telling biographical stories on true heroes and role models. A biography on Warren Buffet and Bill Gates, John D. Rockefeller just to mention a few could easily fetch over $100m each in revenues. Tell more true stories and less science fiction. It is awesome to stimulate our fantasy but it is more productive to educate our minds. Signed: Emeka Ucheaga, Managing Partner, Em...

Dear Mr President, Nigeria expects to raise about 900 billion naira from external sources to fund the budget deficit. It seems like a pretty good idea, with interest rates at historical low levels in developed economies, debt financing has never looked more attractive. But in the world of finance, what is obviously right can be the wrongest decision. Naira has slid an average of 19% annually against the greenback in the last 30 years. Today we see dollar trading at ridiculously high levels in the parallel market, not to mention the value of pounds and euros against the naira in the foreign exchange market. If Nigeria begins to binge borrow externally from the rest of the world, then we must deploy the funds to increasing our export capacity in order to increase foreign exchange earnings. It is imperative that the debt should not be directed at local investments because if interest rates from America is around 0.25% and annual naira depreciation rate is 19%, the real cost of borrowi...

Dear Speculators, A lot of people wrongfully determine cheap stocks by the naira value of its shares. We on the other hand believe Price to Earnings ratio to be a better determinant of a cheap or expensive security. If the PE ratio is unreasonably high, it is too expensive and if it is unreasonably low, it is very cheap. We use the word unreasonable because like Prof Bruce Greenwald of Colombia University pointed out, we live in a world of two extremes. We always believe we are 100% right so when we are wrong, we are 100% wrong, nothing less. As we act on our beliefs, we may drive prices either too high or pull prices too low such that on the average we are both right and wrong. To a large extent, the naira value of a share unit depends heavily on how a company chooses to dilute ownership. For example Company A worth 10 billion naira may sell 100 million shares valued at 100 naira per share and have earning power of 50 naira per share such that the PE ratio is only 2. Compan...

Dear Speculators, The last 12 weeks in the Nigerian stock market has been relatively better than the first 12 weeks. We witnessed a sharp decline in stock prices in the first quarter and a good number of stocks have recovered but stocks are generally down about 6% year-to-date. The market has finished down, up and down again. Uncertainty about the economic outlook in Nigeria has been a huge negative factor, no wonder the market has shed over 1 trillion naira in market capitalization since May 2015. Some investors have made fantastic returns during this period, other have lost and foreign participation in the market has drastically reduced. The best way to profit from volatile markets is first by understanding the root cause of the volatility, then measuring the extent to which the problem can disturb fundamental company earnings and profiting from panic asset sales from knowing better than the market the true value of a particular security. In reality, we can all win in the ...