Wednesday, August 17, 2022

Lowly capped stocks performance can’t be ignored ÔÇô FinCraft

The past two years have seen a tremendous paradigm shift in favour of ‘economic under-dogs.’ At a global level, there is greater shift towards investing in Least Developed Countries (LCDs) and that is due to a number of macro-economic variables, ranging from reforms in those economies and the down-turn in the first world. Even in the mining sector, junior mining outfits have outshined giants in prospecting. At a domestic level, research and investment advisory firm ÔÇô FinCraft Investment Research – is convinced that mid to low capped Botswana Stock Exchange (BSE) deserves to be accorded the same paradigm shift. That is why in two weeks (22 May) the company will be hosting an investment roundtable in Gaborone under the theme “Spotting hidden gems in Botswana”.

Managing Director of FinCraft, Gao Seleka-Sekonopo, told The Sunday Standard that the purpose of the upcoming roundtable is to enlighten the investment community about the enormous potential of lowly capped stocks. The conference comes at an opportune time for the medium and low caps ÔÇô a time when the bourse’s blue chip companies are facing trading difficulties. Financial companies dominate the BSE market capitalization and are worst affected. Since the beginning of the year to 30th April, FinCraft research reveals that financial stocks have had unfavourable trade, with Stanchart recording an average decline of 32.27 percent, fast on the heals followed Barclays and BIHL at 26.57 percent while FNBB recorded a fall of 7.41 percent in the period under review.

The bearish performance has been accompanied by sluggish investor confidence in these stocks, which sparked sell off. In the same period, FNBB came on top in terms of the number of traded shares, the volume of which stood at 11.3 million at a value of P30.5 million. BIHL saw the largest value of shares traded at P60.5 million while Stanchart was second at P38.9 million and Barclays only traded P7.3 million.

It is not yet clear whether the sell-offs resulted in capital flight off the bourse or mere migration within the main board but the picture is nowhere rosy for the large caps. Seleka-Sekonopo attributes the shake-up to a number of variables.

“Generally, the banking stocks were over valued and we have seen some sort of market correction lately. The correction could have coincidentally been compounded by the Lobtrans issue but generally large caps are steadier in terms of risk and returns,” she explained. Contrasting the performance of small capitalized stocks against the blue chips in the past two years, she said the small caps have consistently outperformed their bigger peers.

“They have had a weighted average return of 91.2 percent in 2007 and 78.8 percent in 2006 ÔÇô outperforming both the broader market index returns of the BSE’s Domestic Company Index of 2007 which stood 35.9 percent against 74 percent the previous year. Their larger capitalized peers yielded 67.1 percent during 2006 and 34.8 percent in 2007,” she explained.

This performance, she noted, could play a crucial stabilizer role.

“We are not saying that people should dump larger cap companies for smaller ones, but that in as much as investors chase the omega they should be wary of the fact that small can also offer the alpha in their equity portfolio construction ÔÇô a move that can enhance returns,” she said.

Seleka-Sekonopo is aware of the inherent risk exposure of lowly capped companies in relation to economic volatility hence the urge for consideration of such companies as part satellite investment strategies. Even within the mid and low cap categories, it is a mixed bag of performance. For instance, both Letshego and Turnstar listed in 2002 at P1.00 per share but today, Letshego’s stocks have ballooned to over P14 per share while Turnstar has been hovering around P1.50 per share.

“That is why we are hosting this conference ÔÇô so that people can understand different industries and when investing,” she said. She said the two-tier structured conference would have experts from different sectors of the economy, ranging from finance, tourism, construction and property, mining, telecommunications and agriculture.
Regarding the Letshego and Turnstar, she said the radical inequality in the companies share price could be a function of numerous factors such as sectoral performance and each company’s business model.

“One can argue that the two companies are trading in different sectors and for Turnstar, we can say that by the time they listed the economy was not performing well and construction was low as a result of that. And there seems to be positive correlation between economic performance and the level of household borrowing, probably that is why Letshego has performed so well. When people’s discretionary income is distressed, they tend to borrow more and may, this time around, be a different story for Letshego in light of recent upward salary adjustments,” she said.

The conference is expected to attract about 300 participants and is scheduled to be officially opened by the newly appointed Assistant Minister of Finance and Development Planning, Samson Guma Moyo.


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