Cautious Trading Yet, Amid Impressive Earnings, Heightened Economic Risks, Interim Dividend Season

Market Update for July 26

Selling pressure was intensified on the Nigerian Exchange on Tuesday as telecommunication giant, MTNN, and other blue-chips suffered sharp price declines at the peak of earnings reporting season. Many corporate numbers released so far have been impressive except for few low and medium cap companies that posted mixed numbers and disappointing scorecards.

The NGX bearish transition at the end of Tuesday’s trading was extended to six straight days of losses that further deepened the decline phase on a less than average traded volume and significant negative market breadth. Also, major sectors across the market witnessed sharp selloffs despite companies sustaining a positive trend in their earnings performances ahead of the July 31, 2022 statutory deadline for submission of half-year financials.

The corrections and pullbacks on the exchange makes the market cheap as revealed by the low Price Earnings Ratio and post-Covid impressive earnings performance of listed companies that had supported the NGX rally and stability over the past three years, despite the low participation of foreign portfolio investors. These strong earnings have continued to support the market this year, just as the corporate numbers released so far have been impressive, despite the harsh economic environment, due to the high cost of production, rising inflation and high interest rate occasioned by the war between Russia and Ukraine, and the mismatch in economic policies by the government. Also, the market had further broken down the 51,000 mark to trade below the ‘T line and 20-day moving average, to attract bargain hunters as sector rotation and portfolio rebalancing increased amidst the inflow of more corporate earnings in the market.

The half-year earnings report from Chemical Allied Products Plc, and Q1 of NNFM were impressive revealing improved performance with the top and bottom lines that were up, while those from Skyway Aviation, NASCON and Japaul Gold were mixed and disappointing. Concerning the impressive numbers released before now, their share prices are witnessing a decline, just as more scorecards are expected. Indeed, the days of surprises and disappointing earnings are here. It is therefore time to use technical tools, if you have been ignoring the charts and fighting the trends, it is your chance to step up your game. At this current market mood, investors and traders should target leaders in the various sectors with strong fundamentals, and positive technicals as the market reversal is underway depending on the earnings power.

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Technically, the NGX index’s action is on its decline phase amid selloffs in high cap stocks and cautious trading activities heightened on increase in interest rate, despite the bull trend on long term remained intact on high priced stocks rally or price gain. The daily index and price actions as we go into the earnings season will give direction as to what we should do and expect in Q3, just as more insights into the entire second half will unfold. Market recovery at this point may be powerful, depending on the state of the expected corporate and economic numbers, although with the possibility of maintaining what we saw in 2021 and the Q1 corporate earnings, as portfolio rebalancing and sector rotation continue.

Oil price continued to oscillates as it trades at $105.40 per barrel in the international market, on the fear of recession as central banks across globe continue to hike rate to fight rising inflation, despite remaining above $100 per barrel, in the midst of slowing economic growth data from China and others. All these have continued to influence the monetary policy options of central banks as they move to checkmate the impacts of the Russia-Ukraine conflict on the global economy to avoid the looming economic recession. Nigeria’s soaring inflation is a potent threat to the fixed income market and investment yields, which should be an indication that there will be a reversal of funds flowing back to equity space in no distant time, as institutional investors rebalance their portfolios.

Tuesday’s trading started sharply on the downside and was sustained for the rest of the trading session on selloffs in blue-chip stocks, a situation that pushed the NGX’s index to an intraday low of 50, 409.90bps from its highs of 51,405.60ps before closing significantly below its opening points at 50,442.37bps.

Market technicals were negative and weak, with higher volume traded than the previous day in the midst of negative breadth and selling sentiment as revealed by Investdata’s Sentiments Report showing 3% buy position and 97% sell volume. The total transaction volume index stood at 0.78 points, just as momentum behind the day’s performance was weak as Money Flow Index is looking up at 18.36pts, from the previous day’s 18.04pts, indicating that funds entering the market remained flat.

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Index and Market Caps

At the end of Tuesday, the composite the NGX All-Share Index shed all of 958.16bps, closing at 50,442.37bps, after opening at 51,400.53bps, representing a 1.89% decline. Similarly, market capitalization fell by N516.70bn, closing at N27.20tr, from the previous day’s N27.72tr, which also represented a 1.89% value loss.

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Meanwhile, Tuesday’s downturn was driven by selloffs in shares of MTNN, PZ, NB, Honeywell, United Capital, Flourmill, UACN, UBA, Zenith Bank, GTCO, Cutix, Fidelity Bank and Accesscorp, among others. This impacted negatively on Year-To-Date gain, as it reduced to 18.09%, while market capitalization growth YTD fell slightly to N4.12tr YTD, a 22.42% rise over the opening level for the year.

Bearish Sector Indices

Performance indexes across sectors were down, except for the NGX Industrial goods that closed flat, while the NGX Banking led the decliners after losing 1.85%, followed by Insurance, consumer goods and energy with 1.69%, 1.27% and 0.49% respectively.

Market breadth was negative, with losers outpacing gainers in the ratio of 37:3; just as activities in volume and value terms were up, after stockbrokers transacted 156.17m shares worth N2.94bn, with volume driven by trades in Flourmill, Transcorp, GTCO, Zenith Bank and FBNH.

Livestock Feeds and FBNH were the best-performing stocks, gaining 1.63% and 1.36% respectively, closing at N1.25 and N11.15 per share respectively on earnings expectation and market forces. On the flip side, Trans Nationwide Express and International Breweries lost 10% and 9.91% respectively, closing at N0.63 and N5.00 per share, purely on selloffs and profit taking.


Market Outlook

We expect cautious trading on a strong support level of Fibonacci retracement of 50.0%, as investors react to the impressive earnings released so far and the fear of economic risk, as more results are expected in interim dividend season. We note also the flow of funds into the fixed income segment on the rate hike by the CBN, as sector rotation persists. Analysts are also on the lookout for Q2 GDP and flow of funds amid oil prices oscillation. Also, the market continues to interpret the rising inflation in relation to the crude oil price and other factors, in the midst of profit-taking and portfolio rebalancing. This will result in market players targeting fundamentally sound and dividend-paying stocks in the hope of dividend announcements.

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Ambrose Omordion

CRO|Investdata Consulting Ltd

Tel: 08028164085, 08179547605