NGX Index Slips Lower On FX Market Concerns, Amidst H1 Earnings Influx

Market Update for July 29

The benchmark Nigerian Exchange All-Share Index slipped further on Thursday as stock prices suffered losses on profit-taking and shake out of many from their earlier positions to panic selloffs at the peak of quarterly earnings reporting season, as investors started to factor in the effects of the recent decision of the Central Bank of Nigeria (CBN) on the foreign exchange market, especially a further devaluation of the Naira.

The decline was despite, the influx of half-year corporate earnings to meet the statutory deadline for the submission of their reports.

The numbers so far released by the various companies revealed a mixed performance as some came below market expectations, especially FCMB Group, UACN, and Union Bank of Nigeria, while those of Honeywell, Lafarge Africa, Transcorp Plc, BUA Cement, Caverton, and NPF Microfinance were upbeat to sustain the uptrend that should give retail and institutional investors, whether foreign or domestic, insights into the value and growth potentials of the market as the season gradually comes to a close.

The pullbacks due to profit booking and selloffs by traders in the midst of earnings season are creating buy opportunities for discerning investors and traders, while they continue interpreting and digesting the emergent numbers, amidst portfolio realignment for the rest of the quarter and year in the new month of August. Low-priced stocks remain attractive to retail investors, even as numbers emanating from them remain impressive and likely to support their share prices, going into the future.

The anticipated fall in the nation’s currency has triggered panic in the market and economy at large, as expected, after the CBN Monetary Policy Committee decision to ban BDCs, followed by the apex bank’s announcement that those who paid the prescribed fees for licences that are pending should apply for a refund. The nation’s deposit money banks have been directed to put mechanisms in place for US Dollar sales to customers in their respective banks. Companies that have their source of raw material within, and those that have less imported material in their production process are likely to sustain their positive performance in the face of the impending Naira devaluation in the back market.

The candlestick formation pattern at the end of Thursday trading and the mixed sentiment in the face of a change in trend as the NGX index action and indicators are looking down, suggesting that this profit-taking may not endure. This is because the earnings inflow remains robust enough to support market fundamentals and stock prices, going forward.

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 Q3. These higher-than-expected earnings will make stocks cheaper, a situation that will drive prices up in the short to long run, even as in many companies, the market is trading far below 18 times of earnings.

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Thursday trading started on the downside and it was sustained till early afternoon before oscillating on bargain hunters taking advantage of the correction to positioning in mid-cap stocks with strong Q2 numbers. Meanwhile, the continued selloffs in blue chips stocks pushed the NGX index to an intraday low of 38,356.43 basis points from its highs of 38,791.03bps, and thereafter closed below its opening figure at 38,484.82bps on a high traded volume.

Market technicals were negative as the volume traded was higher than the previous day’s, in the midst of breadth favouring the bears and mixed sentiment as revealed by Investdata’s Sentiments Report showing 70% ‘sell’ volume and 30% buy positions. The total transaction volume index stood at 1.12 points, just as momentum behind the day’s performance was relatively strong, as seen in the 53.78pts Money Flow Index, compared to the previous day’s 61.96pts, indicating that funds left the market on profit booking.

Index and Market Caps

At the end of Thursday’s trading, the composite NGXASI declined sharply by 306.21 basis points, closing at 38,484.82bps, from an opening level of 38,781.03bps, representing a 0.78% drop, just as market capitalization fell by N159.54bn, closing at N20.05tr, from its opening value of N20.22tr, also representing a 0.78%  depreciation in value.  

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The day’s downtrend was attributed to profit-taking and selloffs in blue chips stocks like BUA Cement, GTCO, Zenith Bank, Access Bank, UBA, Fidelity Bank, FBNH, FCMB, UACN, Flour Mills, Unilever Nigeria, UBN, United Capital, NASCON Allied, Honeywell Flour and Oando, among others. This impacted negatively on Year-To-Date loss, increasing it to 4.43%, while the loss in market capitalization YTD rose to N993.89bn, representing a 4.79% drop from its opening value for the year.

Bearish Sector Indices

Performance indexes across sectors were bearish, except for NGX Insurance that was 3.24% up, while NGX Industrial Goods index led the decliners, after shedding 2.02%, followed by Energy, Banking, and consumer goods with 1.83%. 0.81% and 0.35% lower respectively.

Market breadth remained negative as losers outnumbered gainers in the ratio of 22:17, while transactions in volume and value terms increased as stockbrokers traded 259.97m worth N1.98bn, compared to the previous day’s 237.51m units, valued at N1.88bn. Volume was boosted by trades in Oando, GTCO, Jaiz Bank, Fidelity Bank, and Wema Bank.

Tripple Gee and Regency Insurance were the best-performing stocks, gaining 10% and 9.75%, closing at N0.99 and N0.45 per share respectively on market sentiment and earnings expectation. On the flip side, Oando and UACN lost 9.70% and 8.93% respectively, closing at N4.75 and N10.20per share, on profit-taking as some traders cash out gains in Oando Plc, offering opportunities for new entrants after days of scarcity and unimpressive half-year earnings from UACN, .

Market Outlook

We expect a mixed trend as influx of earnings continues on Friday, the last filing date for quarterly earnings reports of companies with December and March year-ends,  just as investors also continue to study emerging numbers so far and development in the FX market, while more earnings reports hit the market.  The improvement in volume suggests that smart money is taking advantage of the pullbacks and relatively low prices to reposition. It is noteworthy that oil price continues its oscillation 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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Ambrose Omordion

CRO|Investdata Consulting Ltd

Tel: 08028164085, 08179547605