NGX Index Rebounds On Better-Than-Expected H1 Earnings, Amidst Low Liquidity

Market Update for the Week Ended August 5 and Outlook for August 8-12

It is not over for Nigerian Exchange as blue-chip stocks rebounded on a better-than-expected quarterly corporate earnings, halting two weeks of decline, following which the NGX All-Share Index recorded a positive trading week for the first time in a long while. The usually dicey month of August, therefore, closed higher on a low traded volume in the midst of positive market breadth and a strong buying sentiment.

This is coming at a time when economic factors or cycles are changing due to rising interest rates, soaring inflation, and the geopolitical tension here and there, which is why it is advisable that every market player should understand the interplay of consumer discretionary spending and staples. It may not be all bad for the economy just yet, as seen from the Purchasing Manager Index for the month of July released by Stanbic IBTC Group at 53.2 points, an improvement over the 50.9 points reported in the prior month on increased factory re-order time during the period.

Consumer discretionary stocks represent those areas where consumers have and option as to whether to buy such products or otherwise, including autos, among others. Consumer staples, on the other hand, are goods consumers will buy and use regardless of how bad the economy might be, like personal use, energy, foods and others. When stocks in general are under pressure, staples tend to outperform, holding up better than most other stocks, especially consumer discretionary, because consumer discretionary stocks do well when the general market and economy are booming.

The latest strong earnings in the market are yet to impact much on the prices of most equities due to the prevailing low liquidity due to the high interest rates, as institutional investors digest these numbers and are likely to start accumulating position in those companies which scorecards beat expectation and there is positive fundamental news to support the sector or the company performance going into the future.

Noteworthy also is the fact that some corporate results came below expectation, especially low and medium cap companies that posted mixed and even disappointing numbers. As such, let your stop-loss and exit strategies guide you at a time like this. We note also that ahead of next year’s general elections in the country, the prevailing insecurity and economic uncertainties as seen through the rising inflation and interest rates, continue to taking a toll on the value of the Naira, while the soaring national debt remains a major source of concerns among equity and fixed income investors at this moment.

In all these, there is position taking in the equity market, hence the need for investors to navigate the market now that many stocks look cheap in the strength of impressive earnings and relatively low prices. The market cycle of bear situation and market bottom in the face of technical pattern of oversold market or individual stocks signal that uptrend is underway, as bargain hunters take advantage of pullbacks and low prices to reposition their portfolios.

The pullbacks on the NGX make stocks cheaper, as revealed by the prevailing low Price to 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 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 remain above the 50,000 basis points’ mark, despite trading below the ‘T line and 50-day moving average, to attract bargain hunters as sector rotation and portfolio rebalancing increased amidst the inflow of more corporate earnings as all eyes are on first tier banks results.

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Movement Of NGXASI

Of the NGX’s five trading sessions for the week, two were up, while three recorded losses, as bargain hunters took advantage of the pullbacks and position in high priced stocks and sectorial leaders that pulled back to reposition their portfolios, amid interpretation and analysis of macroeconomic data released.

Specifically, the week’s trading opened on a negative note, reversing gains of the previous session, after pulling back by 0.83%, before retracing up on Tuesday when it gained a healthier 1.40%. The market side-trended at the midweek and Thursday losing 0.06% and 0.03% respectively on selloffs in BUA Cement for both days, before reversing up on Friday, gaining 0.30%. This brought the week’s cumulative gain to 0.70%, compared to the previous week’s 3.10% loss.

Cumulatively, the NGXASI gained 352.08 basis points, closing at 50,722.33bps, which was the intra-week high, from its lows of 49,886.94bps, after opening the week at 59,370.25bps. Market capitalisation also rose by N195bn, closing at N27.36tr, from the previous week’s N27.16tr, which also represented a 0.72% appreciation in value, as admission of LFZC Funding SPV Plc bonds boosted the market cap.

Low and medium cap companies’ shares dominated the week advancers table that attracted buying sentiments as volatility and pullbacks in Eterna, PZ Cussons, United Capital, Zenith Bank, Honeywell, UPDC, Stanbic IBTC and others. Also noteworthy is the fact that investors are taking advantage of the pullbacks and expected interim from banking stocks.

Market breadth for the week was positive, as gainers outnumbered losers in the ratio of 41:22 on buying sentiments as revealed by the investor sentiment report showing 100% ‘buy’ volume. Money Flow Index was looking down at 57.69bps from the previous week’s 64.15 points, an indication that funds left the market on a weekly chart to reflect the high yield in fixed income instrument and others, while on a daily time frame money flow index was up, revealing that funds entered the market on Friday.

The NGX index action on a weekly and daily time frame retraced up on improved buy momentum and sentiments, as the market remains strong in the midst of increased volatility and selloffs. We note also that the index is trading below ‘T’ line but signal the likelihood of breakout depending on expected improved liquidity and reaction to earnings report. The major strong resistance level of 52,000 points on a low traded volume to remain below the 20- and 50-day moving average. The candlestick formation, at the end of the week, showed buyers are in control, as investors and analysts digest macrocosmic data, and other factors to reposition their portfolios for Q3 and beyond. The candlestick pattern indicates continuation of the trend, depending on market forces in the new week.

Mixed Sectoral Indices

Sectorial performance indexes for the week were mixed, as the NGX Industrial Goods and Insurance closed lower by 5.76% and 0.37% respectively, while NGX Consumer goods led the advancers, after gaining 3.99%, followed by Banking, and Energy with 2.63% and 0.60% respectively.

Activities in volume and value terms were down as investors exchanged 705.64m shares worth N12.85bn, compared to the previous week’s 1.55bn units valued at N16.29bn, with volume driven by Financial Services, Consumer goods and Conglomerates sectors. Specifically, was driven by trades in GTCO, Zenith Bank, FBNH, Dangote Sugar and Transcorp.

Japaul Gold and Honeywell Flour were the best-performing stocks in the week, gaining 47.83% and 36.10% respectively, and closing at N0.34 and N2.79 per share on market forces and news of the Mandatory Take Over bid. On the flip side, MCNichols and LearnAfrica lost 18.68% and 15.38% respectively, at N0.74 and N2.20 per share, purely on selloffs and profit taking.

Outlook for the week

We expect a mixed trend and sentiment amidst market players digesting economic data and Q2 corporate earnings released so far ahead of July inflation report.  Also, investors are repositioning their portfolio on the strength of earnings reports, as market players continue to digest the Purchasing Managers’ Index. Also, investors and traders continue reacting to the earnings power, as the revaluation of quoted companies on their earnings performance and growth prospects continue. We note that income investors have sustained buying into interim dividend-paying stocks.

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Ambrose Omordion

CRO|Investdata Consulting Ltd

Tel: 08028164085, 08179547605