2018 market commentary; Turmoil in the banking sector weighed heavily on the markets
At the end of January 2018, Bloomberg reported that the Ghana Stock Exchange Composite Index (GSE-CI) gained 19
percent in dollar terms, the most among benchmarks tracked by the company globally. The GSE-CI did a race to an all-time, record high by the end of April, but performance for the rest of the year was underwhelming. The Ghanaian stock market grew more volatile from mid-year as troubling events in the banking sector dominated headlines all year.
Both the GSE-CI and the SAS Index, another stock market benchmark, sadly gave up all the gains made in the first four months and a little bit more over the second half of the year to close the year down 0.3 percent and 1.5 percent, respectively. These two indices returned 52.7 percent and 53.4 percent, respectively in 2017.
Market breadth was decidedly negative for the year. Decliners topped advancers 2 to 1 as a total volume of more than 200 million shares and a total value of more than GH¢ 650 million changed hands in trading.
Banking stocks, which had driven big market gains in 2017, declined across the board in 2018, with the GSE Financial Index, a benchmark for financial stocks, shedding 6.8 percent of its value.
Shares of Republic Bank, which rose 85.3 percent in 2017, halved to GH¢0.69 in 2018, and Enterprise Group shares which appreciated 54.2 percent in 2017 dropped 39.5 percent in 2018 to GH¢2.24.
Fan Milk’s share price declined by 54.8 percent to close the year at GH¢8.00, as the company continued to report declining revenues and profits.
Source: GSE, SAS Research
The top price gainers were PZ Cussons, SIC, Mechanical Lloyd and Unilever.
Some investment analysts may argue that record of primary market activity during the year sucked significant liquidity out of investors’ hands, which was not available for after-market trading in the second half, resulting in the flat performance of share prices generally. The two-month initial public offering of MTN Ghana shares in the mid-year alone raised GH¢ 1.15 billion from Ghanaian and non-Ghanaian retail and institutional investors.
The market’s performance in 2018 represents a sharp correction to year-end 2017 price levels. However, for savvy investors, value and profits can still be found in the equity market. These investors will focus on searching for beaten down stocks that are cheaply valued but have historical and potentially high prospective fundamental and investment growth rates, with the hope of benefiting from a meaningful recovery in share prices.
Long-term-oriented investors in the stock market who hold diversified portfolios have accumulated attractive market returns historically. For example, a holding investment in the SAS Fortune Fund between 2013 and 2018 yielded a compounded annual growth rate of 23.5 percent.
Fixed income securities offered an attractive alternative to the volatile equity market
In the government securities market, yields hardened across the curve in the second half of the year. The yield on the 91-day Treasury bill opened the year at 13.33 percent and closed at 14.59 percent. The yield on the 2-year Treasury note increased from 17.50 percent to 19.50 percent. The yield on the 10-year Treasury note opened at 16.35 percent and the last average quote for the year was 17.50 percent.
In the first half of 2018, declining long-term rates in the market rewarded investors who had exposures to term government bonds, but this scenario reversed from mid-year as interest rates started to rise.
While fixed income offered generally higher annual yields for investors in the market in 2018, some non-bank financial institution (NBFI) issuers of fixed deposit instruments reported liquidity challenges during the year.
The Cedi weakened against the major trading currencies during the year but gained on the South African Rand and the Naira. Headline inflation was read at 10.3 percent for January and most recently at 9.3 percent for November, 2018.
Mutual funds outperformed benchmarks in 2018 due to a reallocation of assets to fixed income
Due to poor market conditions in 2018, most fund managers returned less to investors than in 2017. However, performance was above benchmark rates. Equity mutual funds, balanced funds and money market funds recorded an average return of 6.0%, 11.6% and 17.8%, respectively. The asset allocation mix of most funds was heavily weighted towards money market and fixed income securities as fund managers backed away from equities on concerns of unpredictable economic factors and uncertainty surrounding Bank of Ghana’s bank recapitalization program.
An ongoing liquidity crisis faces a number of asset management houses as a domino effect from the banking sector has caused a lock up of funds from investors. The odds of these institutions surviving this crisis will to a certain extent depend on Consolidated Bank Ghana’s ability to pay investors’ money owed.
Also, there is the likelihood of regulatory bodies increasing the minimum capital requirement of asset management firms to improve their financial position and strengthen the financial system. While an agenda like this will help the market, it poses the risk of a lot of shops closing down since the bank recapitalization showed a lack of interest from investors in the Ghanaian financial sector.
This notwithstanding, mutual funds are expected to perform positively this year 2019 on the back of lower valuations in the stock market and higher fixed income rates. Confidence in the market is expected to be restored post bank recapitalization as banks refocus efforts on expanding their loan portfolio and increasing revenue.