October Outlook: Portfolio Adjustments Ahead 2022, As Investors Target Strong Q3 Earnings Growth
Market Roundup for September
The nation’s stock market recorded a stronger momentum in the last trading week in the month of September, despite the mixed sentiment and trend as the benchmark All-Share index closed higher. As such, it strengthened the three consecutive months of recovery to end the quarter and month in the green, helped by the inflow of funds, improved ‘buy’ interests in high cap stocks and volatility that turned sentiments positive, while investors took position for the expected third-quarter earnings and year-end seasonality.
The period under review was bullish, with the Nigerian Exchange (NGX) All-Share index recording the biggest gain to extend the bull transition for the third successive month. In the process, the index broke out the recent resistance level of 39,984.05 basis points and the 40,000 psychological line, while remaining on the path of recovery.
The possibility of this trend continuing is high, considering the expected inflow of funds into equity assets due to the prevailing low-interest rates and dividend yields environment as investors seek to hedge against inflation. Added to this is the expected quarterly earnings that might come mixed, reflecting the level of uncertainty in the foreign exchange market. The sectors that had performed well before now are likely to consolidate and even post better-than-expected Q3 and year-end financials.
The recovery move of Nigeria’s equity market should not come as a surprise to many market players, given the strong recovery after touching an 11-year low in March 2020, made worse by the outbreak of the Coronavirus pandemic which resulted in the panic selloff in that month. The pullbacks in the first two quarters of 2021 made stocks cheaper, grossly undervalued, and thereby attractive to discerning investors who took advantage while corporate earnings maintained a positive uptrend for 2020 full-year, as well as the 2021Q1 and Q2 which turned the face of the market in July and was sustained. Trading in September, on the NGX, maintained its tradition as a month of positioning for the last quarter and year-end, despite the fact that investors would normally seek funds to pay school fees for their children and wards.
Despite the hitches and pressure in the foreign exchange market, local institutional investors are increasing their stakes in blue-chip stocks like Nestle, Dangote Cement, MTNN, and FBNH, among others with high dividends payout policies. The month’s growth was propelled by the decision of the Monetary authorities to retain all rates repeatedly, thereby making fixed income market direction unclear and bearish for the period under review, despite inching up at the last Primary Market Auction.
During the just-concluded third-quarter, the NGX’s ASI gained 6.13%, following which the market closed 0.12% lower Year-to-Date, boosted by the bullish posture that gives insight as to what the year 2021would likely end in the green, in line with INVESTDATA analysts’ projection at the Invest 2021 traders and investors workshop held on December 5, 2020. This outlook was reaffirmed subsequently at different events like the Masterclasses, as well as the Q & A sessions with Ambrose Omordion that holds every Saturday via Zoom and has continued to record increased participation.
Notable sectors of the market that recorded peak performance during the quarter and on a year-to-date basis mostly underperformed in September, except for Insurance, Consumer Goods and Banking sectors that recorded decline with these periods.
During the month, the composite NGXASI gained 1,036.89 basis points, closing at 40,221.17bps from an opening level of 39,184.19bps, representing a 2.64% growth, after touching an intra-month high of 40,221.17 and a low of 38,511.97 to remain above the 40,000bps psychological line, after breaking out various resistance levels. Market capitalization grew by N530bn, closing at N20.96tr, from an opening value of N20.43tr, also representing a 2.65% appreciation in value.
The bullish performance recorded in September resulted from positive sentiment and inflow of funds searching for higher returns that dominated trades as investors increase their positioning ahead of Q3 numbers. Noteworthy is the positive economic data released within the month by the Central Bank of Nigeria (CBN) and the National Bureau of Statistics (NBS), which had a significant impact on the market, despite the weak state of the economy. This was because the data came in as expected, confirming the improved recovery in the economy, just as the inflation rate for the month of August recorded the fifth straight month of decline at 17.01%, from its peak of 18.35% in April, as well as the 5.01% growth in Q2 GDP. Also, Nigeria’s Purchasing Manager index (PMI) expanded to 48.9 points in September from 46.5 points in August.
The volatility during the period was low on high volume traded that reflected the ‘buy’ market and positive sentiments during the period, resulting in 13 sessions of down market and 9 of bull trading. Traded volume for the month was up by 12.90% to 5.6bn shares, as against the 4.96bn units recorded in the preceding month.
Market breadth for the month was slightly positive as advancers outnumbered decliners in the ratio of 46:44, to continue a three-month bull transition with declining magnitude in loses after stock prices adjusted up moderately in the last three sessions of the month. This was an apparent movement in high-priced stocks. The buying volume of total transactions for the month was 100%, while the volume index for the period was 0.85.
Topping the sectoral index movement table for the period were the NGX Industrial Goods and premium, which chalked 7.23%, outperforming the NSEASI’s 6.92%; followed by the NSE-30 which gained 3.57%, whereas the NGX pension and Consumer Goods climbed 3.17% and 2.71% up respectively. The NGX Insurance, Banking and Oil/Gas closed 9.41%, 1.62%, and 0.31% lower respectively, reflecting mixed market activities in their stocks.
Sectorial Index Movement In September
Best Performing Stocks
The best-performing stocks were AXA Mansard Insurance, which appreciated by 164.8%, galloping on the strength of a share price reconstruction of one new share for every four held; followed by Pharm-Dekos’ 45.06% gain; while the share price of NAHCO rose 27.66% on low price attraction and expansion of its operation outside Nigeria. United Capital chalked 24.65%; and NNFM, 17.12%;among others.
Source; NSE and Investdata Research
Worst Performing Stocks
On the other hand, the worst-performing stock for the period was SCOA, which shed 39.58% of its opening value for the month, due to its poor numbers and selloffs. LASACO Plc lost 14.39% due to profit-taking; followed by the 14.04% drop in the price of FTN Cocoa; and Japaul Gold, 13.73%; on the back of weak earnings performance and selloffs.
Source: NSE &Investdata Research
Chart view of September market.
NSE ASI MONTHLY TIME FRAME FOR September
From the above graph, you would notice that the NGXASI on monthly basis is trending up, forming an inverted head and shoulder that reveals continuation of trend or a pullback. A breakout of this level and the bullish pattern will create a new entering point for discerning traders and investors. The candlestick formation for the month supports a bull momentum, whose continuation in the new month and quarter will depend on market forces and the actual performance of the expected corporate Q3 financials. As we cross over to the last quarter of 2021, for which trading kicks off on Monday with likely high hopes that speculators will return to play the market ahead of year-end activities and seasonality.
Market technicals are showing increased optimism with the NGX as performance YTD almost turning positive. This is confirmed by the bright Inverted head and shoulder bullish chart pattern typically associated with major breakout setup and a trend continuation; and critical resistance levels on the NGX highlighted by multiple technical analysis strategies suggests a range of 40,270-42,441.09 is acting as a major resistance levels. If the NGXASI stays above the 40,000 level, then we interpret the recovery and trend as strong and healthy enough to support a higher price, after a slight correction or pullbacks due to likely profit taking from the recent quarter end window dressing.
On this note, the rally in the market is likely to persist, despite the little expected pullback that will be another opportunity to jump into the high-flyers and growth stocks that would drive the recovery of NGX in the midst of smart money entering the market. There is also the impact of expected mixed Q3 earnings reports and positive economic data, as market players are not going defensive at this point considering the last quarter activities and momentum.
We see investors focusing on portfolio adjustment and rebalancing by targeting companies with strong potentials to grow their Q3 earnings and dividend on the strength of their earnings capacity as the year entered its last quarter to usher in 2022.
Again, the current undervalue 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 for the rest of the year.
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