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Thursday, March 30, 2023

These Stocks Are Outperforming Amid Rising Inflation

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Stocks have had a smooth run since the start of 2022.

The NGX30 has gained about 19 percent so far this year, while bellwether firms recorded earnings growth even amid rising inflation, foreign exchange scarcity, supply chain disruption, spiraling energy prices, and global geopolitical tension caused by the Russian/Ukraine war.

In the last quarter of last year, skeptics had thought that the tough and unpredictable macroeconomic environment would undermine corporate profit, but they were oblivious that firms would cling to price adjustments.

Of course, corporate profits were bolstered by the relaxation of the lockdown measures imposed by the government to curb the spread of the coronavirus, which of course reignited consumer spending and business activities.

First, by far the biggest outperformer among most liquid and capitalised firms is the energy stock. So far this year, the energy stock has gained 60.24 percent, making it the best performer on the NGX30 index in 2022.

Seplat Energy, the largest and most capitalised upstream oil and gas firm, has a YTD returns of 99.13 percent.

The jump in stock has coincided with the sharp rise in the price of crude oil brought on by the Russian and Ukraine war that saw Europe and the United States impose sanctions on Russia for invading its neighbor.

It is worthy to note that the U.S. West Texas intermediate futures (CL=F) soaring by more than 50 percent in 2022 alone. This rise in price, in turn, has spurred inflation in developed countries forcing central banks to hike interest rates and a continuous hawkish stance could stoke a recession.

Nigeria too is bearing the brunt of geopolitical tensions as the price of diesel oil used by firms to power plants at offices and factories has spiked, which balloons the cost of productions. Because the subsidy on diesel oil has been removed,  it is vulnerable to the vagaries of international crude oil.

Additionally, both Russia and Ukraine supply most of the world’s grains, another quagmire for importers of the raw material like Nigeria.

Consumer firms, dividend payers

Meanwhile, another group of stocks that’s been largely outperforming this year has been consumer staples. Consumer stock index has gained 17.21 percent so far in 2022.

These firms are in a comfort zone because consumers will always need essential items as they must eat and take care of themselves, which is why it is easy for sector players to pass on rising input costs to them in the form of higher prices.

Cadbury has a year to date return (ytd) of (+101.14 percent); BUA Foods, (44.15 percent); Champion Breweries, (+65.96 percent); Flour Mills, (+155.15 percent), and International Breweries, (+65.65 percent).

While consumer goods firms recorded double digit growth at the top and bottom line, the elephant in the room remains the foreign exchange crisis and red-hot inflation.

Cement makers enjoy rally  

The building material sector index has gained 14.20 percent this year, with the cement makers using cost controls to maximise profit and that is on top of a rebound demand for cement as there has been an acceleration in construction activities.

Dangote Cement has a ytd returns of 16.73 percent, while research house Chapel Hill Denham upgraded their 12-month target price for the company to N336.35 from N308.68 previously and maintained their BUY recommendation on the stock.

Lafarge Africa has gained 20.25 percent so far in 2022, as the cement maker’s ability to deleverage its balance sheet and boost earnings continues to allure investors.

BUA Cement has YTD of 10.74 percent, and the company has been recording double digit growth in earnings since its debut listing on the exchange 3 years ago to emerge one of the most capitalised firms in Nigeria.

Banks are gradually catching up

Nigerian banks operate in an unfriendly regulatory environment, but they are able to surmount the headwinds as evidenced in an uptick in earnings.

The banking sector index has gained 6.03 percent, underperforming the NGXASI index. WEMA Bank is now a star performer with a Year to Date return of 355.56 percent.

There are indications the capital control imposed by the regulator which has stifled foreign direct investment and a high cash reserve ratio will continue to aggravate investors’ apathy towards lenders’ shares.

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