Why investing in consumer goods was better than investing in banks in 2021

view original post

The Consumer Goods sector had a stellar performance in 2021 as its index grew by 2.78% from 573.35 basis points at the beginning of 2021 to end the year at 589.28 basis points. The Consumer Goods index outperformed the banking sector index that lost 2.15% in the same period from 2052.33 basis points at the beginning to end the year at 2008.3 basis points.

Even though the Nigerian Exchange Group had a good 2021, in 2020, the market was one of the best-performing markets in the world gaining over 50%. This feat came in a year where the whole world was hit by the economic impact caused by the COVID-19 pandemic.

The NGX closed the year 2021 on a positive note, gaining 6.07%, with its ASI trading 42,716.44 basis points on the last trading day of the year, putting the total market capitalization at N22.30 trillion.

The total market capitalization for the Consumer Goods sector currently accounts for 11.79% of the total market capitalization of the entire NGX as at the last trading day of the year. The consumer goods sector contributed a whopping N116 billion to the NGX market capitalization in 2021, representing a 4.62% gain.

On the other hand, the banking sector accounts for 16.05% of the total market capitalization of the NGX. The decline in the sector means the sector contributed negatively to the market capitalization by N73.5 billion, representing a 2.01% decline.

Due to the high inflation rate plaguing the country in 2021, especially the increase in food inflation, the prices of consumer goods increased significantly in the year 2021. Due to inflation, more money is chasing fewer goods and this contributed positively to the consumer sectors’ books, as it revealed an improved performance in their income statements and that ultimately led to a rally in the share prices of 66.67% or 14 consumer goods stocks in 2021.

The consumer goods index is made up of 21 stocks and the highest performer of them all is Honeywell Flour Mills which gained a whopping 183.33% in 2021, ranking 11th in the index, contributing approximately N27 billion.

The banking sector is made up of 13 stocks and the year 2021 saw a contrast in nearly 50% or 6 stocks contributing to the index. The best performer in the sector, First Bank of Nigeria Holding Company, gained 59.44%, ranking 4th in the banking sector, contributing approximately N409 billion.

What experts are saying about the performance of the sectors

Adeboye Teriba, the newly appointed CEO of Qualinvest Capital explained that the gains experienced in the consumer goods index is as a result of the battle between stability and liquidity. He stated, “The consumer goods index performed well due to the improvement in government policy which has helped the consumer goods sector improve greatly in terms of raw material sourcing. Since the lockdown, companies under the consumer goods index have ramped up their production capacity in such they way that they find themselves overshooting their regular output production.

“Another factor is as a result of strong institutional investor presence in the consumer goods sector. Companies like Okomu Oil, Flour Mills, Presco, Dangote Sugar and so on, have strong institutional backing and this has helped sustain the share price of consumer goods and also help pushed the price of their stock, especially when they have impressive financial performance which we saw in 2021.”

He further added, “The banking index is the most active and the most liquid stocks traded on the Nigerian stock exchange. Their holdings are well spread between institutional and retail investors. Although the banking sector is known for paying good dividend, the price of their stocks, however, does not necessarily perform well due to the liquid nature of the stock. For example, to move the price of a stock like Nestle, you will require a deep pocket to do so.”

Olumide Adesina, an analyst at Quantum Economics had this to say on why the consumer goods index performed better. He said, “In 2021, Nigerian bank stocks prices cumulatively suffered some drawdowns due to the drop in interest income earnings coupled with complicated economic dynamics despite inflation moderating but still remaining double-digit, growth being sluggish, and foreign direct investment dried up.

“A new challenge is emerging from the growing fintech sector, which has attracted a significant amount of funds in venture capital funding over the past two years, making Lagos the most dynamic start-up scene in Africa.

“Even so, their fundamentals continue to be strong and relatively cheap, and with interest rates likely to go north in 2022, Nigerian banks are expected to generate more interest income in 2022.”

Opeoluwa Dapo-Thomas, a global market analyst, also gave his take on why the consumer goods index outperformed the banking index. He stated, “As we all know, Nigeria’s consumer goods industry was one sector market analysts had their eyes on post the tumultuous 2020 that saw most indices down. So, a sharp recovery was expected as the industry benefited from factors such as rapid consumer demand and industry margins from higher product prices by FMCG companies. With lockdowns in Nigeria now a distant memory, people could move across retail stores, supermarkets and large markets to purchase their daily consumables without rationing on supplies due to uncertainty.

“Although there are still global supply chain issues amongst inflation, devalued purchasing power currency and insecurity on major road networks, the consumer goods sector did very well and impressively than the banking sector. The reason for the tepid performance in the banking sector were already documented in the S&P Global report outlook earlier in 2021.

“Factors stretching from a subdued Nigerian economy, slow GDP growth, Naira weakness to the dollar, slower earnings growth because of high credit impairments: non-performing loans, and slower customer deposits because of frail income levels. So herein lies why the consumer goods index outperformed the banking index on the NGX.”