Undervalued Stocks Attract New Positioning Ahead of Earnings Season End, MPC Outcome

 


Market Update for the Week Ended March 19 and Outlook for March 22-26

Trading activities on the Nigerian Stock Exchange (NSE) last week was mixed and volatile as the composite All-Share index’s action tried to resist further decline but gave way following pressure from selloffs, especially among high cap stocks that suffered losses during the period under view. This is coming ahead of next week’s peak of earnings reporting season which coincides with the oscillating price of crude oil and next week’s all-important meeting of the Central Bank of Nigeria’s Monetary Policy Committee.

The index witnessed a mixed trend and sideways movement before finally breaking down the 38,412.48bps level, extending the downtrend for the seventh consecutive week on pullbacks and price correction. It is important also to note that the market turned up on improving demand for stocks by bargain hunters, which reflected on market breadth and above-average traded volume for the week.

The change in the trading environment with fixed income rising yields and improved dividend yields in stock market due to pullbacks have left many investors confused as stock prices are not responding to released numbers and dividend payouts. However, ability to anticipate the trend in bonds will help you better understand the stock market trend, we will explain more during our master class holding very soon.

With the market turning up technically as revealed by indicators, traders should wait to confirm this new trend on Monday and Tuesday. Even then, the ongoing selloffs present huge buying opportunities for discerning investors to create wealth, given the seeming early economic expansion, following economy’s exit from recession. This is visible also in the recovery in productivity as confirmed by the improvement in Purchasing Managers’ index at 52.7 points in Purchasing Managers’ index Purchasing Managers’ index for February, up from 50.7 points in January. This gradual improvement, Investdata believes, will be threatened, should members of the MPC vote under pressure by the nation’s galloping inflation to raise rates.

Nonetheless, the early stage of recovery and current happenings in the environment offer big opportunities as some sectors and companies continue to benefit from the COVID vaccination now driving global and domestic recovery, which will in turn support oil price despite the oscillation being witnessed at the moment.

Investors and traders must, therefore, target the right sectors and stocks for higher capital gains and yields to stay above inflation in the short-term, following which the equity market remains the best investment hedge, regardless of the rising yields in the fixed income market.

The NSE benchmark index is currently trading below the 38,412.28 basis points support level, a sign of volatility towards the next one sported around 38,000.00bps. Should the index break this point, we reiterate the point that the next visible support is far below at 34,396.3bps, unless there is positive news, or favorable policies capable of knee-jerking the market, while boosting liquidity and sentiments. 


Movement Of NSEASI

The negative sentiment during the week was boosted by selloffs in MTN Nigeria, Dangote Cement and BUA Cement, bringing the week’s total loss to 0.69%, an improvement over previous week’s 1.74% fall, on an above average traded volume and positive breadth.

Consequently, the ASI lost 266.09basis points during the week, from its opening level of 338,648.48bps, touching an intra-week low of 38,309.63bps, compared to a high of 39,053.85bps, attributable to mixed sentiment and selloffs among the high cap stocks. Also, market capitalization fell by N139.22bn to N20.08tr from the previous week’s N20.22tr.

The week’s advancers’ table was dominated by low and medium cap stocks as selloffs hit high cap equities, with the trading and price pattern revealing selloffs and accumulation in some stocks in the midst of mixed sentiment. Added to this was the impact of adjustments in the share prices of Dangote Sugar and Africa Prudential, which further depressed the market.

During the period, advancers outnumbered decliners in the ratio of 33:25 on a selling sentiment and weak momentum as Money Flow Index read 53.54bps, down from 54.01 points in the previous week. During the week also, UBN and Guaranty Trust Bank released their full-year earnings reports, with their directors offering 25 kobo and N2.70 dividends respectively .


NSEASI WEEKLY CHART MOVEMENT

The bearish trend subsided on the NSE despite Friday’s dip, as the benchmark index’s action continued on negative outing and volatility in the midst of changing price patterns and trading environment, as dividend investors accumulated positions in dividend paying and growth stocks.

Also, the index has broken down the 14-day moving average and is above the 20, 50 and 200-DMA on a weekly chart, despite breaking down the 38,412.48bps-mark’s strong support level on above average traded volume and selling sentiments. This is likely to reverse as more players’ position for end of the month and quarter in expectation of earnings, and based on the outcome of next week’s MPC meeting.

Nevertheless, it is expected that the market will rebound at any time soon, especially as more listed companies releases their numbers to the market and trade above the 38,000bps level.

The strong support level to watch out for on the NSE is within the 38,309.63bps and 38,000bps, and a breakdown of these levels will attract new positioning by traders. This is coming at a time crude oil is trading above $65 per barrel at the international market, while the distribution of vaccines is ongoing among the various state governments.

However, we envisage a mixed outlook for the rest of Q1, while not ruling out the ongoing profit booking, especially after the market recorded an uptrend last year.

Our mixed outlook is hinged on factors like the possible impact of corporate earnings, mismatch of monetary and fiscal policies, in addition to the 2021 capital budget, implications of oil prices oscillating around  $65 and $70 per barrel on the nation’s revenue, just as Money Flow Index and MACD are bearish on a weekly chart.


Mixed Sectoral Indices

Performance indexes across the sectors were mixed, with the NSE Banking and Energy, closing 2.09% and1.59% higher respectively, while the NSE Industrial goods led the decliners after losing 2.62%, followed by Consumer Goods and Insurance that closed 1.46% and 0.01% lower.

The general market’s outlook remains dicey and mixed in the short-term; following which investors should take short and medium-term positions, while diversifying their portfolios along long-term trades to protect capital. This, they can do, by considering sectors with high upside potentials on the strength of earnings and policy influence.

The recent market pullbacks call for portfolio adjustments and realignments, as unaudited and audited numbers from some companies and sectors will expectedly come mixed, given the negative impact of the COVID-19 pandemic and the arson that followed the #EndSARS protests on full-year results, as revealed by the macroeconomic indices.

Transactions in volume and value terms were mixed as volume grew by 39.29% to 2.34bn shares, from the previous 1.68bn units, while transaction value dropped by 18.14% to N19.27bn, from N23.54bn. Volume was driven by trades in Financial Services, Natural Resources and Conglomerates sectors, particularly Unity Bank, Guaranty Trust Bank, Multiverse Mining, Zenith Bank and Transcorp.

Eterna and NNFM were the best performing stocks for the week, gaining 20.78% and 9.73% respectively, closing at N5.58 and N6.20 each on market forces and earnings expectations, while Neimeth Pharmaceutical and Africa Prudential  lost 14.83% and 10.08% respectively, at N1.78 and N5.35 per share on profit taking and price adjustment for dividend. 


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 and outcome of the MPC meeting during this earnings season. Also, the pullbacks offer bargain hunters and income investors another opportunity to reposition in value and underpriced growth stocks, 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 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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CRO|Investdata Consulting Ltd

info@investdataonline.com

info@investdata.com.ng

ambrose.o@investdataonline.com

ambroseconsultants@yahoo.com

Tel: 08028164085, 08032055467

https://investdata.com.ng/undervalued-stocks-attract-new-positioning-ahead-of-earnings-season-end-mpc-outcome/

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