Inflation-proofing investments: Analysts urge investors to emphasise strong fundamental stocks
Some analysts have advised investors to focus on stocks with strong fundamentals in order to navigate the challenges posed by persistently rising inflation.
The National Bureau of Statistics recently released the Consumer Price Index (CPI) for December, revealing an increase in inflation from 28.20 percent in November 2023 to 28.92 percent.
This represents a 0.72 percentage point rise compared to the previous month.The year-on-year comparison shows a significant increase in the headline inflation rate, with December 2023 recording a rate of 7.58 percent higher than the same period in 2022, which stood at 21.34 percent.
Additionally, the month-on-month comparison indicates a 2.29 percent inflation rate in December 2023, surpassing the 2.09 percent rate recorded in November 2023.The main contributors to inflation were food and non-alcoholic beverages, accounting for 14.98 percent of the overall increase.
Other significant contributors included housing, water, electricity, gas, and other fuel (4.84 percent), clothing and footwear (2.21 percent), transport (1.88 percent), furnishings and household equipment and maintenance (1.45 percent), and education (1.14 percent).
Food inflation continues to outpace general inflation, with a rate of 33.93 percent in December 2023. This highlights the ongoing challenges faced by consumers in terms of rising food prices. Given the current inflationary environment, analysts are urging equity market investors to prioritize stocks with strong fundamentals.
These stocks are expected to be better equipped to withstand the impact of rising inflation and potentially provide more stable returns. By focusing on companies with solid financials, strong management teams, and competitive advantages, investors can position themselves to weather the storm of inflation and potentially benefit from market volatility.
Reacting to the development, analysts at Arthur Stevens Asset Management Limited projected that there will be a further increase in the inflation figure this month and advised on the strength of the trend that the equity market was the best place to play albeit on stocks with sound fundamentals.
“We see scope for a further rise in inflation in January 2024 on the back of an elevated increase in energy price coupled with lingering insecurities challenges in the food producing region.
“We recommend a strong play in the equities market as the YtD return is currently 13.20 percent as at the time of this writing. Furthermore, we recommend that investors should tilt towards stocks with strong fundamental justification,” said the report which was released on Monday.
Analysts at Cowry Asset Management Limited, who had projected a headline inflation rate of 28.89 percent for December, with an average annual inflation rate of 24.52 percent for 2023, posited that, “The trajectory of inflation in 2024 will hinge on the efficacy of governmental policies aimed at addressing structural challenges in agriculture, energy, and infrastructure. Stability in the exchange rate is deemed imperative to regulate import costs and alleviate inflationary pressures.”
They added that since efforts by the monetary authority to fight persistent inflation had yet to yield results, the next monetary policy committee meeting of the Central Bank of Nigeria will be faced with a decision on whether to adopt a tightening stance or a more cautious approach to monitor inflationary movements while deliberating on key economic indicators that will shape growth and recovery.
“We believe that a moderate uptick in the headline numbers will skew the voting pattern of the committee members in favour of maintaining a tightening stance by between 25 basis points and 50 basis points,” they projected.
