Mixed Trend Ahead, As Investors Await More Earnings, MPC Meeting Outcome

Market Update for the Week Ended July 23 and Outlook for July 26-30

NGX Indexes were up over the past trading week, despite the two days Salah holiday, as earnings reports season commenced fully with more impressive numbers emanated from different sectors and companies on the exchange. This, expectedly, boosted market sentiment, as it turned positive, with improved liquidity and activities that impacted equity prices, halting two consecutive weeks of correction and profit-taking.

The recent rekindled buying interests and rally resulted from investors realigning their portfolios among sectors and stocks with high upside potentials, with their expected earnings likely to beat market and analyst expectations.

Already, corporate earnings released so far have given insights into what the market and investors should expect, especially with the prevailing mixed and weak macroeconomic indices ahead of next week’s Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) meeting with the expectation that members will retain the benchmark rates. Many feel that economic recovery, so far, is weak and fragile such that any form of hike in interest rate, no matter how mild, could truncate the process. This is given that the supply side of the production chain is still lacking due to the high cost of production, imported inflation, Naira devaluation, lack of infrastructure, high cost of energy that continues to fuel the cost of transportation, among others.

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 as in many companies, is trading below 18 times of earnings. In an environment of relatively low interest and high inflation, stocks historically tend to move higher on earnings performance.

Many discerning investors and smart money are already positioned in some sectors and stocks for medium and short-term gains, including banking, energy, telecom, industrial, agribusiness, real estate, construction, and consumer goods. Note that these are sectors where the high operating costs have been transferred to consumers, 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

The three trading sessions of bull transition for the period was supported by increasing traded volume on the daily time frame, thereby halting the weeks of decline on improved positive sentiment to breakout the recent resistance level, as blue chips and mid-caps stocks recorded gains in the midst of impressive scorecards and positive market breadth. The repositioning move of market players was obvious during the week under review, as shown in the volume traded on the daily and weekly charts irrespective of the holidays.

Trading for the week opened on a positive note, which is an extension from the previous Friday’s bull session as the benchmark NGX All-Share index gained 0.12%, which was sustained on Thursday and Friday after NGX index recorded uptrends of 1.67% and 0.21% respectively. These brought total gains for the period to 1.9%, which was better than the previous week’s 0.12% loss.

Consequently, the NGXASI gained 720.72 basis points, closing at 38,667.90bps after opening at 37,947.18bps, touching an intra-week high of 38,667.90bps from its lows of 37,912.50bps on buying sentiments in high, medium, and low cap stocks. Also, market capitalization rose by N376bn closing at N20.15tr, as against the previous week’s N19.77tr, which also represented a 1.9% value gain.

Low and medium cap stocks dominated the advancers’ table during the brief trading period as usual, as more impressive corporate earnings poured in amongst portfolio repositioning ahead of the month-end and MPC meeting as investors continue to study trends and the changing environment. Price actions revealed the presence of bulls in the market, a situation that reflected on some of the sectorial indexes, four of which closed higher, while the Insurance index recorded a decline.

Also, during the week, Total Nigeria released its half-year earnings reports with an interim dividend of N4.00 on impressive numbers, just as BOC Gas and Africa Prudential also made available their half numbers. While that of BOC Gas was impressive, Africa Prudential’s financials came below market expectations.

The week’s positive outing for the few trading sessions of the week was an expectation that boosted market breadth, with gainers outnumbering losers in the ratio of 42:16 on 100% ‘buy’ volume. Money Flow Index was up, reading 59.01bps from the previous week’s 52.13 points, an indication that funds entered the market on profit-taking. 

NXGASI 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 rectangle that supports a continuation of trend and reversal, ahead of more quarterly results. Already, the daily chart has confirmed an uptrend, following which all eyes are on the outcome of the week’s MPC meeting.

Bullish Sectoral Indices

Performances across sectors were bullish, except for the NGX Insurance that closed south. Activities in volume and value terms fell, as investors exchanged 816.17m shares worth N5.24bn, compared to the previous week’s 1.01bn units valued at N10.92bn, with volume driven by trades in Financial Services, Consumer goods, and Conglomerates, particularly Jaiz Bank, Sterling Bank, Fidelity Bank, and 

Transcrop

Cutix and Total Nigeria were the best-performing stocks for the week, after gaining 32.50% and 20.95% respectively, closing at N4.81 and N203.20per share on impressive earnings and payout. On the flip side, Smart Products and Sovereign Trust Insurance lost 38.40% and 12.12% respectively, at N0.15and N0.29 per share, purely selloffs and profit-taking.

Market Outlook

We expect a mixed trend on more impressive numbers and outcome of MPC meeting, as market reaction to positive earnings continues 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-released corporate earnings have supported the recovery of low, medium, and highly-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 a 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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