Fixed Income Market Suggests Stocks Are Overpriced

The fixed income market is sending a message to investors that stocks are overvalued as against corporate credit and treasuries.

That’s according to a MoneyCentral analysis of metric that looks at how much profit companies can generate relative to their stock price (earnings yield). And then compares that against how much yield an investor would earn from bonds (bond yield).

If the yield on a stock is lower than the 10-year Treasury yield, it would be considered overvalued relative to bonds. Conversely, if the yield on the stock is higher, it would be considered undervalued. In this situation, investing in the stock market would be a better option for a value investor.

The current NGXASI index earnings yield stands at 7.74 percent, but it is lower than the Nigeria 10 year bond yield which holds at 14.95 percent, which means stocks are getting more expensive.

Relative stability in the foreign exchange market that underpins gradual economic recovery, a lower interest rate environment which improves earnings for non-financial firms, and easing of inflationary pressures, are driving the rally in the equity market since the start of the year.

The NGX All-Share-Index (NGXASI) has returned 36.18 percent since the start of the year.

Despite a drop in earnings per share due to the disappearance of foreign exchange gains, Banks have the most attractive valuation as their earnings yields are higher than the bond yield.

Access Holdings has earnings yield of 52.63 percent; FCMB Plc, (33.89 percent); Fidelity Bank, (26.95 percent); Guaranty Trust Holdings, (20.57 percent); Sterling Bank, (21.05); United Bank for Africa (44.24 percent); Wema Bank, (100 percent), and Zenith Bank, (22.02 percent).

However, FirstHoldCo and Stanbic IBTC are overvalued as they recorded earnings yield of 2 percent and 14.84 percent.

Non- Financial firms with mouthwatering valuations that generate higher profit include Transnational Corporation (Transcorp), with an earnings yield of 17.60 percent.

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