How Investors Missed Out on Decades of Easy Profit

Enterprise Network-NSE Corporate Challenge Receives Boost from Beta Glass, FCMB Nigeria Stock Exchange Floor, Photo Credit: EnterpriseNetwork.Africa

How Investors Missed Out on Decades of Easy Profit

By Dr Emeka Ucheaga

Timing the stock market is never an easy game. There is usually more money to be made investing in the long run than chasing yields in the short term. Yet, market anomalies occur rather too frequently in the short term that provide courageous investors ample opportunities to make outsize profits in the short run.

One such anomaly we spotted is the “H1 optimism rally” and the “H2 pessimism rally” that has ravaged the Nigerian market since year 2000. In the first half of the year since 2000, the stock market has delivered positive returns 16 out of 18 years while in the second half of the year, the market has rallied only 9 times out of the last 18 years. This means that if you were a probability driven technical investor, you will see easily that there is an 88 percent chance of an upside in the stock market in the first half of the year and a 50 percent chance of suffering a market loss staying in the market in the second half of the year.

If an investor invested only in the first half of the year between 2000 and 2017, he would have earned an average annual return on his portfolio of around 14.23 percent versus an average annual portfolio loss of around -0.58 percent if he only invested in the second half of the year. This performance excludes dividends earned and assumes that the investor holds in his portfolio all the companies in the stock market at market weights.

To put this bizarre anomaly into perspective, if an investor invested N10 million in year 2000 in a H1 Only portfolio, his portfolio will have grown to N96 million as at the end of H1 in 2017, providing the investor with almost 10x returns. If he invested in a H2 only portfolio, his portfolio will be N9.59 million as at the end of H2 2017 in December last year. Quite bizarre!

Investors will give more than a thousand different reasons to factors that may explain the anomaly but what we know for sure is that market can’t claim to be anywhere near efficient if anomalies like this continue to consistently occur.

The old adage of “sell in May and go away” may need to be rephrased in Nigeria to be “sell in June and run-away” as H1 market performance consistently delivers strong results while weak performances in H2 consistently hurt investors overall performance which will be annual return of 12 percent if you played the “buy and hold” strategy between January 2000 and December 2017.

Before you run away feeling like you have learnt the trick to beating the market consistently, anomalies never remain forever, and future performance of the H1 portfolio may not mimic the past. But in the meantime, it may be worth the risk.

H1 2019 is likely to deliver positive returns for investors if elections are held successfully. Non-fundamental selloffs in 2018 driven largely by political tensions, election risk and emerging market selloffs will give way for a more positive and economic and market outlook in 2019. IMF predict Nigeria economic growth will reach 2.3 percent in 2019, its fastest growth in 3 years. Oil prices is also expected to remain above $70 per barrel which will help oil rich Nigeria to grow external reserves, maintain currency stability and reduce budget deficit, thereby boosting investor’s confidence.

Analysts expect that stocks are bound to rise after the general elections which means a rally in H1 is still a big possibility.


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