Caution Still, As Investors Await More Earnings, Reposition For Interim Div

 

Market Update for the Week Ended July 16 and Outlook for July 19-23

Sectorial rotation and selloff in highly capitalized stocks continued last week as the key performance index, blue chips and mid-cap stocks resisted further decline, reversing up on increased traded volume. This was in the midst of impressive Q2 corporate earnings so far released, and positive economic data, especially the rise in the consumer price index for June which dropped to 17.75%, making it the third consecutive month of decline in inflation amidst soaring prices of food, goods, and services across the country.

This is to be expected, given that the supply side of the economy remains weak and incapable of supporting the rising production cost and prices of manufactured products. There are also mixed sentiments, with the market side-trending at this point in the earnings reporting season, with early filers hitting the market with strong numbers. We see the expected momentum, liquidity, sentiments, and activities associated with the season underway to support the anticipated reversal, given that the NGX index action has formed a hammer candlestick on the weekly time-frame with low volume as wave 5 extension builds on the expected half-year financials ahead of this week’s Monetary Policy Committee meeting’s outcome. 

The broad market and sector indexes are holding strong at this point as the rate of selloff and profit-taking have slowed down ahead with more earnings reports and positive economic data in the face of the persisting weak economic recovery. Also noteworthy is the fact that interim dividend-paying stocks and medium cap equities are resisting decline at their five to six months’ strong support levels ahead of their quarterly financials that are around the corner.

United Capital Plc and Unilever Nigeria released their half-year earnings reports surprising investors with 51 kobo and 12 kobo Earnings Per Share during the week, after turnover improved by 54.6% and 43.2% respectively to N6.85bn and N39.15bn respectively, which beat market and analysts expectations. The market is expected to react to these and other numbers as investors become more confident of good dividends at the end of the current financial year.

We know that corporate and analyst forecasts are made to be beaten. In fact, many analysts have typically increased estimates for Q2 numbers while companies are forecasting higher earnings in Q3, even as higher-than-expected earnings will make stocks cheaper.  At the moment, the market’s Price-to-Earnings ratio, just like those of many companies, is trading below 18 times their earnings. In an environment of relatively low interests and high inflation, stocks historically, tend to move higher on earnings performance.

Traders and investors who understand the importance of combining fundaments and technical analysis in making investment decisions in the stock market should take this opportunity to position in some sectors for medium and short-term gains. They include the banking, telecom, industrial goods, agribusiness, real estate, construction, and consumer goods sectors, after a careful study of economic recovery and sectors that had supported the weak recovery which is likely to influence the performance of the companies in that industry and the market.

Movement Of NSEASI

NGX action index had a mixed performance last week with three sessions of the down market and two days of gains, thereby extending the bear transition for the second consecutive week, as low-priced stocks recorded gains in the midst of mixed sentiments and slight market breadth. The wait-and-see attitude of players was obvious during the week under review, as shown in the volume traded on the daily and weekly charts.

Trading opened for the week Monday on a negative note with the index shedding 0.34%, which was sustained on Tuesday with the composite index sliding down by 0.04% before reversing up at midweek when the NGX index closed 0.08% up. On Thursday, it returned south, slipping 0.07% down, after which retraced up on Friday gaining 0.21%, which was not enough to wipe out the losses recorded earlier in the week. These brought total loss for the period to 0.12%, which was, however; better than the previous week’s 0.57% slide.

Consequently, the benchmark NGX All-Share Index lost 47.01 basis points, closing at 37,947.18bps after opening at 38,994.19bps, touching an intra-week low of 37,854.17bps from its highs of 38,988.90bps on selloffs in high cap and profit booking among the blue-chip stocks. Also, market capitalization dropped by N280bn, closing at N19.77tr, compared to the previous week’s N19.8tr, which also represented a 0.12% depreciation in value.

The weekly advancers’ table was dominated by low cap stocks as usual, in the midst of selloffs and portfolio repositioning and balancing ahead of earnings expectations as investors continue to study trends and the changing environment. Price actions reveal the presence of bears in the market, a situation that reflected on some of the sectorial indexes, three of which closed lower, while the Oil/ Gas and Banking indexes were up.

Also, during the week, the share price NAHCO was adjusted for the 13 kobo dividend recommended by its board of directors, as the corporate bond of C & I Leasing was listed on the exchange.

The seeming negative outing for the week reflected on the market breadth, as decliners outnumbered advancers in the ratio of 32:29 on 75% buy position and 25% sell volume, just as Money Flow Index stayed flat, reading 52.13bps from the previous week’s 52.46 points. This is an indication that funds left the market on profit-taking. 

NGXASI WEEKLY CHART MOVEMENT

From the above, the NGX index action has formed a descending triangle chart pattern of consolidation on a weekly time frame, with the candlestick formation supporting an uptrend which is subject to confirmation next week to give direction, after forming a double bottom that supports a continuation of trend and reversal, ahead of Q2 financials. Already the daily chart has confirmed a change in trend, following which all eyes are on Monday’s trading.

Mixed Sectoral Indices

Performance across the sectors was mixed, with the NGX Energy and Banking indexes closing  1.81% and 0.09% higher respectively, while the NGX Insurance led the decliners after losing 1.07%, followed by Consumer and Industrial goods indexes with 0.85% and 0.30% down respectively.

Transactions in volume and value terms fell, as investors exchanged 1.01bn shares worth N10.92bn, compared to the previous week’s 1.35bn units valued at N12.14bn, with volume driven by trades in Financial Services, Conglomerates and ICT industry particularly GTCO, UBA, Zenith Bank, Transcrop and Chams.

The best-performing stocks for the week were FTN Cocoa and NCR, which gained 20.59% and 20.48% respectively, closing at N0.41 and N3.00 per share on market forces and sentiments. On the flip side, Ikeja Hotel and CHI Plc lost 18.83% and 15.71% respectively, at N1.25 and N0.59 per share, purely profit-taking.

Market Outlook

We expect a sustained trend on more impressive numbers and reduced profit-taking, as market reaction to position earnings continued in the midst of bargain hunter and discerning investors accumulate a position in dividend-paying stocks to realign their portfolio, with all eyes on MPC meeting, just as fixed income market yields are slowing down due to bearish trend in the market.

Any breakout of the recent support level that turns resistance will offer new entry opportunities for traders and investors to reposition in value-laden underpriced growth stocks, while the just-concluded March and April year-end accounts audited full-year numbers submission has supported the recovery of low priced stocks. This is based on the fact that 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 ahead of interim dividend announcement. This is especially given that despite the seeming improvements, fixed income yield continues to offer negative real rate of return due to the 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.

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