Emeka Ucheaga Advisory

Dear Speculators, The wait is over, we anticipated bad news and we got it. Our fears have become reality, the economy has continued to back slide and Nigeria has officially tipped into a recession. Not that this surprises anyone though. Falling oil prices, dollar scarcity, exploding oil pipelines, massive labour retrenchment and import restrictions have all contributed their fair share to weaken growth in Nigeria's economy. However, the stock market arguably has had it worse than the general economy this year as the market is currently down about 3.8 percent against an economy contraction of 2.06 percent in the second quarter. A closer analysis of the stock market brings to light some intriguing statistics. The largest 49 companies in the stock market account for 97% of the total stock market capitalization. 41 companies of the 49 sell at an average of 22x earnings. Only 49 companies out of a total of 171 companies trading on the Nigerian Stock Exchange are valued above ...

Dear Speculators,  The stock market in America has been bittersweet this year. The bulls have been rewarded and the bears have been squashed. Active trading is giving way to indexing. Interest rates have been near zero for almost 8 years and the hunt for yield makes the year look like 2006 all over again. A combination of rapid household deleveraging and low productivity growth has contributed to the sluggish economic recovery in the last seven years. To top it all off, political uncertainty looms as the Presidential elections draw near.  However, what has kept people on their toes this year asides Donald Trump is the fear that the US market might be in a bubble and a repeat of the Global Financial Recession of 2008 is eminent. We believe in absolute terms, while measuring the value of the S&P 500 through earnings multiples, that the stock market is overvalued. But in relative terms, when you compare the earnings yields on equity versus bonds, the equity market ...

Dear Speculators, Investment is all about generating returns and the moment your investments stop yielding returns, you are no longer investing, you are simply expending. Investment returns can be optimized through intelligent asset allocation. The age long debate about asset allocation to stocks and bonds is inconclusive so don't even bother joining the drama. The principles of asset allocation though are universal and very simple to understand. Now whether you invest all your money in stocks, bonds or a mix of both assets depends on the prevailing market conditions. Basically, it is comparing equity earnings yield versus bond yields. If the earnings yield on stocks is significantly higher than the bond yield, it means that the stock market is undervalued and you can invest 100 percent in stocks. If the bond yield is considerably higher than the earnings yield on stocks, it means that the stock market is overvalued and you can invest 100 percent in bonds. If the yield o...

Dear Speculators, Lamenting is my least favorite activity but I'm truly baffled at the magnitude of issues left unresolved in the country. Too many questions and no answer. Too many speeches and no action. Too many problems, yet no solution. The Nigerian economic situation is definitely one of a kind. First we had an oil price shock, then a currency crisis. A decline in share prices precipitated by an economic meltdown. Soon, double digit inflation led to negative real interest rates and suppressed bond prices. We could spend weeks listing all our problems but that will do us no good. We could stay at the sidelines and wait for the problems to all go away but they never do. There is no such thing as a perfect stock market or a perfect economy. We do with what we have and that makes us who we are. A smart investor reaps profits all the way up and down in a stock market cycle. Empirically, market participants tend to over react in booms and burst. They get overly ...

Dear Speculators, Many a times in the market, we make rational bets in the stock market and we lose even when we are right. Stock market is a game and the system is either rigged in your favour or against you. Because the market participants are all thinking individuals, they decide the market outcomes by voting with their Naira. If a greater number of people believe in a particular outcome, they move in that direction. The force of their investment moves the market in such a way that the outcome of events in the stock market is exactly as they all anticipated. Confused? Here's a simple example. Imagine you are home alone. You think you will be hungry in an hour so you start cooking an hour early. Nearly an hour later, the food is almost ready and the enticing aroma makes you hungry. "Yes! I knew it", you say, "I correctly predicted what time I will be hungry". But at this point, it is difficult to substantiate correctly what triggered the hunger...

Dear Speculators, The stock market is like one big party. Ultimately, there are 5 kinds of people in a party. Those who come too early, those who show up on time, those who come in a little late, those who show up at the peak of the party and finally those who show up when the party is about to end. Those who come too early will see their stocks flat for a prolonged period of time and when the party starts, their stocks take a one way trip up. Those who show up on time will see their stocks rise instantly and will enjoy the ride throughout. Those who come a little late to the party have missed out on some huge profits but they take as much as they can get before the market peaks. Those who come in when the party has peaked have nowhere else to go than down, they lose money in the market and try to cut their loses and exit the market. Those who come in when the party is about to end haven't been paying attention, they thought the market had bottomed out and it was...

Dear Speculators, A combination of crude oil supply disruptions due to pipeline vandalism and a 26 percent drop in crude oil price from its $53 per barrel highs in June this year has pulled the value of the naira down more than 10 percent since late June. At $42 per barrel, crude oil price appears to have bottomed out and is now edging higher. This mini resurgence has strengthened the naira which is now up about 1.6 percent in the last two days. The sooner the Federal Government solves the militancy unrest issues in the Niger Delta, the better the prospects of an economic recovery within the coming months. Nigeria lost tens of billions of naira in the past month due to falling oil prices and militant attacks on crude oil pipelines. The Central Bank may choose not to respond directly to the weaker Naira since the economic fundamentals support a higher oil price this year settling somewhere above $50 per barrel leading to a stronger Naira. We believe that a dollar-naira exchange ...