Finally, it appears that the bullish sentiments that have returned to the Ghana Stock Exchange. Over the four months up to April this year, the GSE Composite Index recorded an impressive year-to-date return of 31.93 per cent, the highest since 2018, the latest GSE Market Report, has revealed.

The GSE April Market Report shows that the strong response by investors to what are now clearly significantly undervalued shares drove the month-on-month growth of 15.73 per cent in the GSE-CI to close April 2021 at 2,561.45 points.

Interestingly the GSE-CI recorded its highest-ever daily gain of 123.77 points on the back of large gains in the prices of GCB and MTN on the last day of trading in April. The 31.93 gain in GSE-CI year-to-date was attained on advances in the share prices of 10 companies, which outweighed losses in five companies.

This illustrates just how intense the herd instinct can be on the GSE currently. Simply put active traders in equities such as professional fund managers whose strategy is to take profits from capital gains whenever they arise, know that many if not most shared listed on the GSE are undervalued, but are being held back by widespread investor reticence due to the poor share price performance since 2018. Thus, where a bull run takes hold, even over a very short period, such equity investors are willing to take the chance at place buy orders in the hope that they could be the early birds in a sustained upward share price movement towards their real, much higher values.

However, since then the surge in the GSE has abated somewhat in May as some equity investors have decided not to take further risks and realize their brief capital gains while they still can. The strategy here is that if the market in general does indeed believe that the shares are undervalued another wave of bullish trading would sooner than later generate another bull market and as astute investors, they can see it early, get on board and make yet another round of capital gains. By the middle of last week, the composite index’s year to date gain had declined a little to 28.08 percent, but equity analysts remain confident that this is just a temporary blip and share prices will continue to rise over the coming months even if at a slower rate than the pace during the first four months of the year.

The rise in equity prices is being driven by several factors. One is the fall in short term interest rates over the past year, which instructively have culminated in investors refusing to buy up all the short tenured domestic public debt securities offered by government since early April. While much of this reduced demand has gone into long-dated cedi denominated debt securities which offer significantly higher secondary market yields, a substantial proportion has gone into equities which explains the drop in trading volumes on the Ghana Fixed Income Market in recent weeks.

This confirms the converse relationship between the equities segment of the GSE and its fixed income market for publicly traded medium to long term cedi denominated domestic debt securities and for corporate bonds ( including ESLA bonds which are classified as corporate bonds since they are issued by a special purpose vehicle established by government to take its huge legacy energy debts off the public balance sheet, but which in actual fact are regarded as risk less government debt since they are effectively guaranteed by the state).

The longest bear market in the GSE’s three decade long history, which has run from late 2017 to just a few months ago has coincided with a sharp rise in trading volumes and consequent liquidity on the GFIM, indicating that many if not most equity investors see the one as an alternative investment option for the other with GFIM winning out over the past two or three years. This is because with medium to long term government debt securities now having become liquid through active secondary market trading, investors have sought to take advantage of the high coupon rates on new issues and yields on bonds traded on the secondary market, which still reach over 20 percent for the longest tenors. This has been at the expense of investment flows into equities.

However, in recent months government has reversed its longstanding stance of trying to issue mainly medium/long term bonds in order to elongate the average maturity of the public debt, in order to reduce its debt servicing costs since short term rates have fallen over the past year and a half as part of the Bank of Ghana’s monetary easing strategy. But investors have sensibly taken the opposite stance seeking to buy higher interest yielding medium and long term bonds and in their absence have resorted to increasing their holdings in undervalued equities despite the much higher risk involved.

Besides this those longer tenured bonds are no longer regarded as entirely risk free. Government’s debt to Gross Domestic Product ratio reached an inordinate 76.1 percent by the turn of the year (the International Monetary Fund computes it as even higher at 78 percent) and the World Bank recently predicted that this ratio could reach over 82 percent by the middle of this decade. This is another reason why some investors are moving away from bonds to equities in the face of falling yields and rising investment risk.

Yet another is the unexpectedly strong profitability of several listed companies for 2020 despite the economic ravages of COVID 19. Bank stocks in particular did exceedingly well led by Agricultural Development Bank whose profits last year were nearly five times their 2019 levels. Indeed, the rebound of the composite index would have been higher still since the start of the year if the BoG had not banned the banks from paying dividends (although it recently relaxed this regulation partially). With the banking sector leading profit growth for 2020 (for instance Agricultural Development Bank’s net effects of COVID 19 and this increased nearly five-fold over the previous year and the two largest banks in the country, Ecobank and GCB Bank both saw their profits rise sharply) bank share prices should have risen faster than those in other sectors but the regulatory hurdles in approving dividends on those profits have contributed to much slower share price growth; by the end of last week the year to date growth of the Financial Index was just 6.50 percent, barely a quarter of the 24.45 percent growth in the composite index. However, some non-bank stocks are reporting strong profit growth despite the effects of COVID 19 and the resultant fall in already inordinately low price earnings ratios are attracting equity investment too.

Another factor has been the stability of the cedi against the United States dollar which has stemmed the foreign exchange losses hitherto suffered by foreign investors on the GSE. About half of the tradable stocks listed on the GSE (that is shares not held permanently by parent companies) are held by foreign investors and cedi depreciation eats substantially into the yields of even the best performing stocks, in some cases turning handsome cedi profits into dollar losses. But since last year the cedi, has been relatively stable against the dollar thus preserving the yields from their equity investments in dollar terms. With the exchange rate outlook for the cedi pointing to more stability – as indicated by the forward forex auctions conducted by the central bank – these foreign investors are encouraged to say with equities listed on the GSE.

However, while the GSE got off to a roaring start this year, by April signs of a slow down were already emerging. During the first three weeks of May, Profit taking by equity investors saw the composite index fall by over seven percent. Nevertheless, the market’s performance remained far better than that for the corresponding period of 2020.

The report said, the volume and value traded in April were GHC29.77 million and GHC31.01 million respectively, down 48 per cent and 36 per cent on volumes and values traded the previous month.

“The year-to-date volume traded was up 79 per cent compared to same period last year, to 230.7 million shares while value trade was up 86 per cent to GHC184.5 million during the same period,” the April Market Report indicated.

However, the volume of shares traded in the period under review on the main bourse fell by 48.40 from 57,696,113 in March to 29,773,214 in April.

The value of shares traded also declined by 35.84 from GH48, 459,787.97 in March to GHC31, 093,842.33 in April.

The GSE Ghana Fixed Income Market saw relatively muted volumes traded of 15.9 billion during April, down from 40 per cent from the all-time monthly high of 26.7 billion attained in March 2021 but still an impressive 73 per cent higher than volume traded some period last year. The decline in trading volumes in April from the previous month reflects the move by portfolio investors f5rom bonds to equities.

It said the Government of Ghana securities totaled 14.36 billion, accounting for 90.31 per cent of market share, while corporate notes and bonds accounted for the rest. While corporate bonds offer higher yields than government bonds of similar tenors, investors still worry about the level of risk associated with bonds issued by private enterprises. Indeed, the indications are that portfolio investors are now showing a preference for equities over the bonds issued by the same companies.

However, the decline in equity prices in May from their highs attained in April is being seen as warning by some equity investors that the bear market that has gripped the GSE over the past three years has not gone away completely. Therefore, the direction and quantum of share price movements over the next few months will be crucial. If this month’s price retreat turns out to be temporary it will tell investors that it was simply due to profit taking by investors who have seen their investment values shrink over the past three years.

That will, in turn, suggest that the bull market is back on the GSE at last.