Improved investor sentiment is reflecting in a bullish stance of the Ghana Stock Exchange (GSE), as investors keenly look to take advantage of the current undervaluation of equities, analysts have said.
The bullish run began in the fourth quarter of last year and gained momentum after the December general elections, which returned incumbent President Nana Akufo-Addo to power.
“The historical price to earnings (P/E) ratio [of the stock market] has been around 12x; however, currently this ratio is below 5x. This is an indication that the entire market is hugely undervalued,” the Head of Research at Databank, Alex Boahen, said in an interview with Business24.
“Because of that, investors are beginning to take advantage of this position of the market, especially the pension fund managers who most often restructure their portfolio at the end and start of each year,” he added.
The GSE Composite Index (GSE-CI), which measures the weighted average price change of all the equities listed on the market, improved its return from a year-to-date position of -18.23 percent at the start of the last quarter of 2020 to close the year at -13.98 percent.
At the end of trading on Tuesday, January 12, the benchmark index advanced by 11.74 points to 1,967.52, with a 1.34 percent year-to-date return, while the market’s capitalisation increased by 0.22 percent to GH¢54.67bn.
“The market went so low in the past two to three years, and it was due for correction because most of the stocks on the market were undervalued. This has been factored into the decision of investors currently, given that prices of most stocks are undervalued and this seems the opportune time to get back into the equities market,” Ben Ackah, General Manager at UMB stockbrokers, said in an interview.
Stock market analysts hold a common view that the current position of the investor is largely going to drive the market this year.
“From the third quarter of 2020, the market had started to rebound. What we noticed at the time was that instead of the supply side increasing in volume, the demand for stocks rather increased,” Mr. Ackah explained.
Notwithstanding the current position of investors, Databank’s Mr. Boahen said the market remains cautious due to the existing risks in the economy, which could spill over to the market.
“We are still cautious because there are issues with the economy. The suspension of the fiscal deficit limit of 5 percent of GDP could raise a lot of concerns with regard to the country’s debt levels and its implications on the economy.”
Analysts have also pointed out a number of global factors that will play to the advantage of the stock market, including the low-interest-rate environment in advanced markets as well as the high market valuation on the back of the consistent higher performance of foreign markets for the past two years.