Mixed Trends Ahead On NGX, Amid Portfolio Rebalancing, Profit Taking

 

Market Update for the Week Ended May 28 and Outlook for May 31- Jun 4

Over the past few weeks, the Nigerian equity market’s benchmark index NGX All-Share Index has been on the downtrend before consolidating in the week under review, resisting further decline on a low traded volume and mixed sentiments. This reflected low participation by institutional investors or players that are seemingly looking the way of the bond market due to recovery in yields in the fixed income space.

This was obvious on the key performance index which had witnessed deep pullbacks in the month of May, creating opportunities for discerning investors before Friday’s rebound on buying interests in highly capitalized stocks that control 70% of the market. The oscillating trend, so far in the month of May, besides being the result of the rising yields, was due to analysts and investors expectation of economic data to support the Q1 corporate earnings.  The pullbacks were becoming a source of concern for active traders with trading momentum in the short term changing to reflect in the price patterns and candlesticks.

The ongoing divergence in earnings and stock prices, as witnessed lately, reveal the potential of the equity market to create wealth for discerning investors who take advantage of these pullbacks to position in undervalued stocks with a high possibility of beating their earnings forecasts. When earnings are going up and prices are coming down in a recovery market, such trend does not last before correction sets in. 

The monthly NGXASI chart shows the biggest picture, with the market is set to change in June and rally sharply on slowdown in NTB rates, expected March year-end full-year audited results and half-year interim dividend/earnings season as players’ position ahead of actual reports in June and July.  Usually, as prices move away from the bottom, a sharp recovery may take place initially after the bottom completes. Friday’s rebound or initial upward price trend often represents some of the strongest upward momentum after the bearish trend.  

Movement Of NSEASI

It was another bearish week dominated by negative sentiments with the composite index recording losses in four of the five trading sessions, closing marginally lower after Friday rebound.

The NGXASI lost 0.14% to open the week, which was extended to Tuesday when the benchmark index fell by 0.08%, just as it also suffered a 0.06% and 0.46% dip on Wednesday and Thursday respectively. The trend was however halted on Friday when buying interest was rekindled, resulting in a 0.56% gain, bringing the week’s cumulative loss to 0.18%, as against previous week’s 2.93% gain.

Specifically, the NGXASI index shed 67.08 basis points from the 38,324.07bps it opened, after touching intra-week low of 37, 563.79bps, and a high of 38,382.35bps, before closing the week at 38,256.99bps on selloffs in bellwether and medium cap stocks. During the period also, market capitalization lost N35bn, closing at N19.94tr, from previous week’s N19.98tr, also representing a 0.18% loss in value.

During the week, low priced stocks and medium cap equities dominated the advancers table as usual, as profit booking and repositioning continued in expectation of Q2 numbers.  Also, trading and price actions revealed the presence of buyers in two sectors that supported the sideways trading and Friday’s rebound.

The week recorded positive breadth as advancers outpaced decliners in the ratio of 31:29 on buying sentiment and relatively weak momentum, as Money Flow Index looked improved to 33.63bps, from the previous week’s 32.70 points.

NSEASI WEEKLY CHART MOVEMENT

The weekly NGX index action has formed a systematical tringle pattern that supports trend continuation and reversal. The bullish hammer and Doji also signal reversal on the weekly and daily charts in the midst of the buying sentiments and an ongoing portfolio repositioning on the strength of economic data and  Q1 financials ahead of half-year results.

Going forward, all eyes are on oil prices, positive news   and Q2 numbers in the face of rising fixed income yields. There is also an increased volatility in the midst of changing price patterns and trading environment, while discerning investors continue accumulating positions in undervalued and growth stocks.

Also, we note that the index’s candlestick formation on a weekly and daily charts are given signal or direction, so we have to wait for confirmation during Monday’s session, depending on market forces in the new week. We observe that volume traded was low, as the daily timeframe chart signals a top that needs confirmation also on Monday.

Nevertheless, we see the market reversing, especially as investors await March year-end corporate earnings reports, just as the index continues trading below the 39,000 basis points.

The strong support level to watch out for on the NGX is within the 38,000bps and 37,567.18bps, and a breakdown of these levels will attract new positioning by traders and support stronger rebound. This is happening at a time crude oil is approaching the $70 per barrel level at the international market, as more economies reopen for business activities, while the Covid-19 vaccines are on a high gear at the global and domestic levels, despite few climates suffering the second wave. We note that the positive economic data from the U.S and China support oil prices.

However, we envisage a mixed outlook for the rest of Q2, while not ruling out profit booking and repositioning of portfolios especially after the market recorded a sharp uptrend in 2020.

Our expectation of a mixed outlook is hinged on such factors as the possible impact of corporate earnings, ongoing vaccination, mismatch of monetary and fiscal policies, implementation of the 2021 capital budget, as well as implications of oil prices oscillating on the nation’s revenue. We note too, the impact of the Money Flow Index and MACD are bearish on a weekly chart, but bullish on daily time frame.

Mixed Sectoral Indices

Performance indexes across the sectors were bearish, except for the NGX Insurance and Oil/Gas that closed 1.01% and 0.85% higher respectively, while the NGX Banking led the decliners, losing  1.80%, followed by Industrial  and Consumer Goods with 0.43% and 0.07% lower respectively.

The general market’s outlook remains mixed in the short and long-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.

Transactions in volume and value terms were down as players traded 1.04bn shares worth N9.47bn, compared with the previous week’s 1.05bn units valued at N11.54bn. Volume was driven by trades in Zenith Bank, FBNH, Fidelity Bank, etranzact and Transcorp.

Regency Assurance and Consolidated Hallmark Insurance were the best performing stocks for the week after gaining 44.12% and 43.14% respectively, closing at N0.49 and N0.73 each on market forces and impressive Q1 numbers. On the other hand, ABC Transport and Academy Press lost 17.07% and 15.38% respectively, at N0.34 and N0.33per share on profit booking

Market Outlook

We expect the mixed trend to continue as portfolio rebalancing, profit taking and interpretation of economic data and corporate earnings, in the face of rising fixed income market yields. Also, any breakout at this point offers new entry opportunities for traders and investors to reposition in value and underpriced growth stocks, while companies with March year-end accounts release their unaudited and audited full-year numbers to support recovery in the new month. 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 oscillating 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 galloping inflation.

However, the strong and faster recovery may continue, depending on market forces, going forward, as propelled by expected Q2 earnings reports, until the next MPC meeting in July.

Also, the current undervalued state of the market offers investors opportunities to position for the short, medium and long-term, which is why investors should target fundamentally sound, and dividend-paying stocks for possible capital appreciation in the new year.

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Ambrose Omordion

CRO|Investdata Consulting Ltd

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