Benchmarked RoE’ll boost capital market profitability –Czartoryski

Chinwendu Obienyi

Setting a Return on Equity (RoE) target for the quoted companies on the Nigerian Stock Exchange (NSE) could help improve investors’ confidence as well as companies’ profitability in the nation’s capital market.

According to the Head of Research, at Coronation Asset Management, Guy Czartoryski, the returns of the Nigerian equity market have not been kind to investors and the approach to solving the problem requires setting a benchmark, namely a target RoE for the listed Nigerian companies.

Giving insight into the nation’s Investment landscape in its report, Navigating the Capital Market: the Investors’ Dilemma, yesterday in Lagos, Czartoryski said the era of beating inflation  by buying Federal Government of Nigeria (FGN) treasury bills have come to an end following the crash in interest rates in the first half of 2020.

He explained that the equities market, in contrast, has not preserved capital for investors over the long term, even when adding back the generous dividends paid to investors. He noted that the newly launched report identifies stocks that are likely to generate satisfactory returns for their owners, and back-tests the results.

“Nigerian investors are faced with difficult choices as interest rates have crashed. The alternatives are either to simply wait for rates to rise again in future, or to accept more risks in order to increase returns. But, to do that, they need to increase their understanding of risk.

“Navigating the Capital Market takes a new approach to setting investment return benchmarks. Instead of targeting inflation, which is the conventional benchmark, it recommends that investors should aim to beat the effects of Naira devaluation against the US dollar, and obtain the risk-free return they would have in US dollars. This suggests that they should ask for Naira risk-free fixed-income (or treasury bill) return of 14.7 per cent per annum over the long term”, he said.

According to him, “ when it comes to equities, Coronation Research calculates that Nigerian investors should demand a return of 20.5 per cent per annum. These are high benchmarks, but they show what is necessary to preserve the value of investors’ hard-earned money.

This target, 20.5 per cent per annum, represents what we require listed companies to return internally, that is, their internal profitability, or return on equity (RoE) and also represents what we target as the equity return for the stock market”.