How to invest in a volatile market

How to invest in a volatile market

There is no getting around the volatility in the stock market these days. It seems good news one day is offset by bad news the next. It is maddening for investors to watch their investments yo-yo back and forth. Even the best, most stable stocks in the market are not immune from the volatility. Market watchers note that investors are apt to overreact to market developments pushing prices far in either direction of their fundamentally justified levels.

This behavioral trait, according to analysts at Meristem Securities Limited, a dealing member firm of the Nigerian Stock Exchange (NSE), “has forced a broad spectrum of investors to take position at peaks and exit at troughs, a rather absurd strategy.” Pundits averred that at times like these, it is often a good idea for individual investors to step back from the day-to-day swings of the stock market, and identify long-term trends that are not likely to change, no matter what happens.

As part of strategies to position for the months ahead, Meristem Securities posited that despite the sparks in risks risk aversion, the equities market still present itself as an attractive investment window when compared to other alternative investments.

Make a list. Start a watch-list of stocks that will benefit from the trends you identify. This will help you maintain a perspective within which you can identify attractive entry points. For instance, banking is not going to go away. And many investors feel that a couple of stocks offer attractive long-term upside. Buying a little of a stock every time it moves lower is a good way to scale into the stock. For instance, the Nigerian Stock Exchange (NSE) index has been swinging between around 26,000 and 26,500 for some time now even as investors are advised to go for stock with long-term upside potential.

However, analysts at FSDH Securities noted that more investors are likely to enter the market on account of the attractiveness of some stocks whose prices had declined as well as the low rates existing in the inter-bank market. “While we expect the full year results of Flour Mills, CCNN and Dangote Flour, we advise investors to invest in stocks that have good fundamentals and have prospects for growth in 2010. Investors should also invest having a medium and long-term view rather than investing for speculations. We note that there are select opportunities in the banking, building materials, food & beverages and conglomerates subsectors of the market,” FSDH maintained.

Indeed, the market is expected to ride on the back of volatility in interest rates in the inter-bank market. For instance, Afrinvest West Africa in its fortnightly report observed that the market opened the third week of May with a net credit balance of N114.9 billion and closed with N127.3 billion. OBB and overnight rates hovered between 6.0 percent and 8.0 percent during that week. However, FAAC allocations of N749.9 billion hit the system after the FAAC meeting on Monday, May 24, leading to a crash in the interest rates. OBB and overnight rates subsequently closed at 1.0 percent and 1.5 percent at the end of the fortnight.

Analysts at Meristem Securities observed that the current trend in the stock market opens up opportunities for bargain hunters who can carefully identify attractive stocks with robust upside potentials. “A well carved out investment strategy, which marched returns outlook with risk tolerance, in such a time as this when the market appears to be trading sidewayas is inevitable to drive compelling return performance,” the stockbroking firm stated.

Also analysts at Vetiva Capital Management Limited expect sideways trading to prevail in the market, at least for now, in the absence of any positive news or scorecards to nudge equities in a northwards direction. Like FSDH, Vetiva added that “the next drivers in our view, would be the release the outstanding results of some manufacturers like Dangote Flour Mills, Nascon, Dangote Sugar, whose scorecards are long overdue.”

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