26-Month Bear-run: Caution Still, As Investors Await Q2 Earnings, Fiscal Stimulus, To Rescue NGSE Index

Market Update for the week ended July 19 and Outlook for July 22-26
Stocks closed lower on the Nigerian Stock Exchange (NSE) over the past week, despite Friday’s marginal gain as the benchmark All-Share index closed the period on a negative note after touching a new lower low of 27,803.57 basis points. It extended its third consecutive week of decline on a low volume amidst selling pressure across all market sectors.

The absence of economic reforms policies and direction by the government has finally dragged the benchmark NSE index below the 28,000 mark as investors review the political risk associated with the failure by government to appoint a cabinet almost two full months after President Muhammadu Buhari took his oath of office for the second four-year term. The situation becomes even worse when the severe insecurity situation is factored into the equation, as well as weak government earnings, low liquidity, and low purchasing power, all of which are showing in the nation’s mixed economic fundamentals. These have, so far, also played out in the ongoing selloffs and volatility on the NSE, given that the stock market as a leading economic barometer had suffered losses in the last 26 months, which can be appropriately termed a recession. The market’s prolonged bear-run is an indication that something is indeed wrong with the Nigerian economy, given that it cannot be separated from the systemic problems in the nation’s socio-economy.

The market and economy have been rocked back and forth in recent years on a mixed outlook on the global economic sphere, the prevailing negative sentiment and low confidence in the system. Considering the ongoing trade dispute between the U.S and China, the Fed’s plan to cut rates in the face of oscillating crude oil price has slowed down pressure on emerging markets currency. This is expected to pave way for the nation’s monetary policy to further reduce the benchmark Monetary Policy Rate (MPR) so as to make funds cheap while increasing credit flows that will boost productivity and consumption as desired by Central Bank of Nigeria (CBN).

The key macroeconomic indicators suggest that a cut in interest rate will help ongoing CBN efforts at stimulating economic growth and development. For instance, the Purchasing Managers Index (PMI), which measure of the rate of expansion in the nation’s manufacturing activities, eased from 57.8 points in May 2019 to 57.4 points in June, which suggests weakening expansion in the sector, attributable to the high cost of capital and the poor state of critical infrastructures like power and transportation.
We, however, believe a further cut in MPR at this time will result in an expansion of the PMI in the coming months due to a reduced cost of capital.

We also believe that the spillover effects of a further cut in the MPR will increase the production and employment capacity of the real sector, as well as the purchasing power of many consumers in the near term to oil the macro-economy. This will, in turn, impact the performance of the equity market as surplus economic agents will likely consider making new investment decisions, while producers (taking advantage of the reduced cost of funds) will declare better dividends.
Election season is over and harvest season is here to help keep inflation under check and ahead of the minimum wage implementation.

Movement Of NSEASI
Meanwhile, the composite NSEASI opened last week on a negative note losing 0.81%, an extension of the previous session’s loss as selloffs continued. This trend was maintained on Tuesday, Wednesday, and Thursday as stocks shed 0.41%, 0.56%, and 0.64% respectively, before Friday’s rebound, gaining 0.20%. This brought the week’s total loss to 2.27% which was slightly lower when compared to the previous week’s 2.41% decline.

The market witnessed a huge selloff during the period to further push the NSE’s year-to-date loss to 11.17%; while market breadth was yet negative, as selling pressure increased due to a lack of liquidity and economic direction, as investors continue to adopt the wait-and-see attitude ahead of the Q2 earnings reporting season, especially for interim dividend-paying stocks.
Kobo stocks and low cap equities were the week’s top gainers, dominating the advancers table, while highly capitalized and blue-chip stocks remained under intense ‘sell’ pressure in the midst of a low traded volume and the prevailing low liquidity.
The momentum behind the week’s performance was weak, as shown by the money flow index at 17.50 basis points, compared to 17.00bps in the previous week, indicating that new funds are not entering the market but moving among some stocks. Also, sentiments remain negative and mixed, with a sell position at 85% and ‘buy’ volume, 15% on a transaction volume index of 0.63.

NSEASI Weekly Time Frame
The selling pressure in medium and high cap stocks increased as many touched their new 52 weeks low in the midst of free fall in equity prices and the Q2 earnings season on a low transacted volume which reveals accumulation and indecision among traders as money flow index remained weak, even though it managed to inch up (READ MORE). The poor liquidity and negative market breadth supported the pullback, but Friday’s rebound signals that bargain hunters are repositioning, a situation which may support recovery, especially as more company are expected to release their numbers in this last full week of the month. However, the expected reversal will be a function of liquidity and the strength of half-year scorecards

Nonetheless, the low transaction volume in the market raises hope for a bull run in a bearish market.
The current chart pattern on the NSEASI supports a reversal, as it trades below its 20-Day Moving Average and on top of the lower Bollinger band, line, while RSI is reading ‘oversold’ at 32.68. But then, Money flow at 17.50 points remains weak.

BearishSectoral Indices
All the sectoral performance indexes for the week were in red, with the NSE Oil/Gas led the decliners after shedding 5.70%, followed by the NSE Industrial Goods index with 5.17%, just as the banking, insurance and Consumer Goods indexes closed at 4.30% , 3.77% and 0.01% down respectively.

The selling sentiment across all sectors is coming at the peak of earnings reporting season and a negative market breadth with decliners outnumbering advancers in the ratio of 52:15, to withstand the down market.
Market activities were mixed as volume was up by 10.10% to 1.09bn shares, compared to 988.49m units traded in the prior week, while value slipped by 3.25% to N13.39bn from N13.84bn in the preceding week.
The best-performing stocks for the week were LASACO and Abbey Mortgages that topped the advancers’ chart with 13.79% and 10% gains respectively, to close at N0.33 and N0.99 per share on 3kobo dividend and market forces. On the flip side, McNichols and CCNN lost 18.18% and 17.24% respectively, closing at N0.45 and N12.00, on profit-taking.

Market Outlook
We expect bargain hunting at this point and repositioning for half-year earnings reporting season to change the market direction this week, considering the positive inflation data for June ahead of the MPC meeting slated for Monday and Tuesday, as discerning investors take advantage of low valuation to buy into interim dividend stocks and undervalued equities.
They may also take into consideration the expected economic reforms as government announces its much-awaited new cabinet, just as plans by the CBN to reduce banks’ participation in government securities is expected to boost private-sector lending to drive economic activities and investment.

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
CRO|Investdata Consulting Ltd
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