The four most dangerous words in investing are: “This time, it’s different”.’ – Sir John Templeton
My phone rang and as I checked my phone screen, I saw it was a call from a friend I have not spoken with in almost two years. He runs an online financial news outfit and I had been seeing his tweets on foreign stocks in recent weeks. I wondered why he was calling for a few seconds before picking the call, of course we had to the normal “how your this and that” before getting to the koko of the call. The next thing was, “Bros , have you been investing in foreign stocks ?” My answer was “No, but I follow it closely”. My friend went on to tell me how he does not trade Nigerian stock anymore, citing the few numbers of listed stocks (about 160) compared to thousands of listed stocks on New York Stock Exchange, NASDAQ and the likes. He claimed to have made over 90% returns during the lock-down period, and I can understand how this happened.
Foreign stocks have become popular among Nigerian since last year when we started having apps like Bamboo, Trove and Chaka . They also came at a time when there are genuine concerns about the stability of the Naira, so many foreign stock investors see it as an opportunity to preserve their investment against currency devaluation. Those who bought during the low points in February- March have certainly had their pay day, going by the performance of the top stock indexes like S&P 500. A stock index is a single price that roughly represents the single price of the all the constituent stocks, such that the index price changes as price of the constituent stocks change. They can also be traded as stocks. S&P 500 has returned 41% to investors who bough it at low price of $2,191.86 during the lock down and is now trading for $3,097.94.
However, the question I have been considering is whether this is a good time to jump into the foreign stock market, having missed the low points in March. Many conservative investors believe that the current performance of this stocks is another bubble in the making , because the stock prices are not supported by strong fundamentals. Fundamentals in stock parlance refers to a company’s ability to make money. S& P 500 stocks are reportedly trading at 22 times of their projected earnings , which means that that it will take you 22 years to recoup your investment at their current price and profit levels.
Two major reasons were given for this. First is the $10 trillion economy stimulus provided by the US government which has stabilized the US economy in no small measure as it created confidence in the economy and some it trickled into the stock market. The second reason is the activities of many newbie investors that have signed up with Robinhood, a trading app that does not charge any trading fee. An example of how the newbie Robinhood traders play the market is the case of Hertz, a car rental company that has just filed for bankruptcy. But the share price rose by 521% in just five trading days in May, this anomaly was traced to the activities of 80,000 new Robinhood users. Therefore many industry veterans have been talking of an impeding bloodshed on the market, especially if a new wave of infections breaks out
Regardless of the the direction the market goes on the short run, we strongly believe that there are still opportunities in the stock market. Most of the recent stock market gains came from companies that benefited from the lock-down. Amazon were able to ship more orders as people stayed at home. Netflix reportedly signed 7 million new subscribers in the first quarter of the year as people sought to be entertained whilst staying indoors. Therefore, a simple trick to benefiting from the second wave of profit on the foreign stock scene is to look for stocks in sectors that are yet to be reopened and expect them to bounce back as life returns to normal.
Would you like to learn more about investing in foreign stocks? Join our newsletter for more information about how you could invest here.