Amidst Weak Earnings, New Price Methodology Fails To Stop NGSE Hemorrhage, As Market Cap Sheds N620.35bn

Market Roundup for October
Trading on the Nigerian Stock Exchange (NSE) in the month of October, the first month of the last quarter of 2019, ended on a negative note, despite closing positive in the last two sessions of the month, extending five consecutive months of bear transition. 

The negative close on bearish sentiment, successfully defying the NSE new price methodology, in the midst of low liquidity and the influx of mixed corporate earnings reports released over the past two weeks, to meet the regulatory deadline for submission of the scorecards.

It is a known fact that stock markets, as leading indicators of economic activities, are forward-looking, such that current share prices reflect future earnings potentials, or profitability, of quoted companies. Since stock prices reflect expectations about profitability, and profitability is directly linked to economic activity, fluctuations in stock prices are thought to show the direction of any economy.

The continued decline of the NSE’s benchmark All Share index and the weak corporate earnings of listed companies released so far show that all is not well with the Nigerian economy. Of the 111 earnings reports made available to the investing public, all of 52 recorded lower profit, while 13 posted negative numbers for the period ended September 30, 2019.

This is a reflection of the nation’s fiscal and monetary policy stance over the past seven years, given within that time frame, the stock market was up in only 2013 and 2017, and closed negative in 2014, 2015, 2016 and 2018. Already, the market, so far, 2019 is giving signs that only a miracle would change the direction of the market at this time, because the possibility of a positive close this year is very slim, due to the mismatch of fiscal and monetary policies. Also, the implementation of the 2019 budget has not reflected on the economy enough to complement the efforts of the monetary authorities.

The huge appropriation bills in all of these years have not strengthened our economic fundamentals to boost national output as a result of unclear economic policies. For emphasis, there are no good road networks for the movement of goods and services to the market, just as Nigerians have not benefited from the privatization of public power supply, hence the huge expenditure on private electricity generation by individuals and companies.

These have made the cost of goods and services prohibitive, in addition to the high cost of other production variables that have almost crippled the manufacturing sector as reflected in the earnings of companies in the real sector.

Despite the weak investor responses to the mixed numbers as at release dates, which is an evidence of low liquidity and confidence. As mentioned earlier, the Q3 numbers of the companies have revealed the real state of the economy in Q3, besides giving an insight into what the Q3 GDP will look like when published by the National Bureau of Statistics (NBS).

The possibility of prices resisting further decline from here is high, amidst portfolio reshuffling on the strength of the Q3 numbers, just as investors would be assured of reward in the form of dividends when the full-year score-cards begin to flow into the market in the early days of 2020. It is expected that discerning investors and traders would take advantage of the prevailing low stock prices, year-end season and cycle to grow their income, ahead of major earnings season in the first quarter of 2020

In the 22 trading wessions of October, the market was up in just five sessions, and down in 17 trading days, deepening the five months of loses, bringing the year-to-date negative position to 16.15%, which makes the Nigerian bourse one of the worst-performing MSCI Frontier markets across the globe.

The low valuation of quoted companies, their fundamentals, and the seemingly positive macroeconomic indices may attract inflow to the Nigerian stock market, with many equities selling between their 52-week and five-year lows, offering higher upside potential.

Meanwhile, the composite NSE All-Share Index in the month lost a total of 1,275.20 basis points, closing at 26,355.35 after touching a high of 27,645.46bps and low of 26,113.88bps within the period, compared to the 27,630.56 at which it opened. This represented a 4.84% decline over the period on strong selloffs that impacted negatively on stock prices, pushing them further down.

Total ‘sell’ volume for the month was 84%, and ‘buy’ position, 16%, further prolonging the bear-run in the last quarter, while volume index for the period was 0.67. Market capitalisation fell by N620.35bn, closing lower at N12.83tr, from N13.45tr, representing a 4.84% value loss. Traded volume for the period was up 17.10%, at 4.93bn shares, as against 4.21bn units recorded in the preceding month.

The ASI’s year-to-date loss stood at 16.15%, whereas market capitalisation for the same period adjusted up to N1.13tr, representing a 9.68% gain YTD from the opening value.
Market breadth for the month was negative with the decliners outnumbering advancers in the ratio of 62:24 to extend the five months down market that was as a result of factors mentioned above.

Insurance Sector Close Positive Others Down

The sectoral performance chart below shows that the NSE Consumer Goods and Banking indexes dragged the market down the most in the month under review, while, the NSE-50 index lost 7.75%, driven by price decline in Dangote Cement, MTNN, GTBank, Zenith Bank, NB, Guinness, PZ and Lafarge Africa, the banking index fell by 8.92%, faster than the composite NSE All-Share Index during the period.

It was followed by the NSE-30, which shed by 6.69% to reflect the performance of blue-chip stocks on the exchange, while the NSE mainboard and Industrial Goods indices lost 5.85% and 4.38% respectively, revealing investors’ negative sentiment and the indecision among traders, despite the low Price-To-Earnings attraction.

The only sector that closed up during the month was the NSE Insurance, which notched 3.62% on the strength of the ongoing recapitalization n the sector,

Best And Worst Performing

The month’s best-performing stocks were low caps from the insurance sector, led by Consolidated Hallmark Insurance that gained on the strength of positive sentiment, rallying up by 42.86%, followed by industry peers- Continental Reinsurance, which appreciated by 15.94%; and Law Union Insurance’ 15.38%. University Press climbed 15.04%, despite its mixed numbers; just as NASCON Allied, 10.82%; among others.

The worst performing stocks for the period was led by Guinness, which lost shed 29.85% off its opening price, amidst selloffs and poor earnings performance in the recent numbers released; PZ Cussons lost 21.43% also as a result of its unimpressive earnings; just as Oando declined by 17.29%. Lafarge Africa closed 16.35% lower for the month; just as GTBank dropped 14.73% on the back of selloffs and profit-taking, after posting flat Q3 earnings.

Technical View
Index action for the month of October reversed the attempted rebound in September to extend the two ongoing corrections as a result of mixed sentiment and weak market fundamentals.

The market is still trading within the bearish channel and below the 20-day moving average, despite the improved volume of trade to reflect increased selloffs of stock in October, which was also the earnings reporting season.

With the mixed numbers released, trading patterns and momentum going forward are likely to change amidst portfolio rebalancing and repositioning ahead of year-end and seasonal cycles. Market technicals for the market were negative which is expected to reverse in the new month.

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