Equities

NGX Index Rebounds On Low P/E Ratios, Positioning Amidst Soaring Inflation

Market Update for May 10

The Nigerian stock market traded mixed on Monday to begin the week on a positive note, thereby extending the bull transition for the second consecutive session, as buying interests in blue-chip stocks were sustained on the back of the impressive Q1 numbers and undervalued state of these stocks, as well as the general market.

The benchmark NGX index’s action technically formed a continuation chart pattern at the end of Monday’s trading, supporting the uptrend in the midst of mixed sentiment and above average traded volume. These runaway momentum moves are created when demand is overwhelming supply.

Also, at this point of supply and demand imbalance, leading to pullbacks or basing patterns that provide an entry point do not form. Without those typical entries, most are left behind, watching prices move away without them. As such, to play this market knowledgeably, identify reversal and continuation patterns on time so as to profit from any rally, get the comprehensive stock market trading videos, up your game and manage trading risk with technical analysis.

Strength is gradually returning to the Nigerian equity space as a result of the prevailing relative low Price-to-Earnings ratios in the midst of the rising inflation and unclear policy direction of the government and its economic managers. Just as the mood in the fixed income market remained bearish as bond prices, which move in opposite direction of yields, continue to decline.

The Debt Management Office (DMO) is expected to release an auction calendar this week, and we expect minimal investor participation in the secondary market as they prepare to fill their demand at the auction instead.

With the heightened insecurity challenges in the country, and its negative influence which may hamper the seeming economic recovery if not properly addressed by the government and agencies saddled with the responsibility to protect life and properties. This has been further compounded by the high rate of policy summersaults in the nation today.

As events unfold, market players should target companies with earnings growth, quality and value that are able to meet Investdata’s Earnings Gauges, while investing wisely, allowing investment goals guide their decisions, especially entry and exit strategies necessary to ensure they not only survive, but profit from the expected new trend. Be guided also by current price patterns and money flow index now supporting a trend continuation as funds continue flow in and out of the market.

Meanwhile, Monday’s trading started on the upside due to position taking in undervalued bellwether stocks, while at the same time posting better than expected Q1 numbers, despite oscillating to push the benchmark index to intraday high of 39,409.17 basis points, from its lows of 39,198.75bps. Afterwards, the index closed above its opening level at 39,312.74bps. on a positive breadth.

Market technicals were positive and mixed, with volume traded higher than previous day’s in the midst of breadth that favoring thebulls on a mixed sentiment, as revealed by Investdata’s Sentiments Report showing 54% ‘buy’ volume and 46% sell position. Total transaction volume index stood at 1.10 points, just as momentum behind the day’s performance was relatively strong with Money Flow Index reading 64.88pts, from the previous day’s 66.28pts, indicating that funds left the market on a daily chart while looking up on a weekly to signal entrance of funds.

Index and Market Caps

At the end Monday’s trading, the composite NGX All-Share Imdex gained 113.99bps, closing at 39,312.74bps after opening at 39,198.75bps, representing a 0.29% up, just as market capitalization rose by N59.41bn, closing at N20.49tr, from an opening value of N20.48tr, also representing a 0.29% value gain.

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Monday’s upturn was due to buying interests in Lafarge Africa, Zenith Bank, Guaranty Trust Bank, UBN, UBA, United Capital, Africa Prudential, Eterna, Honeywell, and International Breweries, among others. This impacted positively on Year-To-Date loss, reducing it to 2.38%, while the decline in market capitalization YTD dropped to N548.64 billons, representing a 2.64% below its opening value for the year.

Mixed Sector Indices

Performance indexes across the sectors were mixed, as NGX Banking, Insurance and IndustrialGoods closed 2.89%, 1.33% and 0.08% higher respectively, while Consumer goods led the decliners after losing 0.26%, followed by Oil/Gas with 0.08% lower.

Market breadth was positive, as advancers outpaced decliners in the ratio of 28:15; even as transactions in volume and value terms rose by 35.7% and 11.11%, while investors exchanged 324.31m shares worth N3.28bn, just as volume was boosted by trades in Etrazact, Zenith Bank, Access Bank, UBA and AXA Mansard Insurance.

ABC Transport and Regency Insurance were the best performing stocks, gaining 9.68% each, closingat N0.34 and N0.34 per share on market forces. On the flip side, Unity Bank and Japaul Gold lost 8.33% and 6.67% respectively, closing at N0.55 and N0.56 per share, on profit taking and selloffs.

Market Outlook

We expect the mixed trend to continue on profit taking, positioning and portfolio rebalancing on the strength of the numbers released recently amidst the rising infection rate of the novel coronavirus across the globe and the high yields in the fixed income market. We also expect economic data like the 2021Q1 GDP report, April Purchasing Managers’ Index and inflation among others to reveal the state of the economy and give direction. The banking sector remains attractive on the back of the prevailing low prices, despite the Q1 mixed numbers.

Also, the market is trading above the 14 and 20-Day Moving Average. Note that the market may discount the political and insecurity challenges, ahead of economic reports.

However, the pullbacks offer bargain hunters and income investors fresh opportunities to reposition in high dividend yields and undervalued stocks, while looking out for quarterly numbers that would support recovery. This is based on the fact that the rising fixed income yields may not be enough to scare all investors away from the equity market.

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. This is especially given the rising oil prices that have so far supported the economy and equity market, despite the seeming improvement in the fixed income yield which had remained at negative real rate of return due to the subsisting high inflation.

However, the strong and faster recovery may continue, depending on market forces, going forward, as propelled by 2020 full numbers and expected 2021 Q1 earnings reports, until the next MPC meeting in May.

The NSE’s index action and indicators are heading in the same direction   on a low traded volume and positive buying sentiments in the midst of rising yield in bond and TB.

Also, the current undervalued state of the market offers investors opportunities to position for the short, medium and long-term, which is why investors should target fundamentally sound, and dividend-paying stocks for possible capital appreciation in the new year.

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Ambrose Omordion

CRO|Investdata Consulting Ltd

info@investdata.com.ng

ambrose.o@investdataonline.com

ambroseconsultants@yahoo.com

Tel: 08028164085, 08032055467

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