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It appears from all indications investors have come to the realisation the central bank is going to make a serious effort to tame inflation, which, of course, means higher benchmark interest rates are on the way. And that means their stock valuations will be suppressed.
In short, the central bank has been raising interest rates since the first quarter of 2022, due to Russia invading Ukraine that stoked prices of commodities as these countries are the largest producers of Wheat, corn and other grains, insecurity in the North part of Nigeria, fuel scarcity, and higher utility bills.
There are indications the removal of subsidy by a new government and lingering bedlam underpin price instability this year.
Inflation, the monster that steals workers’ wages, impoverishes the people, and disrupt asset prices, edged higher to 21.82 percent year on year (YoY) in January 2023 (vs 21.34% YoY in December 2022),
However, despite the volatility, businesses that have the ability to raise their prices with limited consequences in an inflationary environment should still do exceptionally well.
Fidelity Bank with a 2022 return on of +77.31 percent; PZ Cussons, +54.2 percent; Seplat, +45.64 percent; Okomu Oil, +41.67 percent; Presco, +38.85 percent; First City Monument Bank, +36.31 percent; BUA Cement, 31.67 percent; Cadbury,+24.86 percent, outperform 12 month inflation.
When the return on a stock is higher than inflation, it means the investment beats inflation and that is “real alpha” generation and positive real return on investment.
“Generally, one of the fundamental basis for investing money is to ensure that we mitigate the impact of inflation on the purchasing power of money, so when the return on an investment surpasses inflation rate, it means the investment has delivered positive real return and it has more than compensated the investors for impact of inflation on the value of the money,” said Rasaq Abiola, former analyst at United Africa Bank for Africa (UBA).
These stocks appear to trade at a lower price relative to their fundamentals, such as dividends, earnings, or sales, making it appealing to value investors.
Analysts at Chapel Hill Denham say investment portfolios will struggle to beat the consumer price index (CPI) in 2023.
The equity market which returned 17.85 percent in 2022 has gained 4.98 percent so far this year, and that is lower than the 21.85 percent inflation figure.
“In our view, sizable exposure to USD or USD-linked securities will help investors generate returns that can beat the CPI in 2023. We also reiterate our view that USD/NGN devaluation, convergence of rates, and improvement in liquidity are crucial to the FX market and will likely materialize before the end of the year,” said analysts at Chapel Hill Denham.
“This will lead to a return of foreign investor confidence in the market. On equities, some high quality names have outperformed or recorded stock returns close to the CPI in the last 12 months. We remain constructive on some of such equities, but mindful of free float and entry prices,” said the analysts.
These are some of the stocks whose returns beat inflation
Fidelity Bank Plc: The Tier 2 lender recorded double digit growth in earnings as its digital banking business added much impetus to earnings.
Gross earnings were up 33.94 percent to N335.89 billion as at December 2022 while net income increased by 32.58 percent to N47.16 billion.
Its shares trade at a price to earnings multiples of 3.13 while dividend yield stood at 9.45 percent.
PZ Cussons Plc: The Home and Personal Care (HPC) producer faced menacing challenges due to foreign exchange scarcity and competition from unlisted.
However, PZ Cussons surmounted the headwinds as it recorded improvement in all segments. Revenue rose by 29.37 percent to N35.06 billion in December 2022 from N27.10 billion the previous year. Net income surged by 436.89 percent to N5.71 billion as at December 2022.
Okomu Nigeria Plc and Presco Plc: The oil palm producers’ benefitted rally in global oil palm prices persisted in the first half of the year which is largely attributable to supply constraints in the top producing regions of oil palm (Malaysia and Indonesia).