It is time to invest in listed stocks

Thursday March 21 2019


An analysis of the underlying activities driving our equities and the fixed-income markets over the last couple of months presents reassuring outlooks for prospective investors at the Dar es Salaam Stock Exchange’s listed securities.

It is a fact that the recent past has been depressing to some investors, but not the value-investors.

For a start, the DSE is currently trading at attractive multiples on the back of significant sell in 2018 which saw, DSE indices and market capitalization for domestic listed companies decline by 6 per cent. The cause for the decline may be many – depends on the perspective, in summary key ones are: (i) sell-off by foreign investors in preference of US dollar-based assets (equity, bonds, currency)– note that foreign investors contributes up to 80 percent of liquidity creation at the Exchange; (ii) the declining appetite and change of priority/preference from listed equity by domestic institutional investors – particularly pension funds; and (iii) the selloff pressure by retail investors due to increased social economic demands requiring liquidation of their investments and/or also preferences for other alternative asset classes. However, putting these factors aside –because the intent of this article is not to explain the decline in prices -- now let us proceed to the issue.

The upside to this [experienced decline in prices and depressed values of listed equities], is that valuations are now ever so attractive, presenting excellent entry point for most stocks which were previously traded at a premium relative to their true intrinsic value. What I am almost arguing is for investors to do away with speculative motives and sentimental driven investment approach and consider the “value-investment” approach and strategy. For more on this read the writings by Warren Buffet and his mentor Benjamin Graham, or Buffet’s long-term investment partner Charlie Munger.

Why the proposal to invest now may be attractive? Because, macro-economic forecasts support the idea of value investment.

According to forecasts by the Government, the Gross Domestic Growth in 2019 will be about 7 percent, the same growth rate as has been in the past two decades. This growth rate is one of the highest not only in Africa, but across the global. Furthermore, data on the forecast by various agencies indicates that this growth will be sustained/maintained in the medium term, with some potential for the upside.

This positivism in sentiments and the underlying fundamentals of economic activities should somehow be reflective in corporate entities forecasts and performances. Data indicates that lending to private sector and productive sectors of the economy is increasing, in the stock market there has been less profit warnings, but rather reported stronger earnings growth, on the back of more attractive macro data and background.

These indicators once digested are supposed to reflect and drive activity on the bourse.

Data also indicates that industrialisation drive is gaining traction, as it is for the infrastructure and public investment activities. Based on these and other factors, there seem to be investment opportunity presented in the banking, manufacturing, agribusinesses, and infrastructure and FMCG sectors.

I therefore would imagine that there will be opportunities for relatively good returns for investors in these sectors counters of listed securities, i.e. for those investors with medium to long-term view in their investment approach.

Without going into specifics but looking into the price earnings and price book value valuation matrices to determine which listed counters presents the most viable investment option, there are several counters which presents attractive prospects for value-investors, while others are also good buys for dividend seekers. For instance, while the banking sector has an immense potential, on the fact that some banks are trading at the trailing Price Earnings Ratio of five times and Price Book Value of less 0.5 times.

Overall value weighted average PE ratio for banks listed in the Nairobi bourse, trades at 7.32 times and a value weighted Book Value is 1.32 times compared to our value weighted average NBV of 1.17 times. The same can be said of other sectors.

Let me conclude by summarising this case: in India and almost elsewhere, there was a push for socio-economic growth via economic liberalization and market-based approaches and the more use of capital markets in the early 1990s – but, despite this, few expected much from a small software company that struggled to list its shares in Mumbai Stock Exchange in February 1993. Despite its size and potential, during then India was an economic “small fish” and the technology sector was tiny and untested.

Those who were brave and bought shares of Infosys Technologies did well if they held on to the shares to date.

The company reported an operating profit for the year to March 31, 2018 of over $2.6 billion – on a turnover of more than $10 billion. Shares were worth 4,000 times more than they had been 25 years earlier.

Our TBL and TCC shares are now worth 20 times more than they have been 20 years ago when they listed in the local exchange, but those who benefit from these (and other such stories I previously shared in my articles) are those who don’t get pulled or pushed by momentary sentiments of the stock market.