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Since the opening of the year, the Malawi stock market has registered notable volatility that is synonymous with stock exchanges. This has come about due to market practice changes that are aimed at restoring confidence in the price discovery mechanism on the local bourse.
The price volatilities displayed over the last few months will on the short run help the market find its trading equilibrium, a platform from which the market can set a growth pattern. While this volatility has added to the uncertainty, at the back of the decline of 2009, this could be short lived. Again, the volatility sets the ground for bargain buys for the medium to long term investors out there.
The market depression of 2009 could be viewed as an indirect impact of the world economic/ financial meltdown. The depression of the market however offers an opportunity for investors to buy shares at a cheaper price. While this is the case, when one buys shares, they are basically buying the future prospects (cash flows) of the underlying company. Thus, the economic meltdown could negatively affect the performance of the underlying companies in the short term. In the medium to long term, we expect that management of the companies would have revised their strategies to make their businesses more viable and profitable.
Every investment has inherent risks and shares are no exception. The volatility of shares offers some reasonable risk. The liquidity (ease with which you can move in and out of a counter) is another risk. The uncertainty of the future is yet another risk. However, risks are part of life and rewards and returns compensate for the risks we take.
The Malawi Stock market.
The Malawi stock market is still in its infancy with a narrow product base, few counters (14) and fewer participants. The knowledge base of most participants is not as complicated. There is a lot of information that comes to the market but quite often no reaction from the market is reflected on the share prices. Suffice to say, other shares are reasonably cheaper than others and the return and prospects also vary across the board.
Selection of the stocks suitable for you would depend on a number of parameters. The final decision on which shares to buy comes from you. We may offer insight and recommendation to you based on the information we have, but the ultimate decision lies with you.
The following are decision parameters that we need to get some guidance on from you:
1. Investment objective
We need some guidance from you as to what you intend to achieve through the investment. For example; Capital growth (targeting medium to long term growth of the funds invested) or Income growth (targeting some income stream from dividends). This will help us in narrowing down the choices so that they meet your specific objectives.
2. Investment return expectation
The return expectation is very important in investment decision making. You have to bear in mind the risk/return trade off in coming up with targets. The Malawi stock market has tended to give returns well above 30% in times of good tidings. However, recently we experienced an 18% decline of the market which I some cases was reflected by over 50% loss of value on the shares. Certainly there are risk mitigating measures so that the losses don’t get too heavy. However, there is still reasonable risk when chasing any level of return in investments. Currently, inflation is hovering around 8.5%. Capital preservation objectives would thus target returns within inflation range.
3. Investment Horizon/ Timeframe
The period within which you can exercise patience with your investment is also very important in coming up with an investment proposal. Growth stocks normally have inherent high risk structure owing to the high potential they have. Coupled with this high potential is the price volatility that they can display. Since they are being chased by reasonably a larger number of the investor population, they are a prime speculative target – hence the volatility and higher risk. Mature stocks on the other hand tend to display some stable growth pattern. Other investors may not really like the lack of excitement that comes with “rapid growth”. Again, in times of depression, a longer term view to an investment helps take off the “panic” in the investor as quite often than not – the shares rebound and recover their value.
4. Risk Appetite
Trading as a speculator can create some quick returns over the short term. However, this means exposing oneself to potential losses – hence the trade-off between high return and high risk. On the other hand, medium to long term investors do not necessarily have to speculate and thus minimize their risk appetite by among other things opting for stability and moderate risk appetite. Low risk chasers have to be contented with low return.
Notwithstanding the above information, we can quickly look at the Malawi Stock exchange and chose the top 5 stocks that should be o our radar. The choice of which stocks we can invest in will then be guided by the information we obtain from you as discussed above. Probably a sectoral perspective would offer some reasonable guidance.
The simplest interpretation if the P/E is that assuming the underlying company’s earnings per share remains constant, it would take X number of years for the earnings to match the price you are paying for the share. Thus a lower P/E means a shorter “payback” period and vice-versa for a higher P/E. comparing P/Es of similar stocks thus offers some insight into the growth prospects of each individual stock and can act as a guide to which share to choose from among peers.
A dividend return matched against the price per share is reflected by the dividend return. Thus a higher dividend return reflects stocks that offer cash return in the short term and can be a good source of income especially for short term investors. The challenge lies in accessing the liquidity requirements of the underlying company vis-à-vis the stage in the company’s lifecycle. Though this could be an issue for some companies, most companies dividend yield already reflect their funding requirements as cash is returned for recapitalization resulting in lower dividend pay outs that are reflected by the low dividend pay -out. Again, dividend yield can offer some insight to the growth prospect of the underlying company and guide one in assessing whether they can hold the stock for the long term.
The Malawi stock market has shown a tendency of “herd mentality” a situation where a large group of investors, especially retail/ individuals follow the group into some stock without due analysis. This “perception” can be used in the short term in chasing short term gains. Again, in situation where the herd moves to sell off the shares, one can capitalize on demand/supply mismatch to get cheaper shares (as the case is currently).
Investing in shares can be a game of following the money. As the overall economy grows, certain sectors of the economy could lead the charge while others lag behind. A good analysis of the sectors where performance looks robust can guide an investor into good stocks.
A. FINANCIAL SECTOR
1. Standard Bank
2. National Bank of Malawi (NBM)
3. NBS Bank (NBS)
4. First Merchant Bank (FMB)
B. HOLDING COMPANIES/CONGLOMERATES
1. Press corporation Limited (PCL)
2. NICO Holdings Limited (NICO)
1. Illovo sugar Limited (ILLOVO)
2. Packaging Industries Limited (PIM)
1. Old Mutual
2. Malawi Property Investment Company Ltd(MPICO)
3. National Investment Trust Limited (NITL)
4. Real Insurance
1. Blantyre Hotels Limited (BHL)
2. Sunbird Tourism Limited (Sunbird)
1. Telekom Networks Malawi Ltd (TNM)
The stocks above have been ranked on how each sector is assessed. Currently, the most reassuring is the financial sector. Exposure to the manufacturing sector (especially ILLOVO) wouldn’t be bad. Telecom is supposed to be a money spinner. However, the experience locally has been disappointing and may take some time before this sector becomes attractive – unless of course you are looking at the long term. For diversification, the conglomerates especially in the form of PCL would be ideal.
Hope this guides you. Our team is at your disposal to assist you make the best