How To Know Which Nigerian Stocks To Buy & Sell Now – Learn How To Analyse Nigerian Economy Using Oil Price, Forecast The Best Performing Sector Index Perfectly.
Whether you are buying shares for a long term or short term, the simple truth is you may not be profitable if you don’t take your time to analyze and understand the economic factors that affect the future prospect of your investment; forget what your stockbroker is saying, use your intuition to find one or two pieces of evidence to support your decisions.
For me, I always look at the economic trend and cycle we are currently in as that alone tells me which sectors of the economy is the best to invest in. I had an investment chat with a friend and shared a very simple and practical revelation as thus: “if you want to know which industries smart investors are putting their money, follow Oil prices and the factors affecting global production cut”. As at 2016-2017, OPEC and non-OPEC members held a meeting to have an agreed global production quota, a move that cushioned oil glut. That factor alone reversed the bearish Oil market to the other side (currently trading at $60, from a low of $40), This is a clear boom for Nigerian economy as the revenue from sales of crude output is driving the CBN reserve to a pre-crisis high of $40billion.
What does this mean for a smart investor? Focus on the sector that was badly hit by the previous falling prices and will likely benefit from a recovery.
Let’s discuss the effect of Oil prices on Nigeria economy and how it affects your stock performance using the 2016-2017 trend.
When Oil is down due to excess global output from US shale productions, rising inventory level, and increasing supply from non-OPEC members, countries that depend on the commodity tends to suffer from dwindling revenue and as such tightens their belt. Nigeria was badly hit by the falling revenue and that threatens the external reserve to low ($23b), the CBN at that point couldn’t sell more US dollars to banks for import finances which affected the availability of the greenback to the extent that SMEs resorted to buying dollars at a higher exchange rate from alternative markets. Ordinarily, when you incur more cost, it will definitely affect your button line (profit). The increased material input cost had an adverse effect on the overall consumer goods industries as operational cost skyrocketed.
The industrial good segment of the economy consisting of construction and heavy equipment companies also had their share of the bite as capital expenditure (CAPEX) was affected by fall in government revenue. CAPEX is a term used to describe capital expenditure of the government that drives infrastructural development.
What happened to the banking sector? when you look at a bank’s financials (specifically, the asset side), you will notice that a major percentage of bank’s loan and advances is exposed to the oil and maritime sector. A fall in oil price will likely affect the sustenance of loan repayment from companies in these sectors, as they grapple with dwindling revenue from oil sales.
According to CBN prudential guideline, banks are expected to provide for the loan whose recoverable value may fall below the actuals otherwise known as an underperforming loan. Provision for underperforming loans affects the profitability of banks too. When you run a check on the financials of some banks in 2016-2017, you will see the impressive top-line performance but an alarming provision that slowed down profit.
Even consumer had to tighten their personal spendings as prices of outputs went northside as producers look to pass on the extra cost of importing at a higher exchange rate.
I can go on to explain more effects of falling oil prices on different sectors but I think the information shared so far is enough to let you see the reasons Oil is a major driver of the Nigerian economy.
As Oil Recovers, What Next…
Let me share a chart of the recent recovering that started in the 2-3rd quarter, 2017 and show you how the rising price is helping the economy recover:
Notice the reversal that started in 2016 but showed a clear uptrend in May-July 2017, this was an after effect of the several OPEC meeting with non-members on the best oil output level to maintain, a decision that excluded Nigeria, Libya and eventually led to a positive GDP growth in 2017 to make Nigerian’s exit from recession. The Nigeria stock market index began to recover and ended the year as one of the best index performers with NSE ASI up by 42%.
Let’s take a look at the NSE ASI chart to confirm the positive correlation between Oil price and the index:
From the chart above, you discovered that both NSE index and Oil have repetitive trend patterns; the stock market fell and picked up, at the same period(May-July 2017) Oil price started its uptrend, to hit the 2014 high at 43,000 basis point. So, I haven’t just shared stories but also proved that the key driver of the Nigerian economy is oil and if you are looking for which Nigeria stocks to buy, always check the economic cycle. The boom period is characterized by rising oil price and bullish stock market while the recession period is the reversed.
Which Stocks Should I Buy Now As Oil Price Moves To A Higher Level?
Here are top 3 sector stocks to buy now and their revenue drivers:
- Banking stocks – this stock will enjoy reduced loan loss provision to oil sectors as oil price maintain a bullish trend. One of their profit boosters will mostly come from an increased net interest income.
- Consumer goods stocks – this sector will likely experience reduced material input costs from the stable exchange rate, hence drive operational profit.
- Industrial goods sector – An increase in oil price leads to more revenue from oil sales, hence drives government spending on major infrastructural. I see cash flows available for heavy equipment and industrial companies.
That’s all for now. I think you are well informed on how to know which Nigerian stocks to buy and sell right now. Like I shared earlier, focus on Oil and you will always find the next big opportunity.