NGSE Index Bows To Profit Taking Pressure, Inflation Fears, As Investors Realign Portfolios

Market Update for November 18

Trading activities on the Nigerian Stock Exchange (NSE) on Monday bowed to the expected profit-taking pressure, capital wave and disappointing inflation report for October which rose to 17 months high at 11.61%, from September’s 11.24%. The rise in Consumer Price Index further dragged returns on Treasury Bills into negative territories, following which fixed income market yields are already threatened. This is due to the clash in fiscal and monetary policies arising from the impact of the three-month closure of Nigeria’s land borders to check smuggling. Although, the effects of the closure have not all been negative, given the drop in the country’s consumption of petroleum products. There is also inflationary impacts such as the heavy rainfall that affected farm produce, the increasing demand for goods in preparation for the festive season that is just weeks away, as well as the recent drop in money market rates that further pushed inflation up, as a result of the expected increase in consumption.  

When we factor in the latent impact of the border closure and subsequent rise in food prices, Nigeria’s effective inflation rate may actually be around 16%, which is one reason foreign investors are watching with concern to see how long the country can defend its Naira before it completely unravels the hidden effects of the policy mismatch and summersault on the economy. Low and falling inflation, according to analysts, indicates that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating.

Also, a low-interest rate will support and drive economic growth by making available, cheap funds that will make housing more affordable, for example, and allow more homeowners to refinance. Lower corporate bond rates will encourage investment, just as higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will ultimately lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

Meanwhile, Monday’s trading opened on the downside as profit booking from last week’s rally hit the market and was sustained all day long, despite the oscillation during the session, as the NSE index touched intraday low of 26,666.40 basis points, from its high of 26,851.68bps. It, therefore, closed the day lower at 26,691.09bps on a low traded volume. 

Market technicals for the session were negative and mixed in the midst of positive breadth and mixed sentiment as revealed by Investdata’s reports showing a 'buy' volume of 52% and ‘sell' position of 48%. The day’s Transaction Volume Index stood at 1.01, while the momentum behind the day’s performance slowed down with Money Flow Index reading 50.84 points, from the previous session’s 57.87bps. This is an indication that funds exited some stocks and the market as funds flow to FGN Bonds.

Index and Market Cap

At the end of Monday’s trading, the All-Share Index lost 160.59bps, closing at 26,691.09bps from its 26,851.68bps opening, which represented a 0.60% decline, just as market capitalization lost N188.76bn, closing at N12.88tr, from an opening value of N13.07tr. This represented a 1.44% value loss, resulting from Monday’s delisting of Dangote Flour Mills, following its acquisition by Olams International through its subsidiary- Crown Flour Limited (<a href="https://investdata.com.ng/2019/11/aftermath-of-olam-acquisition-ngse-delists-dangote-flour-mills/">READ MORE</a>).

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The day’s decline was driven by profit-taking in stocks like Zenith Bank, Access Bank, UBA, FBN Holdings. Ecobank Transnational Incorporated, Wema Bank, Okomu Oil, and Transcorp Plc. These impacted negatively on the NSE’s Year-to-Date loss, which increased to 15.08%, while market capitalization gain dropped to N1.16tr, representing 9.91% growth over the year’s N11.72tr opening value.

Mixed Sector Indices

The sectoral performance indexes were largely bullish, except for NSE Banking that closed 2% lower on profit-taking, while the NSE Consumer Goods index led the advancers, after gaining 0.42%, followed by the NSE Insurances index which climbed 0.01% up, just as the NSE Industrial Goods and Oil/Gas closed flat.

Market breadth remained positive as advancers outnumbered decliners in the ratio of 16:14, while market activities were down in volume and value traded by 34.48% and 54.56% respectively to 307.96m shares worth N2.54bn from previous day’s 459.99m units valued at N5.59bn. This volume was driven by transactions in UACN, Zenith Bank, UBA, Access Bank and FBNH.

Nemeith Pharmaceuticals and Jaiz Bank were the best-performing stocks, topping the advancers table, after gaining 10% and 9.86% respectively to close at N0.44 and N0.78 each, on the back of market forces and sentiments. On the flip side, Wema Bank and FCMB lost 7.89% and 7.50% respectively, closing at N0.70 and N1.99 purely on profit-taking and market forces.

Market Outlook

We expect mixed performance to continue on capital wave, profit-taking, repositioning in value stocks and portfolio adjustment as market players digest the Q3 scorecards and read unfolding sentiment in expectation of improved liquidity as interest rates drop in the money market ahead of MPC meeting. The recent NSE’s new lows offer investors opportunities to position for short and medium-to-long-term views. We expect that investors would target fundamentally sound and dividend-paying stocks for possible capital appreciation as the year draws down.

Also, traders and investors need to change their trading strategies due to NSE’s pricing methodology, CBN directives and its impact on the economy in the nearest future, as well as other fiscal policy initiatives that may provide liquidity for the economy and market.

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