How To Know Which Sector Stocks To Invest Right Now

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:

how to know which stocks to buyNotice 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:

how to know which stocks to buy

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.

See – How to pick the best stocks to trade for maximum profit.

How To Always Know Top Sectors Big Investors Are Putting Money

Best Sectors To Buy Shares & Invest In Nigeria – Part 1 – Learn How To Trade Shares Online, Find Top Performing Sector Index – NSE Banking, Industrial, Oil & Gas, Insurance Index.

I always tell small traders who are just entering the stock market not to focus fast rising shares but invest in sectors with most liquidity. This is very vital because liquidity drives price and makes it easy for you to buy and sell your shares faster when the need arises. In my early days of trading, I never knew the importance of liquidity until I offered to sell my shares in an insurance company but was unable to do so; my broker would take my order to the market on opening hours and come back to tell me that there was no bid, only offers (everyone wanted to sell), then I started asking why I couldn’t sell my stock in the market and realised that only a few traders buy and sell the shares daily. I checked the stock market section of BusinessDay Newspaper to see the volume of transactions traded daily and discovered that it would take a while to find buyers because the stock was underperforming; no one was ready to buy into an ailing company.

That one mistake from that made me focus on shares that were heavily traded in millions per day so that when I compare my  XX, XXX units orders with what is exchanging hands it will be easy to find buyers. 

See – How I Started Trading Stocks Online With 3 Investing Principles

In this investing guide, I will be sharing my simple steps to uncover sectors investors are currently trading millions of shares week on week. The investors I am referring to are not retail investors but foreign institutional investors, mutual funds, investment managers, pension fund administrators, insurance companies and banks. These guys trade millions of shares and when they buy, you will see the ripple effect on the price of your shares and when it’s time to sell quickly, you really do not have issues liquidating your investments as they are readily available to bid; only if they see that the company had a solid growth record.

So how then will I know where they are putting more money in so that I can capitalize on that, buy into such stocks and sell back to them when it appreciates by 10-15% in 5-10 days of trading? Here is my simple guide to do that:

  • Go to Nigeria stock exchange website and look through the weekly report section – 

    The NSE Weekly Market Report presents a summary of all activities relating to securities trading on The NSE’s market. It includes a detailed summary of securities traded in the week under review, company-specific financials, corporate actions and other announcements.

  • Click on the latest report for the week and locate the index movement. The stock market is categorized into different sectors which represent a group of listed equities in similar industries or similar line of businesses. each of the categories is represented under banking, consumer goods, industrial, insurance, and oil & gas. 
  • Find sectors that are recording best positive performance on a year to date (YTD), quarter to date (QTD) and month to date (MTD). These are the sectors big investors are actively putting their money into.  As at when we posted this guide, the NSE banking index (an index that tracks the performance of all listed banks) recorded 21.89% on it’s YTD, QTD, and MTD column, followed by NSE Industrial Index and NSE oil and gas to record 15% and 14% respectively.  This means that top investors are putting more money into the banking sector, no wonder the sector has more traded volume. On the other hand, the consumer sector at similar period has the least volume interest.
  • The final step is to locate top performing companies in these sectors and buy into them. 

You may be wondering, why do I need to pay attention to liquidity in the stock market? The first reason is to avoid being stuck when you need to sell and the second is take advantage of high volume transactions that can drive prices higher in a bullish market. These top investors have invested so much in hiring the best analyst, and trend watchers, so they have more information about every sector than you do. If you see more fund managers, insurance companies, banks, pension managers gradually moving their fund into a particular sector, it will reflect in the shares trading volume and prices (industry index). But, the downside risk is that you could also experience sharp price fall in a bearish market too.

While this is not 100% foolproof, I still believe it will help you find the best sector stocks institutional investors are currently paying more attention to.

See – How I Pick Best Performing Stocks To Buy