Monday, November 15, 2021  / 10:33 AM /  ByCoronation Asset Management  / Header Image Credit: Coronation Asset Management

Coronation Research releases a new report 'Equitiesfor a superior return'. This report written by Guy Czartoryski andAdebayo Adebanjo challenges the widely-held opinions about Nigerianinvestments, in particular views about the equity market. "Nigerian listedequities, if properly selected, can deliver an adequate return to investorsover the long-term," said Aigbovbioise Aig-Imoukhuede, MD/CEO, Coronation AssetManagement.

Nigerian Equities for beating inflation

As Nigerian investors face a third successive year ofT-bill rates well below the rate of inflation, Coronation Research asks: "WhichNigerian investments beat inflation over the long-term?" The surprising answerto this question is: "Equities".

Coronation Research has studied equity returns duringthe period from 1 January 2016 until now. While the performance of the NGXAll-Share Index was not strong, the performance of a selection of the mostprofitable NGX-listed companies has provided superior and inflation-beatingreturns.

Deep dive into equity returns

So, the return of the NGX All-Share Index from 1January 2016 to 30 September 2021 was 40.50% or a compound annual growth rate(CAGR) of 6.15%. With gross dividends reinvested, that rose to a CAGR of12.44%. But neither return would have beaten inflation over the same period,which averaged 14.26% per annum.

However,a basket of 10 NGX-listed companies, each with a long-term and sustainableReturn on Equity (RoE) of 20.5% or more, would have delivered an investmentreturn with a CAGR of 16.36% from 1 January 2016 to 30 September 2021. Withdividends reinvested, this would have risen to a compound annual growth rate of24.71%.

This basket would have easily beaten inflation of14.26%, giving a compound annual growth rate, in inflation-adjusted terms, of8.29%. And in US dollar-equivalent terms, the compound annual growth rate wouldhave been 9.71%.

Meet Mr. and Mrs. Olufemi

In our report, we imagine a prosperous Nigerianhousehold that, in January 2016, had one million Naira in savings to invest.Then, we follow what would have happened to their money if they had invested ineither equities or Nigerian Treasury Bills (T-bills).

In the report, Coronation Research highlights the bigdifference between the performance of the NGX All-Share Index and the same returncalculated when dividends are reinvested, the Total Return. Only with TotalReturns can investors begin to make meaningful long-term gains.

The High RoE Portfolio

For a truly superior return, investors need toidentify listed companies whose internal Return on Equity (RoE) is high - westipulate a minimum of 20.5% per annum. Furthermore, this return on equityneeds to be sustainable. We found 10 NGX-listed stocks with thesecharacteristics and created a hypothetical portfolio with these stocks in equalweight. Then we measured their total returns from 1 January 2016 onwards andcame up with the surprising results given above.

Download Full PDF Report

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