NGX Begins August Positive On Sector Rotation, Despite Dicey, Mixed Outlook

 

Market Update for the Week Ended August 6 and Outlook for August 9-13

Nigeria’s equity market rebounded last week amidst continued portfolio repositioning and sector rotation as market players interpret recent corporate earnings to enable investment decision making.  The mixed sentiment is ahead of macroeconomic data, as investors await the release of interim dividend paying banks results.

The week was characterized by activities of bargain hunter, despite Thursday’s seeming profit booking and pullback that reversed up on rekindled buyinginterests in high cap stocks and blue chips companies on the following day.

With half-year earnings beating expectations, investors remain upbeat, armed with insights into what the nation’s Q2 GDP number would look like, helped by the recently published Purchasing Managers’ Index which hit 55.4 points for the first time in 18 months in July, from 53.8 points in June according to a report by Stanbic IBTC Research.  Consequently, we expect the market to continue its oscillation and volatility as investors react to these data as they realign their portfolios for profitable trading in the month and quarter, due to the changing price patterns and trading environment.

These notwithstanding, as discerning investors and traders, you should take advantage of the sectorial performance as revealed by the recent scorecards to adjust your position by selling off and buying back, depending on how demand and supply dynamics play out. So far, the most outstanding sectors, in terms of the half-year earnings performance are: Agribusiness, Industrial Goods, Healthcare, Energy, Consumer Good, Banking and Services. This is a function of demand and supply, sentiments, and earnings which are the engines that drive prices in the short to long-run.

Technical View of A Weekly Chart

Despite the mixed trends, some stocks have recorded huge gains year-to-date and most of those on the Investdata “buy & sell” signal setup, and those who attended the Q3 Master Class have benefited from the July recovery. For them, the month was really as a very rewarding one. In any equity market across the globe, superior fundamentals define leading stocks and earnings rebound has great influence on the share prices of companies, especially when positive earnings uptrend are sustained or established. Also, technically, the best of stocks distinguish themselves by their sound base chart patterns.

Profit-taking is inevitable in stock trading, and doing so at between 12% and 15%, rather than the normal 20% to 25% may be a useful strategy in the second-half of this year to avoid being trapped in any position for too long. In the next six months, the small and medium cap stocks are set to outperform their high and large cap peers, especially given that most of the high priced stocks are overpriced and over-weighted already.

As every investment or trade is against expectations, let your investment objectives guild your entry and exit decisions, since the beginning of the year 2021 the equity market has been oscillating due to a factor like the high inflation. This is regardless of the fact that it has been slowing down over the last two months, in addition to others such as the rising yields in the fixed income space, recovering oil price in the international market as above $68 per barrel.

While investors continue to watch effects of recent changes in the foreign exchange market policy announced by the Central Bank of Nigeria, the IMF has approved of $650bn in Special Drawing Rights (SDR, of which $3.4bn could be earmarked for the country based on its quota contribution and economic standing.

The SDRs are not actual currencies but assets through which IMF members can improve their balance of payment positions by exchanging all or some of their allocations for freely usable currencies of other member countries. They can also be used as a basis for seeking concessionary debt facilities from the IMF. However, given lessons from the previous year, we favour refraining from utilising our SDR allocation until a rainy day. Consequently, given the elevated oil prices and the increasing likelihood of a successful Eurobond issuance, we do not think that Nigeria is in such a dire situation to warrant a full SDR drawdown.

In assessing the materiality of the recent developments, we note that the combined planned foreign borrowing of $6.2 billion and SDR allocation of $3.4 billion amount to c.68.1% of our 2021 current account deficit forecast and 28.7% of Nigeria’s FX reserves of c.$33.5bn. Thus, there is a strong likelihood that the FX liquidity position of Nigeria will improve before the end of the year if these inflows materialise.

We highlight some of the potential impacts of the expected reserve accretion on markets below:

The spread between the parallel market and the I&E rates is likely to materially narrow in the coming months. This narrowing spread should primarily reflect sharper corrections in the parallel market rate, which is currently substantially higher than our fundamentally derived NGN/USD rate. We also expect some retail demand to flow away from the BDCs to deposit money banks, which have been recently mandated to meet legitimate dollar needs 

The need for an aggressive mop-up of banking system liquidity will likely taper on projected improvement in the near-term FX liquidity position

As a consequence of points 1) and 2), we expect yields to remain near current levels until Q4’21, when the fiscal authority may have to increase issuances ahead of the N593.9 billion bond maturity in January 2022. The apex bank may also be cautious ahead of the pre-election year 2022. These, and the opportunities to earn better returns on bank placements, continue to support a short-duration strategy.

The expected improvement in FX liquidity could provide some support for equity prices. Therefore, improvements in FX conditions could positively impact sectors such as manufacturing, as FX-induced inflationary worries subside and pressures on real consumer income taper. More so, companies that rely heavily on imported raw materials or require FX for routine plant maintenances may get some reprieve.

Movement Of NSEASI

It was a positive outing on the Nigerian Exchange with the composite index recording four trading sessions of up markets and one down, halting previous week’s bear position on renewed buying interests amidst sector rotation and portfolio rebalancing.

NGX index action opened the week on a positive note, extending the previous Friday’s bull session as the benchmark NGX All-Share index gained 0.09%, which was sustained till midweek after gaining 0.81% and 0.03% respectively. It however gave up on Thursday when the key performance index pulled back on profit taking, losing 0.31% and then rebounding on Friday with the NGX index inching 0.03% again. These brought total gains for the week to 0.68%, wiping out previous week’s 0.31% loss.

Consequently, the benchmark index gained 263.67basis points, closing at 38,810.75 basis points after opening at 38,547.08bps, touching an intra-week high of 38,950.74bps from its lows of 38,532.78bps on mixed sentiments and position taking in high, medium and low cap stocks. Also, market capitalization rose by N137bn, closing at N20.22tr, compared to previous week’s N20.08tr, which also represented a 0.68% value gain.

Low and medium cap stocks dominated the advancers’ table during the period as usual, as investors continue to study corporate numbers, trend and the changing environment. Price actions revealed the presence of buyers in the market, a situation that does not reflect on the sectorial indexes. Also, during the week, Meyer Plc and Consolidated Hallmark Insurance announced interim dividend of N1.50 and two kobo respectively.

The bullish market for week did not reflect on market breadth, with losers outnumbering gainers in the ratio of 36:23, but on the sentiment report for the period which was 67% buy volume and 33% sell position. Money Flow Index was up, reading 57.03bps from the previous week’s 59.01 points, an indication that funds left the market.

NSEASI WEEKLY CHART MOVEMENT

From the opening chart, the NGX index action has formed a rectangle chart pattern of consolidation on a weekly time frame, with the candlestick formation indicating that buyers are still in charge but we need a confirmation next week to give direction, after forming a rectangle that supports a continuation of trend and reversal, after the just conclude earnings season. Already, the daily chart has confirmed indecision among traders.

Bearish Sectoral Indices

Performance across sectors were bearish, led by NGX Insurance that closed south which lost 1.65%, followed by Oil/Gas, Banking, Consumer and Industrial goods with 0.61%, 0.58%, 0.48% and 0.48% lower respectively. Activities in volume and value terms fell, as investors exchanged 989.59m shares worth N8.18bn, compared to previous week’s 1.4bn units valued at N11.82bn, with volume driven by trades in Financial Services, Conglomerates and Consumer goods, particularly Transcorp, Sterling Bank, FBNH, Zenith Bank and Wema Bank

Cutix and Regency Assurance were the best performing stocks for the week, after gaining 17.95% and 14.29% respectively, closing at N5.65 and N0.48 per share on good payout and market forces. On the flip side, Neimeth Pharm and AIICO Insurance lost 14.29% and 12.04% respectively, at N1.50 and N0.92per share, purely selloffs.

Outlook for August

On the strength of these earnings power and quality of numbers released so far, we expect to see a mixed market this week and for the rest of the month. Considering that the March accounts and half-year interim dividend qualification dates for most companies are within this month. So there will be activities as investors participate in the interim dividend. So, let us keep our eyes on market breadth and direction.

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https://investdata.com.ng/ngx-begins-august-positive-on-sector-rotation-despite-dicey-mixed-outlook/