In a concerning economic development, Nigeria’s headline inflation rate climbed to 27.33% in October 2023, marking a significant 0.61% increase from the previous month’s figure of 26.72%.

This represents a noteworthy 6.24% surge compared to October 2022 when the inflation rate stood at 21.09%. The impact of such inflation on the stock market and penny stocks is crucial, as it steadily erodes the purchasing power of the country’s currency over time.

Investors, who typically focus on nominal returns, need to pay equal attention to real returns that factor in inflation, especially in the context of the stock market. Real returns provide a more accurate depiction of the actual increase in purchasing power, crucial in an inflationary environment.

Traditional asset classes like bonds and cash equivalents often struggle to provide positive real returns in such circumstances. Conversely, stocks generally have the potential to outperform inflation and yield positive real returns, though individual stock performance can vary significantly.

The dynamics of this interplay are evident in the stock market, particularly when considering the total return of stocks, including capital gains and dividend yields, relative to the inflation rate.

In 2022, this played out distinctly, with some stocks showing positive real returns, surpassing the closing inflation rate of 21.34%, while others grappled with negative real returns.

For example, Guinness Nigeria Plc achieved an impressive total return of 87.99% in 2022. Considering the inflation rate closed at 21.34%, Guinness Plc secured a real return of 54.93%, indicating not only a performance that outpaced inflation but also a substantial real return.

Contrastingly, within the penny stock category, AXA Mansard recorded a total return of +4.21% in 2022. However, factoring in the inflation rate of 21.34%, AXA Mansard’s real return turned negative, settling at -14.12%. This emphasizes that even in a positive total return scenario, the impact of inflation can diminish real returns.

As of 2023, penny stocks have shown resilience and growth in the stock market, with over 40 of them boasting year-to-date gains above the current inflation rate. Notably, ten standout performers, including CHAM, JAPAULGOLD, FTNCocoa, Ikeja Hotel, OMATEK, Golden Breweries, ABC Transport, THOMASWY, SUNUAssurance, and TRIPPLEG, have not only outpaced inflation but have soared with triple-digit year-to-date gains.

Penny stocks, characterized by their modest per-share value often below N5, present an accessible entry into the stock market, making them attractive for investors seeking opportunities without a substantial upfront commitment.

However, it’s crucial to acknowledge the dual nature of penny stocks. Their affordability, coupled with the potential for significant returns, positions them as enticing yet high-risk options.

Some analysts caution against adopting long-term buy-and-hold strategies in the penny stock sector due to their high volatility and susceptibility to substantial drawdowns.

This cautionary approach becomes particularly relevant when examining the performance of the top ten penny stock performers in 2023 in comparison to their 2022 performance. Except for Thomas Watt Nigeria, which recorded a year-to-date gain of +169.44%, the remaining nine top performers for 2023 either remained stagnant or experienced negative year-to-date returns.

In conclusion, while equity investments may be considered inflation-protected to some extent, there are no guarantees. Against the backdrop of the current inflation rate of 27.33%, the stock market and penny stocks have not only weathered the economic storm but have also surpassed the rising inflation, showcasing their resilience in the face of economic challenges.

Photo (Annastacia Wairimu)

21st November, 2023
Delino Gayweh
Serrari Financial Analyst