Caution On NGSE, Amidst Likely Month-end Portfolio Rebalancing Ahead March FY Earnings Season

Market Update for the week ended June 21 and Outlook for June 24-28
The Nigerian Stock Exchange (NSE), ended three consecutive weeks of pullbacks last week, despite Friday’s seeming upmarket, after attempting a rebound in the month of May on the strength of the listing of MTN Nigeria and hope that the Federal Government will hit the ground running after the inauguration of President Muhammadu Buhari for the second four-year term, which has not happened.

The week’s benchmark NSE All-Share index, however, closed lower on the strength of a huge volume traded as stock prices resisted further decline during the last two trading sessions on seemingly improved buying interest and market breadth. The huge volume seen during the week was last witnessed during the market’s January 2018 peak which ushered in the current prolonged downtrend that has lasted 17 months.

During the week also, Nigeria’s National Bureau of Statistics (NBS) published the Consumer Price Index (CPI) for May 2019 showing that on the average, the general price level of goods and services or Headline inflation rose by 11.40% from 11.37% in the preceding month. This was mainly driven by an increase in the Food price sub-index of the Headline inflation for the second month running, just as the global trend reported by the Food and Agricultural Organization (FAO), an arm of the United Nations. According to the June 2019 report FAO says global food price index moved up 2.08pts, Month-on-Month, to 172.4pts in May, owing to increases in the price indexes of Meat, Dairy, and Cereals.

Investdata research believes the uptick seen in Nigeria’s food price index for the last two months arose from seasonal impacts due to the planting season, especially with the onset of rainfall, rather than being demand pushed, given that the purchasing power of consumers remains low. We expected that this uptrend in inflation will likely persist till July /August when the harvest season kicks off. Stabilising prices at the expenses of economic productivity and growth will lead to recession, as such, to avoid this one step forward and four backward movements the fiscal and monetary authorities need to agree on what their plan for the economy and how to achieve it.

Movement Of NSEASI
The week opened on a negative note, reversing the previous session’s gain, shedding 0.30% on a resumed selloff in highly capitalized stocks, which was extended to Tuesday when the index declined by a further 0.39% on a huge volume. This trend was sustained at the midweek session and Thursday when it lost 0.15% and 0.02% respectively, before a marginal rebound on Friday with the 0.29% gain, after medium and high cap stocks resisted a further decline. This brought the week’s total loss to 0.65%, compared to the previous 1.27% slide.

Despite, the slowdown in the losing momentum for the period, year-to-date loss stood at 5.02%, just as market breadth turned positive as buying interests increased due to portfolio rebalancing ahead of the last trading week of the month of June when window dressing is expected, even as investors position for March year-end earnings reports.

Also, this last trading week of the month is expected to usher in the second quarter earnings reporting season, especially for interim dividend-paying stocks.
Medium and low cap stocks were the week’s top gainers as they dominated the advancers table as the ‘sell’ pressure on blue-chip stocks subsided during the period in the midst of huge traded volume and the prevailing low liquidity.

The Federal Government’s delay in appointment of ministers, articulating its new economic reforms policy agenda to give a sense of its direction remains a cause for concern among investors. The sluggish style and attitude of the government have not helped matters, considering that the President was re-elected for this second term since February, compared to the fact that South Africa, our counterpart, whose President was elected in March had within 72 hours announced his new cabinet to drive the country’s governance and economy.

The impetus behind the week’s performance was weak, as shown by the money flow index at 14.55 basis points, compared to 18.23bps in the previous week. This indicates that funds are leaving the market and some stocks, even as sentiments remained negative and mixed, with buy volume at 40% and sell position, 60% on a transaction volume index of 3.79.

We however note that finally, after four years, the Federal Government is set to reconstitute the board of the Securities and Exchange Commission (SEC) and ensure proper regulation of the Nigerian capital market as against the present situation where such a very important economic growth and development agent is run as a branch of the Federal Ministry of Finance and subject to the “body language” of a single individual, a situation largely responsible for the doldrums in the market today. Members of the new board chaired by Olufemi Lijadu, 60, a partner in the Commercial Law firm of Ukiri Lijadu, will be inaugurated on Monday, June 24, 2019, will have as a first task the restoration of market confidence.

NSEASI Weekly Time Frame
Mixed sentiment for medium and highly capitalized stocks has reduced the market’s losing momentum on the high transaction volume that reveals accumulation in the midst of weak money flow index, low liquidity, but positive market breadth and pullback from the recently attempted rebound that was short-lived as investors took profit from the rally. However, a reversal of the downtrend is imminent as Fibonacci retracement is between 38.2% and 23.6%. The high transaction volume in the market raises hope for a full rebound in no distant time.

The current chart pattern on the NSE All-Share index supports reversal as it is trading on top of its 20-DMA within the Bollinger band, while RSI is reading ‘oversold’ at 42.26. But then, Money flow at 14.55 points remains weak.

Bullish Sectoral Indices
All the sectoral performance indexes for the period closed higher, except for the NSE Consumer Goods that closed 1.54% lower. The NSE Insurance, however, led the advancers after gaining 8.34%; followed by the NSE industrial goods with 3.17%, just as the banking and oil/gas index closed 2.53% and 0.71% up respectively. This reflected a buying sentiment in the market, at a time market breadth turned positive with advancers outnumbering decliners in the ratio of 34:33, to continue the down market.

Market activities in volume and value rose 758.94% and 475.63% respectively, to 7.48bn shares worth N91.11bn, as against previous week’s 868.74m units valued at N15.79bn.
Linkage Assurance and NEM Insurance were the best-performing stocks for the period, topping the advancers’ chart with 37.50% and 33.33% gains respectively, to close at N0.66 and N2.80 per share on market forces and low price attractions. On the flip side, Chams and Chemical & Allied Products lost 13.89% and 11.58% respectively, closing at N0.31 and N27.50, on profit-taking.

Market Outlook
We expect portfolio repositioning and balancing for month end and the Q2 earnings reporting season to improve the overall market outlook. This will slow down the southward trend as bargain hunters likely hit the market any moment from now, while discerning investors are taking advantage of low valuation to ahead of March year-end numbers and second half interim dividend stocks.

They may also take into consideration the expected economic reforms as government announces its much-awaited new cabinet, just as plans by the Central Bank of Nigeria (CBN) to reduce banks’ participation in government securities is expected to boost private sector lending to drive economic activities and investment.

There is also the likely end of month trading account balancing in the midst of portfolio repositioning in expectation March year-end earnings reports.
Profit taking may persist in highly capitalized stocks due to portfolio restructuring. Hence, overall market performance to remain mixed amidst positive sentiments and negative breadth.

Market players should maintain a cautious outlook due to low confidence, liquidity and the wait for major economic triggers. Hence, we advise investors to trade cautiously in the short-term, with their gaze fixed on blue-chip stocks that are selling more than 40% below their 52 weeks high. As we look out for a positive catalyst to drive market recovery.

That notwithstanding, we would not overlook the possibility of a bargain-hunting motive supporting positive performance, especially with many fundamentally sound stocks remaining underpriced. With the prices of major blue chips continuing to drop in recent weeks, we expect speculative trading to shape the market’s direction this week, despite the seeming negative outlook.

The sustained volatility will continue as investors and fund managers rebalance their portfolios, with eyes fixed on the political space and post-inauguration market dynamics. Investors should review their positions in line with their investment goals, the strength of company numbers and act as events unfold in the global and domestic environment.

However, we would like to reiterate our advice that investors should go for equities with intrinsic value and allow numbers guide their decisions while repositioning in any stock, especially now that stock prices remain low in the midst of mixed company numbers, weak economic and market fundamentals.

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Ambrose Omordion
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https://investdata.com.ng/2019/06/caution-on-ngse-amidst-likely-month-end-portfolio-rebalancing-ahead-march-fy-earnings-season/