Mixed Trend May Linger, Amidst Corporate Earnings Expectations, Rising Yields
Market Update for March 16
It was yet another mixed and volatile session on the Nigerian Stock Exchange on Tuesday, as the benchmark All-Share index, closing higher and halting three successive days of decline after a long downtrend.
This, however, is yet to signal anything, even as the index was pushed up by combined effects of the 3.55% and 1.20% price appreciation in Dangote Cement and MTN Nigeria respectively, as investors continue to cut their exposure in banking stocks. This may have been influenced by the unexpected dividend cut witnessed in UBA. Observe that since the release of that result, and despite the fact that UBA’s share price has resisted further decline, other banking stocks yet to announce their 2020 full-year results are recording price drops. This has nonetheless made the sector more attractive for new entrants.
Nigeria’s rising inflation rate remains a risk to the economy and investing public, amidst concerns among investors about the geometric rise, since August 2019, towards the all-time high last seen in the 90s. February consumer price index hit 17.33%, from 16.47% in January thereby worsening the negative real rate of return in the fixed income space, despite the rising yields. This higher-than-expected inflation rate, driven by the obvious misalignments in government policies, in addition to the unchecked rise in insecurity, high electricity tariff, and the pump price of fuel, continue to wreck the biggest damage to the economy and market.
The worsening negativity in the real rate of return in the markets could trigger sales off in the face of rising yields and earnings season, a situation that could change the views and expectations of economic recovery in 2021 among fund managers. Worsening the already bad situation is the nation’s unemployment rate of 33.3%, according to the National Bureau of Statistics.
There was however some reprieve in the form of the seeming recovery in productivity as indicated by the February Purchasing manager index at 52.7 points, up from 50.7 points in January. This early expansion and exit from recession are already threatened if members of the Monetary Policy Committee vote to raise rates owing to pressure from the galloping inflation.
Nonetheless, bigger capital gains and yields are required to outrun inflation in the short term, following which the equity market remains the right investment vehicle today, despite the rising yields in the fixed income market. This is especially true during this earnings season’s peak with offer of dividend payment and reward to investors, with Zenith Bank, for example, having a dividend yield of 11.25% within less than four weeks of announcing its 2020 full-year numbers.
The market is currently trading below the 39,000 basis points support level,a sign of volatility towards the next one that has been sported around 38,464.00bps. Should the index break this point, the next visible support is far below at 34,396.3bps, unless there is positive news or favourable policies capable of knee-jerking the market, while boosting market liquidity and sentiments.
Tuesday’strading opened slightly on the upside and oscillated on buying interests in high, medium and dividend-paying stocks, and selloffs in banking stocks, pushing the NSE’s index to an intraday high of 38,846.27 basis points from its lows of 38,531.86bps.
Market technicals were positive and weak, with volume traded higher than previous day’s in the midst of negative breadth and mixed sentiment as revealed by Investdata’s Sentiments Report showing 60% ‘buy’ volume and 40% ‘sell’ position. Total transaction volume index stood at 0.56 points, just as momentum behind the day’s performance remained weak, with Money Flow Index looking down at 21.73pts, from the previous day’s 25.71pts, indicating that funds left the market, despite the day’s gain.
Index and Market Caps
At the close of Tuesday’s trading, the All-Share index gained 158.97bps, closing at 38,561.84bps after opening at 38,561.84bps, representing a 0.41% rise. Similarly, market capitalization rose by N83.18bn, closing at N20.26tr, from the previous day’s N20.18tr, which also represented 0.41% appreciation in value.
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The day’s upturn was driven by demand for stocks like Dangote Cement, MTNN, Guinness Nigeria, GSK, and Vitafoam, among others. This impacted positively on Year-To-Date loss, reducing it to 3.85%, just as market capitalization loss ballooned to N1.15tr, or 3.60% below its opening value for the year.
Mixed Sector Indices
Performance indexes across sectors were mixed, as the NSE Industrial and Consumer goods indexes closed 1.70% and 0.23% higher respectively, while the NSE Banking index led the decliners, after shedding 3.51%. it was followed by Insurance with 1.07%.
Market breadth was negative, as decliners outnumbered advancers in the ratio of 20:11; just as activities in volume and value terms improved, as players exchanged 220.86m shares worth N4.21bn. The day’s volume was driven by transactions in UBA, Access Bank, Mutual Benefits Assurance, AXA Mansard Insurance, and Guaranty Trust Bank.
Guinness Nigeria and Regency Insurance were the best-performing stocks, after gaining 10% each, closing at N25.30 and N0.33 per share respectively on market forces and earnings expectations. On the flip side, Coronation Insurance and Africa Prudential lost 9.09% and 8.26% respectively, closing at N0.50 and N5.00 per share, on profit-taking and selloff.
Market Outlook
We expect the mixed trend to continue as more corporate earnings hit the market in the face of rising fixed income market yields, oil prices and high dividend yields during this earnings season. Also, the pullbacks offer bargain hunters and income investors another opportunity to reposition, while more companies release their full-year numbers to support recovery. This is based on the fact that the rising fixed income yields may not be enough to scare all investors away from the equity market.
Again, the way to go is: Target dividend-paying stocks and fundamentally sound companies with growth prospects in 2021, looking the way of mispriced equities. This is especially given the rising oil prices that have so far supported the economy and equity market, despite the seeming improvement in the fixed income yield which had remained at the negative real rate of return due to the subsisting high inflation.
However, the strong and faster recovery may continue, depending on market forces, going forward, as propelled by expected 2020 full earnings reports, until the next MPC meeting in March.
The NSE’s index action and indicators are in divergence on a low traded volume and positive buying sentiments.
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