Mixed Trend Ahead Of Month-End Realignments, Interim Dividend Stocks, Q2 GDP Data
Market Update for August 23
The last full trading week in the month of August started on the Nigerian Exchange negative after witnessing a mixed trend and volatile Monday session, thereby extending the bearish run on a less-than-average traded volume and positive market breadth ahead of the expected release of interim dividend-paying banks’ scorecards and end of the month window dressing.
The selling sentiment at the closing bell was due to selloffs and profit booking in major sectors and high cap stocks like GTCO, Lafarge Africa, and others that suffered losses, amidst the continued portfolio repositioning and sector rotations, at a time crude oil price is rebounding in the international market. This is expected to impact the Nigerian equity market somehow because it will rub off on the Exchange’s oil and energy sector.
According to Agusto & Co’s Banking report, the COVID-19 pandemic brought about an extraordinary test for the global community, even as the global COVID mortality rate stands at about 2.2%, while casualties increased from less than 3,000 in December 2019 to about 3.9m as at 30 June 2021. Nigeria’s mortality rate stood comparably lower at about 1% as of the same period. However, the local economy had its fair share of pandemic-related adversities.
However, leveraging on lessons from the 2016/2017 economic recession, the Nigerian banking industry was better prepared in 2020. Proactive measures in the form of forbearance granted by the Central Bank of Nigeria CBN), enabled banks to provide temporary and time-limited restructuring of facilities granted to households and businesses severely affected by COVID-19. There was generally a cautious approach to lending in the Industry, given difficulties in the operating environment. Although gross loans and advances grew by 12%, loan growth was negative when the 19.3%-naira devaluation is considered. Underpinned by the forbearance and proactive measures adopted by banks, the NPL ratio improved to 6.6% (FYE 2019: 7.6%).
The reliability of business continuity measures was tested in 2020, considering the movement restrictions that lasted for months. Most banks showed resilience through innovative measures including remote work arrangements and upgrade of network infrastructure to accommodate higher traffic on digital channels. These arrangements also provided support during the mandatory curfew elicited by the civic unrest that followed the #EndSARS protests in October 2020. Indeed, the pandemic brought to the fore, technology’s crucial role in deepening financial services as some banks recorded as much as a 50% increase in digital banking transaction volumes.
Technically, market pullback or correction at this point is normal and creates opportunities to buy low ahead of Q4, which 20-year data research has shown to be the most active quarter of the year due to year-end seasonality and policy formulation ahead of the new year. Month-end window dressing and the quality of interim dividend-paying banks’ earnings will determine how far the benchmark index will go from here, considering the level of traded volume, positive broad market, and mixed indicators which suggest that investors and traders are still playing with caution.
Meanwhile, Monday’s trading opened slightly on the upside before oscillating on selloffs and position taking in high and low cap stocks which pushed the benchmark index to an intraday low of 39,424.95 basis points, from its highs of 39,494.93bps. Thereafter it closed below the opening points at 39,434.69bps.
Market technicals were mixed as the volume traded was lower than that of the previous sessions in the midst of breadth favouring the bulls on selling pressure as revealed by Investdata’s Sentiment Report showing 86% ‘sell’ volume and 14% buy position. Total transaction volume index stood at 0.91 points, just as the impetus behind the day’s performance was relatively strong, with Money Flow Index reading 57.87points, from the previous day’s 65.25 points, an indication that funds left the market.
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Index and Market Caps
At the end of Monday’s trading, the benchmark index NGXASI shed 48.39bps, closing at 39,434.69bps, from its opening level of 39,483.08bps, representing a 0.12% drop, just as market capitalization fell by N25.21bn at N20.55tr, from the opening value of N20.57tr, also representing a 0.12% value loss.
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Monday’s downturn was driven by selloffs and profit bookings in stocks like GTCO, Lafarge Africa, Flour Mills, PZ Cussons, UBN, ETERNA, FCMB, International Breweries, and Oando, among others. These impacted mildly on Year-To-Date loss which dropped to 2.08%, just as loss in market capitalization YTD stood at N479.17bn, representing a 2.51% decline from the year’s opening value.
All the sectoral indexes were down, except for the NGX Insurance that closed higher by 0.37%, while the NGX Industrial Goods Index led the decliners, after shedding 0.32%, followed by Energy, Consumer goods, and Banking with 0.14%, 0.12%, and 0.07% respectively.
Market breadth was positive as gainers outnumbered losers in the ratio of 21:11, while transactions in volume and value terms were down as traders traded 211.33m shares worth N2.02bn, compared to the previous day’s 280.57m units valued at N3.18bn. The day’s volume was driven by trades in Charms, GTCO, Honeywell, Courtville, and Wema Bank.
FTN Cocoa and Pharmdeko were the best-performing, gaining 10% and 9.88%, closing at N0.44 and N1.89per share respectively on market sentiment. On the flip side, Lafarge Africa and PZ lost 5.29% and 4.17% respectively, closing at N21.50 and N5.75 per share, on profit-taking and market forces.
We expect the mixed trend to continue as month-end draws closer ahead of first-tier banks results and Q2 GDP data release, as well as continued repositioning of portfolios ahead of the year last quarter. Just as, investors are still observing the interplay of market forces in the FX market as the CBN plans to launch a digital currency platform. There is also the kick-off of the country’s privileged drawdown from the $3.6bn IMF special window. The day’s low volume suggests that institutional investors and others are still cautiously looking at the numbers. It is noteworthy that oil prices rebounded in the international market; corporate actions, as well as the 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 $68pb to support the global economy 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 mixed half-year earnings.
Again, the way to go is: Target dividend-paying stocks and fundamentally sound companies with growth prospects in 2021 and beyond, looking the way of mispriced equities ahead of interim dividend announcement and last quarter economic activities. 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 next month.
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