HOW TO PROTECT YOUR INVESTMENT IN BEARISH MARKET

By West Africa Capital Market School

After having reflected on the fact that there is now little doubt that the Nigeria Stock Market is in the midst of a bear run and that the bear would dominate the market over a long period, experts at the West African School of Capital Market, have offered to avail capital market operator the appropriate trading strategies for the bearish market.

“Economic fundamentals do not support a swift return to an upward price trend,” the experts noted in a dispatch to operators and investors. “With oil hovering in the low $40s, there is precious little money flowing from the public sector unless of course there are draw downs from dedicated accounts to fund some sort of large scale infra-structural investment and even this will take some time to trickle through based on emergent large bets against the local currency.”

The experts highlighted eight broad approaches to managing clients’ portfolio for stockbrokers.

1. Avoid investment diversification. Diversification is a great idea in good markets as it cuts down market and sector risk. However, in a bear market, the problem is with the broad market. The broader your selling of low performers, and concentrating your investments in fewer stocks that have shown the best performance, is the way to go. Your risk is no longer corporate performance but low confidence in the overall market and so it does not make sense to be broadly represented.

2. Help clients identify and preserve core capital – you will have to trace client investments by contribution/performance to identify core capital. Let clients know that you are focused on ensuring that they remain “in the game” and are positioned for a market rebound when it eventually comes.

3. Review your website and its contents to reflect the new realities and change research recommendations from “buy’ “sell” “hold” to a “preserve”, “growth” and “aspire” type recommendations. Preserve stocks will provide growth and income necessary to preserve core capital and maintain lifestyles. Growth will beat the overall index and Aspire is for long term gains when the market picks up. Conservative clients may choose to start out with 50 per cent Preserve, 40 per cent Growth and 10 per cent Aspire and then mechanistically adjust the portfolio later.

4. Shift emphasis from selling stocks to financial planning and wealth management if you have the skills for these. Financial planning is far more defensive than wealth management which requires the identification of non-financial wealth and the setting up of the right trust structures.

5. Be wary of new investment types that you don’t fully understand. The property market, for instance, will in all probability self correct especially at the high end where oversupply and tighter bank credit is now becoming an issue. If you are just getting into property come in at the middle and low end. Avoid the Lekki-Epe axis by all means.

6. If you choose to bet against the naira, do so in an intelligent way and realize that dollar rates can crash if government so desires. You need to get an inside track on just what government thinking is. A strong dollar will cut imports in the medium term and do long term good to the reserves but this strategy might go horribly wrong. We have to wait and see.

7. Keep your people engaged as much as you can. The obvious reaction is to slash and cut and sometimes this may be necessary but rather stay positive and prepare for the bull market because it will come back and for a fairly sustained period too. This means lighter more qualified and educated personnel and wise investments in scalable technology. If you are going to sell optimism abroad then sell it at home too and stay on message.

8. How do you know when the market is recovering? You will need to get some of your people busy on creating and maintaining the A/D Line of the NSE All share. Each day deduct the number of stocks gaining from stock shedding value and graph the resultant values. This will show clearly when the broad market begins to recover.

Technically, the market is in base formation right now with small gains being matched by exits/loss capping. Traditionally, base formation is followed by a sharp and sustained movement to the up or downside. You can estimate this by looking carefully at the volume on up days and the volume on down days. The whole idea is to cancel out the noise being generated by the overall index to see where recovery is likely to begin from.

The other option to these suggestions is to do nothing and hope for the best. While hope might be a laudable trait it is certainly not an advised business strategy. We believe that the market is transiting from high volatility/high gain frontier market status to a more sustained emerging market growth type of market. Such transitions are always painful but unavoidable,” the experts submitted.

Investment guide for 2009: diversification

Last week we started the discourse on the forces of risk and return as the two major factors every investor who intends to succeed in the investment world in 2009 must come to terms with. I had explained the weaknesses and strength in the different classes of assets. This week we will be looking at how to create a balanced investment portfolio through good diversification.


You’re almost certainly familiar with diversification, but it is also one of the most misunderstood investment concepts.

Diversification is one of the most commonly discussed topics among all types of investors-from those just starting out to the largest money managers on Wall Street. The reason: “Diversification is, without question, one of the keys to your success as an investor, “But you must employ it correctly”

As an investor, it’s crucial to ask yourself two important questions about your portfolio: Am I truly diversified? And am I taking advantage of all the strategies at my disposal to capture the full range of diversification benefits?

True diversification

The basic idea behind diversification is simple: Don’t put all your eggs in one basket. That said, simply owning a large number of stocks or other investment doesn’t automatically make you diversified. The key, is to spread your capital across a wide variety of asset classes and asset styles that have fundamentally different risk and return characteristics.

Such investments typically behave differently from each other during a market cycle-bonds often perform well during periods of stock market weakness, for example, while some international shares might rally when the Nigerian market falls.

By combining different types of asset classes, you can enhance your portfolio’s return potential, while simultaneously lowering its overall level of risk.

These advantages can be especially important for investors looking to preserve what they’ve earned. For example, consider an executive whose wealth is concentrated in his or her company’s stock. “The same stock that makes an investor wealthy can also damage that wealth if it runs into trouble, as within the past six months with many companies and CEO’s” If one of your goals is to preserve your capital, diversification is an absolute must. Feelers reaching us have shown that the world’s richest men are not immune to the mess caused by the financial crisis because of poor diversification. It was recently carried in a national daily that virgin Nigeria might be running into cash flow troubles; this is a company that Richard Branson would have easily assisted in times past if the cash was there.

Diversification is a useful technique that can reduce overall portfolio risk and volatility. Diversification neither ensures against a profit nor protects against a loss. Each investment type has different investment and risk characteristics. Bonds, treasury bills, treasury certificates and other money market instruments have fixed principal value and yield if held to maturity. Bonds have market risk, interest rate risk and credit risk. Stocks can have fluctuating principal and returns based on changing market conditions. The prices of small company stocks or penny stocks generally are more volatile than those of large company stocks this is evidenced by the significant losses witnessed in the insurance sector of the Nigerian stock exchange in 2008.

Asset allocation

One of the most effective ways to diversify an investment is with asset or fund allocation, and it is a good way to help smooth out volatility in your portfolio.

How does asset allocation work? Different asset classes (such as stocks, bonds, properties) may respond differently to the same market conditions. This means if one part of a diversified portfolio does poorly it can be buffered by other investments that do relatively better. In other words, asset allocation helps spread the risk over several investments. The key to asset allocation is investing in assets with dissimilar performance. While the scientific and measurable investing principles of asset allocation are sound and are well proven, up until recently the process required some detailed mathematical calculations.

A properly diversified portfolio within the Nigerian economic terrain should include investments in a variety of industries and asset classes such as cash, stocks, government bonds, fixed annuities, insurance policies, real estate, and personal business endeavours. A Detail study of these different classes of diversification for a Nigerian investor will form the focal point of our discussion in the next edition.