GSE awaits the return of a bull market for equities

In 2018, a bull market transformed into a bear market mid-year, leaving many equity investors disappointed. In this second part of our series on where to invest in 2019, TOMA IMIRHE continues his portfolio investments outlook for the new year by examining the prospects for equities listed on the Ghana Stock Exchange

This year equity investors in shares listed and traded on the Ghana Stock Exchange are eagerly looking forward to a rebound in corporate profitability, share prices and consequently their investment fortunes. Price earnings rations have, on average fallen to their lowest levels in several years, and this, coupled with improved prospects for corporate earnings, hold the potential for a return of a bull market this year on the GSE.

But while significantly rising share prices are widely anticipated for 2019, this view is by no means unanimous; a few analysts think the stock market still has not bottomed out and prices will fall further before rebounding. Instructively though, disparate expectations put local knowledge of the factors that should drive share prices upwards against econometric and financial markets modelling which predict continued bearish stock market performance his year.

Unsurprisingly, the most bullish sentiments regarding expectations for 2019 are coming from local equity analysts and stock brokers, many of whom think the GSE Composite Index could rise by as much as 30 percent this year.

If that happens it would be a welcome recovery for equity investors, some of whom are now regretting not selling off their holdings when the market peaked after a bull run during the first half of the year, while others are ruing their timing having bought into a rising market just before it peaked and subsequently declined during the second half of the year.

Indeed 2018 was a year of two opposite parts. During the first four months of the year the composite index rose by 35 percent, creating the spectre of another world beating performance by the GSE for the full year. Indeed, this had happened twice during the 1990s and again in 2003 and 2004, years in which the composite index had risen by 100 percent and in one year had actually more than doubled.

However, several factors combined to transform the early 2018 bull market into a bear and by the end of the year, the index had recorded a full year loss of 0.29 percent. With treasury bill and bond yields rising marginally since mid-2018, many investors began 2019 thinking of focusing more on fixed income debt securities this year.

This might not be the best way to go however. The factors behind the transformation from bull market to bear market last year are now being expected by local analysts to drive rising share prices this year.

The immediate causes of the bear market that took hold during the second half of the year were profit taking by investors in equities whose share prices that had risen sharply during the bull market of the preceding months, disappointing financial performance results for 2017 as announced by several companies during the second quarter of last year, and continued biting general illiquidity in the economy resulting from fiscal consolidation and monetary policy by the Bank of Ghana aimed at curbing inflation. Add to these exits by some foreign investors as resumed cedi depreciation began to turn their gains into exchange rate losses.

Expectedly, these circumstances will be somewhat different this year and expectations of better macro-economic performance in general are adding to renewed bullish investor sentiment.

“A bull market is expected this year,” asserts Ernest Tannor, Manager for Asset Management at Cidan Investments, an asset management and investment advisory company that has built a strong reputation for accurately predicting future trends through comprehensive research and deep knowledge of how Ghana’s financial markets work. “This is largely attributable to the natural cycle in the Ghanaian Stock market and the positive macro-economic targets set by government in general. Also, the promise of a realization of the fruits of the current government’s work in the last two years will spur investors to look at the stock market.”

Indeed, government is targeting growth in Gross Domestic Product of 7.6 percent this year, up from a provisional outcome of 5.7 percent for 2018 as macro-economic stability returns to the economy after two years of fiscal consolidation and policies aimed at boosting economic output begin to bear fruit.

“Economic growth is expected to rebound and that will provide opportunities for banks to expand their loan portfolios” concurs Alex Boahen, Head of Research at Databank, the largest investment bank in Ghana. We expect the stock market to rise in 2019 as investors anticipate stronger corporate earnings on improved margins in view of a softening of cash pressures and an improving macro-economic environment.”

Such optimism is not restricted to analysts in Ghana itself. Moody’s, the globally renowned credit ratings company predicts that increased profitability and consequently increased dividends should translate into share price appreciation on the GSE.

Equity analysts and asset managers expect financial sector stocks to lead a price surge this year.

“We expect dividends accruing from the clean up of the banking sector and other reforms in that sector to boost efficiency and profitability” says Tannor. “We expect the financial stocks to drive growth on the GSE I 2019 as the clean up in the financial sector is expected to contribute to creating a well-capitalized and resilient banking system capable of supporting economic growth and attract investors.”

Adds Eli Keledorme an equity analyst at Strategic African Securities, one of Ghana’s oldest investment banking and stockbroking firms, “Valuations may attract buyers to lenders such as Standard Chartered Bank, GCB Bank and Republic Bank.”

Another sector worthy of the attention of equity investors this year is that for consumer goods.

“We also expect government’s projection of improved economic activity to influence consumer spending which could boost revenues of the consumer goods sector” projects Cidan Investment’s Tannor.

SAS’s Keledorme is in agreement identifying consumer-oriented stocks such as Guinness Ghana Breweries, Fan Milk and Unilever as expected beneficiaries of increased consumer spending as households become more liquid.

Add to these the downstream oil and gas sector stocks. “We expect the expansion drive by GOIL and Total, coupled with improved automation to boost their revenues and efficiency,” says Tannor.

All this points to significantly rising share prices on the GSE this year. Databank and SAS believe the composite index could rise by up to 30 percent in 2019. Cidan Investment is more conservative in its expectations but still thinks that both the composite index and the financial index can deliver returns in excess of 20 percent this year.

Instructively however, this optimism does not quite extend to the Ghana Alternative Stock Exchange (GAX), which is more recently established stock market for SMEs. “There has not been much traction on the GAX due to the not so exceptional performances of companies listed there” Ernest Tannor tactfully explains. “If much does no change – corporate actions such as dividend declarations, bonus issues and ultimately, profitable performances by the companies – not much is expected to change.”

Actually, not everyone shares the optimism that local equity analysts and fund managers are expressing about the main board of the GSE itself for this year. Trading Economics, a highly reputed global economic and financial markets research firm forecasts that the GSE’s composite index will lose further ground this year, falling from the 2,503.03 points at which it was trading earlier this month to 2,471.73 points by the end of the first quarter of the year and further to 2,399.84 points by the end of 2019.

However, critics of this forecast point out that it is based primarily on mathematics based econometric and financial markets modelling which derives more from historical trends and macro-economic projections than from local knowledge of ongoing and future trends in the listed companies themselves, which the local analysts are basing their own forecasts on.

But even those local analysts themselves admit that their own forecasts are not cast in stone.

“If yields on the fixed income securities market and government treasury issuances take an upward turn, the bullish expectation may not be met as both markets are inversely related with regards to returns” warns Ernest Tannor. Instructively this is a real possibility as the Bank of Ghana has stopped pushing interest rates downwards in order to retain the competitiveness of cedi denominated assets in the face of rising interest rates for dollar denominated assets.

“Also, depreciation of the local currency is increasingly becoming a prominent issue to investors and financiers” notes Tannor. “Investors will likely exit their positions if the cedi continues to depreciate against its major trading partners. Besides if the expected dividends accruing from the clean-=up of the banking sector delays, confidence in the banking sector will remain lower and this could affect profitability.”

Such uncertainties mean that equity investors are better of relying on the expertise provided by professional investment managers such as Cidan Investments, or by licensed equity funds that come in the form of mutual funds or unit trusts. To be sure empirical evidence backs this up.

“The performance of the equity mutual funds in relation to price movements on the GSE has been generally good” asserts Ernest Tannor. “Some equity funds have even performed better than the overall GSE index in certain years.”

However, while investors with high risk appetite should consider equity funds as these funds create good value over time, for investors with moderate risk appetite and shorter waiting periods to exit their investment positions, balanced funds which are partly invested in equities and partly invested in fixed income securities are a better option, since they tend to be more liquid and surer of delivering positive returns although they do not anywhere the upward yield potentials of pure equity funds.

Another option is to consider unlisted stocks – of companies not listed on the GSE – although here professional advice and facilitation is crucial. Here though, Cidan Investments is among a group of asset management firms that offers such opportunities to their clients.

“Some companies do not like the laborious steps to go through to be listed on the stock exchange but if their fundamentals and corporate governance structures are solid, we will recommend them to investors” confirms Tannor. “There is not a particular over the counter market but an unlisted company, through its registrar, can facilitate trade in its shares.”

This brings the key issue of liquidity to the fore. Many investors worry that equity investments are often illiquid because trading volumes on the GSE are thin. However, Tannor disagrees, insisting that the GSE is relatively liquid, although it depends on the market direction in a particular stock. He points out though that liquidity could improve significantly if more companies list on the market.

Here though, the capacities and pedigree of the stock brokerage an investor is using is key. “More often than not, if the brokerage firm has built a reputation over the years and/or has backing in the form of a parent company such as a bank or affiliated companies like a fund management firm, it is likely to facilitate liquidity to cater to the needs of an investor.” This means companies like Cidan Investments offer their clients a distinct advantage with regards to liquidity.

This year promises to hold exciting potentials for equity investors in Ghana. But it is the investors that best leverage the peculiar expertise of professional fund managers and their capacities to provide the liquidity requisite to adjust the composition of their portfolios as opportunities are identified that stand to come of the best.