Expect Reversal, Mixed Trend, As Investors Digest MPC Outcome, Earnings Reports
Market Update for July 27
Equity prices slipped on the Nigerian Stock Exchange on Tuesday to halt five successive sessions of bull run as members of the Central Bank of Nigeria Monetary Policy Committee voted to keep the rates unchanged. Godwin Emefiele, the CBN Governor and chairman of the MPC, at the end of the meeting also announced far-reaching decisions, particularly the stopping of foreign exchange sales to Bureaux De Change operators.
Also on Tuesday, there was the expectation of more corporate earnings inflow to the market as companies rush to meet the regulatory submission deadline.
The slowdown in momentum and mixed sentiment witnessed was due to selloffs in high cap stocks and profit-taking among low-priced equities in the face of upbeat earnings already submitted. These impressive numbers emanating from listed companies are expected to support the market fundamentals and stock prices going forward.
Market players continue to digest these earnings reports while awaiting others, ahead of month-end adjustment due to portfolio rebalancing and realignments among the sectors and individual stocks with high upside potentials. We note that investors are positioning on the back of expected earnings that are likely to beat expectations and reverse the trend as more positive numbers hit the market. Examples of this scenario include Vitafoam, Livestock Feeds, and some other earnings reports that beat expectations.
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 the Q3. This is just as these higher-than-expected earnings will make stocks cheaper, a situation that will drive prices in the short to long run. Just as in many companies, the market is trading far below 18 times of earnings.
In an environment of relatively low interest and high inflation, stocks historically, tend to move higher on earnings performance that supports high payout to enable investors to hedge against inflation.
Technically, the NGX index’s action has recently maintained an uptrend pattern to break out the second resistance level of 38,648.91 on a high traded volume after forming a double bottom heading to the third resistance line of 39,157.29 which is also a major resistance level to confirm strong upbeat and recovery. A breakout of this level will signal a new trend in Q3.
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Tuesday’s trading started on the upside before pulling back on profit-taking in highly-priced equities and insurance stocks that pushed the key performance index to an intraday low of 38,794.08 basis points from its highs of 38,882.78bps, and thereafter closed below its opening figure at 38,802.15bps on flat market breadth.
Market technicals were mixed and weak, as the volume traded was slightly lower than the previous day’s, in the midst of flat breadth on negative sentiment as revealed by Investdata’s Sentiments Report showing 91% ‘sell’ volume and 9% buy position. The total transaction volume index stood at 1.04 points, just as the energy behind the day’s performance was relatively strong, as seen in the 69.45pts Money Flow Index, compared to the previous day’s 69,76pts, indicating that funds left the market on profit booking.
Index and Market Caps
At the end of Tuesday’s trading, the benchmark NGXASI, shed 46.93 basis points, closing at 38,802.15bps, from an opening level of 38,849.08bps, representing a 0.12% drop, just as market capitalization fell by N24.46bn, closing at N20.22tr, from its opening value of N20.24tr, also representing a 0.12% depreciation in value.
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The session’s downturn was driven by selloffs and profit booking in stocks like MTNN, GTCO, UBA, UACN, Unilever, International Breweries, United Capital, Africa Prudential, NASCON Allied, and Cutix among others. This impacted mildly on Year-To-Date loss which rose to 3.65%, while the loss in market capitalization YTD rose to N816.06bn, representing a 3.99% drop from its opening value of the year.
Bullish Sector Indices
All the sectorial performance indexes were bullish, except for the NGX Insurance that was down by 0.03%, while the NGX Oil/Gas index led the advancers, after gaining 1.99%, followed by Banking and Consumer goods with 0.21% and 0.11% higher respectively. While Industrial goods was flat.
Market breadth was at par as gainers were equal to losers in the ratio of 20:20, while transactions in volume and value terms were down as stockbrokers traded 243.09 million worth N1.90bn compared to the previous day’s 246.56m units, valued at N2.24bn. Volume was boosted by trades in Access Bank, Wema Bank, UPDC, UACN, and UBA.
Oando and Champion Breweries were the best-performing stocks, gaining 9.86% and 9.00%, closing at N4.79 and N2.30 per share respectively on market expectation and forces. On the flip side, UPDCREIT and Unity Bank lost 6.67% and 6.45% respectively, closing at N5.60 and N0.58per share, on selloff and profit-taking.
We expect a reversal and mixed trend as the market players digests the outcome of the MPC meeting and earnings released so far, as more earnings reports hit the market in the bid to meet the regulatory deadline for submission. The improving volume suggests that smart money is taking advantage of the prevailing 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 the 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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