A major concern for investors over the years is how they can manage to maneuver effects of inflation on the returns made from their investments. From the fixed income market to equities and lately, cryptocurrency assets, beating inflation has been a major bone of contention.
While experts have declared crypto assets a safe haven to escape inflationary pressure on investment returns, a development that pushed the market above a historical $3 trillion recently, some investment analysts in Nigeria are equally betting on the domestic stock market to provide similar shield against inflation.
Experts at Coronation Research, a division of Coronation Asset Management, have said Nigerian stocks can deliver an adequate return to investors over the long term if properly selected.
The company said this in a new report by its Head of Research, Guy Czartoryski, and an analyst, Adebayo Adebanjo. The report, which was released during a webinar on Friday, was titled ‘Equities for a superior return’.
It said investment in the equities of some companies had proved to be more profitable despite inflation as Nigerian investors faced a third successive year of Treasury bill rates being below the rate of inflation.
The report explained the challenges in the widely-held opinions about Nigerian investments, with particular views about the equity market.
The Managing Director/Chief Executive Officer, Coronation Asset Management, Aigbovbioise AigImoukhuede, said, “Nigerian listed equities, if properly selected, can deliver an adequate return to investors over the long term.”
Coronation Research said it had studied equity returns from January 1, 2016 to November 2021.
It said while the performance of the Nigerian Exchange Limited’s All-Share Index was not strong, the performance of a selection of the most profitable NGX-listed companies had provided superior and inflation-beating returns.
The report said, “So, the return of the NGX All-Share Index from 1 January 2016 to 30 September 2021 was 40.50% or a compound annual growth rate (CAGR) of 6.15 per cent.
“With gross dividends reinvested, that rose to a CAGR of 12.44%. But neither return would have beaten inflation over the same period, which averaged 14.26 per cent per annum.
“However, a basket of 10 NGX-listed companies, each with a long-term and sustainable return on equity of 20.5 per cent or more, would have delivered an investment return with a CAGR of 16.36 per cent from 1 January 2016 to 30 September 2021.
“With dividends reinvested, this would have risen to a compound annual growth rate of 24.71%. This basket would have easily beaten inflation of 14.26%, giving a compound annual growth rate, in inflation-adjusted terms, of 8.29%.”
The report said in US dollar-equivalent terms, the compound annual growth rate would have been 9.71%.
In the report, Coronation Research highlights the big difference between the performance of the NGX All-Share Index and the same return calculated when dividends are reinvested, the total return. Only with total returns can investors begin to make meaningful long-term gains, it stressed.
For a truly superior return, the experts in the research said investors need to identify listed companies whose internal Return on Equity (RoE) is high.
“We stipulate a minimum of 20.5 per cent per annum. Furthermore, this return on equity needs to be sustainable. We found 10 NGX-listed stocks with these characteristics and created a hypothetical portfolio with these stocks in equal weight,” they stressed.
