Caution, NGXASI Pulls Back Amidst Earnings Season Peak, As Investors Study 2021H1 Numbers, Devts
Market Update for July 28
The nation’s stock market had a mixed and very volatile session at the midweek, thereby extending the negative outing for the second consecutive day after recording a marginal decline as investors digest likely impacts of the Monetary Policy Committee meeting’s outcomes. Governor of the Central Bank of Nigeria and chairman of the MPC announced on Tuesday after the two-day meeting its decision to discontinue the weekly sale of to Bureax De Change operators. Were the apex bank to sell about US$110.1m at between US$5,500 to US$20,000 each BDC weekly, it will amount to US$5,72bn yearly.
The decision to stop FX sales to BDCs really makes the license less attractive and creates tighter FX liquidity in the parallel market, especially as I doubt whether the banks can really meet the demand of BDC clients, most of whom do not meet relevant CBN criteria, which banks would adhere to. Hence, this decision may further widen the spread between official and parallel market rates for FX. Even so, I think it is exigent to stop the rent-seeking and arbitrage of BDCs, who buy FX from CBN at N410, only to sell at N504.
The approach of the CBN in managing the transition will determine the ultimate impact of this decision on the economy, even as we have seen the expected knee-jack reaction in the parallel market, with a rally of USD towards N520. Investdata notes that although the recent announcement does not provide full clarity of the CBN’s approach, this move is, however, a plus for the banks in terms of improved performance and profitability.
Wednesday’s mild decline happened at the peak of earnings reporting season that had been characterized by positive scorecards, on a day when sellers had the upper hand as traders took profit from the financial sector. It was also on a day when the share prices of first-tier banking stocks recorded pullbacks ahead of their half-year earnings reports. We are seeing more companies rushing to meet the regulatory submission timeframe, and expect that market volatility will continue.
The slowdown in momentum at the end of midweek’s trading and the divergence between the NGX index action and indicators are somewhat, although it thus suggests that this profit-taking may not endure. This is because the earnings inflow remains robust enough to support market fundamentals and stock prices, going forward.
Also, the market’s prevailing relative low Price-to-Earnings ratio at this peak of earnings season is a reflection of the value and growth potential of stock prices, especially as many analysts and companies are forecasting higher earnings for Q3. These higher-than-expected earnings will make stocks cheaper, a situation that will drive prices up in the short to long run, even as in many companies, the market is trading far below 18 times of earnings.
In an environment of relatively low interest and high inflation rates, stocks historically tend to move higher on earnings performance that supports high payouts, allowing investors to hedge against soaring prices.
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Meanwhile, midweek trading opened on the upside and sustained till late afternoon before pulling back on profit-taking in banking and insurance stocks that pushed NGX index to an intraday low of 38,788.73 basis points from its highs of 38,829.61bps, and thereafter closed below its opening figure at 38,791.03bps on less than average traded volume.
Market technicals were negative and weak on Wednesday, amidst the lower volume traded than the previous day’s, in the midst of negative breadth and selling sentiment as revealed by Investdata’s Sentiments Report showing 94% ‘sell’ volume and 6% buy positions. The total transaction volume index stood at 1.02 points, just as momentum behind the day’s performance was relatively strong, as seen in the 61.95pts Money Flow Index, compared to the previous day’s 69.45pts, indicating that funds left the market on profit booking.
Index and Market Caps
The composite NGXASI, at the end of the day trading, declined slightly by 11.12 basis points, closing at 38,781.03bps, from an opening level of 38,802.15bps, representing a 0.02% drop, just as market capitalization fell by N5.79bn, closing at N20.22tr, from its opening value of N20.22tr, also representing a 0.02% value loss.
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Midweek’s downturn was attributed to profit-taking in stocks like GTCO, Zenith Bank, Access Bank, UBA, Fidelity Bank, FBNH, FCMB, UACN, United Capital, Eterna, CHI Plc and Regency Insurance among others. This impacted mildly on Year-To-Date loss which inched marginally to 3.67%, while the loss in market capitalization YTD rose to N846.07bn, representing a 4.01% drop from its opening value for the year.
Mixed Sector Indices
Performance indexes across sectors were mixed, as the NGX Banking and Insurance were down by 0.96% and 0.88% respectively, while NGX Oil/Gas index led the advancers, after gaining 1.68%, followed by Consumer goods with 0.11%.
Market breadth turned negative as losers outnumbered gainers in the ratio of 24:18, while activities in volume and value terms dropped while players traded 237.51m worth N1.88bn, compared to the previous day’s 243.09m units, valued at N1.9bn. Volume was boosted by trades in Oando, UBA, Wema Bank, Access Bank, and Jaiz Bank.
Capital Hotel and Oando were the best-performing stocks, gaining 9.85% and 9.81%, while closing at N2.90 and N5.26 per share respectively on market sentiment and forces, as some investors took profit in Oando Plc, offering opportunities for new entrants after days of scarcity. On the flip side, CHI Plc and Tripple Gee lost 10% each, closing at N0.54 and N0.90 per share, on profit-taking.
Market Outlook
We expect a reversal and a mixed trend at the peak of earnings season, as investors study emerging numbers so far and development in the FX market, while more earnings reports hit the market. The improvement in volume suggests that smart money is taking advantage of the pullbacks and relatively low prices to reposition. It is noteworthy that oil price continues its oscillate in the international market, even as corporate actions and interim dividend possibilities are around the corner.
We note also that some stocks are trading within their buy ranges to become more attractive at this point for income investors and traders, even as the market anticipates positive news, while oil price continues to oscillate above $69pb to support global economic and stock market recovery across climates. We also expect the ongoing COVID-19 vaccination to support global and domestic economic recovery that will enhance the market and give direction.
The banking sector and others remain attractive on the back of the prevailing low prices, despite the Q1 mixed numbers.
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 the coming week.
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