Volatility May Continue, On Mixed November Outlook, Price Corrections, Pullbacks

Market Roundup for October

Transactions on the Nigerian Exchange for the month of October, which is the earnings reporting season, mostly of third-quarter scorecards, closed on a positive note, with the basic indicators recording their highest monthly gain since February 2021. Specifically, the composite NGX All-Share index gained 1,817.43 basis points on positive buying interests, the better-than-expected corporate earnings, and inflow of funds searching for higher real returns amidst the relatively low-interest rates, inflationary environment, and the unclear direction of yields in the fixed income market. The rates for FG and corporate bonds, including the just-concluded Treasury Bonds primary auction fell to 6.99%, while the 364-day tenor stood at 7.25%; well below the inflation rate for the month of September stood at 16.38%. Recall that the nation’s GDP has been on the growth path for two quarters, and rose to 5.01% in Q2, according to data from the National Bureau of Statistics (NBS).

There was also the impact of the recovery in oil prices at the international markets in the midst of a slower economic recovery driven by vaccination and positive buying sentiments among blue-chip and growth stocks.

These triggered buying interests in the equity space that had been sustained for over four consecutive months of bull-run, as the monthly NGX index action formed a saucer chart pattern that supports an uptrend and market recovery on a higher traded volume and positive breadth.

October, the first month of the last quarter of 2021, ended on a positive note with Friday’s market rally suggesting a trend continuation as the index is set to breakout 42,412.66ahead of the release of more earnings reports, and an eventual portfolio reshuffling along sectors and companies’ performance.

The positive close on bullish sentiments in the market was also despite the growing insecurity challenges across the country and crisis in the foreign exchange market and continued rise in external reserves. We do know that stock markets across the globe, as leading indicators of economic activities, are forward-looking. Consequently, it is not unexpected that the current share prices are reflecting the future earnings potentials of quoted companies, or their profitability, which is directly linked to economic activities and eventually the GDP.

However, the Nigerian equity market has since July rallied on the back of low stock valuations, liquidity, and positive sentiments, while economic indices and at the same time are pointing to economic recovery as reflected in the quoted company’s earnings, despite the inconsistent policies of the government. 

The continued uptrend by the composite NGX All-Share index and the positive corporate earnings of listed companies released so far show that the Nigerian economy is still on the path of growth. This is a reflection of the monetary policy stance driving economic activities again through relatively low-interest rates.

However, for these low rates to achieve the desired objective, it is time for the government to revisit its various policies needed to boost the economy while ensuring coordination with the monetary authorities so as to check the wanton incidences of mismatch in policies that have prevailed for years.

Despite the seeming impact of the government and Central Bank of Nigeria intervention funds in critical sectors like agriculture and the health sectors, the national output remains low due to the unhealthy business environment, with the unresolved bad road networks for the movement of goods and services to the market across the country.

The impact of this was worsened by high electricity tariff and pump price of petrol, further pressuring the cost of goods and services when added to the high cost of other production variables that have almost crippled the manufacturing sector as reflected in the mixed earnings of companies in the real sector.

The positive responses to the strong numbers as at release dates by investors have pushed many growth and low priced equities to new 52-week highs, confirming the improving liquidity and confidence in the market. As noted earlier, the Q3 scorecards of various listed companies have given insights into the real state of the economy in Q3 and what the Q3 GDP will look like when published by the NBS before the next MPC meeting in November.

The possibility of prices rallying further from here is high, amidst portfolio reshuffling on the strength of the Q3 numbers, just as investors would be assured of reward in the form of dividends when the full-year score-cards begin to flow into the market in the early days of 2022, as the possibility of dividend growth is high. It is expected that discerning investors and traders would take advantage of the relatively low stock prices, year-end season, and cycle to grow their income, ahead of major earnings season in the first quarter of 2022.

In the 19 trading sessions of October, the index recorded gains in 16 sessions and down in three trading days, raising year-to-date gain to 4.39%, even as we note that the undervalued state of quoted companies, their fundamentals, and the seemingly high dividend yields may attract more inflows to the Nigerian stock market. This is given that many equities are having a high margin of safety, thereby offering higher upside potentials.

Meanwhile, the key performance Index in the month gained a total of 1,817.43 basis points, closing at 42,038.40bps, after touching a high of 42,054.18bps, from its lows of 40,221.17bps for the month, which was equally its opening figure. This represented a 4.52% growth over the period on strong buying interests that impacted positively on the index and stock prices, pushing them further up to breakout various resistance levels of 41,000 and 42,000 psychological lines.

Total ‘buy’ volume for the month was 99% and sell position of 1%, further extending the bull transition in the past quarter, while volume index for the period was 1.26 points. Market capitalization rose by a princely N1.00tr, closing at N21.958tr, from N20.956tr, representing a 4.78% appreciation in value. This was higher than the percentage growth in the index as a result of the right issues listing and admission of the NGXGroup that boosted the market cap for the period. Traded volume for the period rose by 48.39% to 8.31bn shares, as against the 5.60bn units recorded in the preceding month. Market breadth for the month was positive with the advancers outnumbering decliners in the ratio of 80:38 to extend the four months of upmarket that was due to factors mentioned above.

Bullish Sectorial Performance

Performance indexes across the sectors were bullish as the chart below shows that the NGX Banking and Energy indexes boosted the market the most during the month, outperforming the general market. The NGX Main Board and Pension index gained 6.24% and 6.16%, driven by price appreciations in dividend-paying stocks, while the NGX Growth index improved by 4.64%, and NGX 30 index garnered 4.34%, followed by the NGX Industrial, which chalked 4.21% to reflect the performance of blue-chip and high cap stocks on the exchange. The NGX Insurance and Premium indices inched up 3.98% and 2.85% respectively, revealing investors’ positive sentiment and the clear decision among traders, as the market’s Price-to-Earnings ratio remains low and attractive. It is also worthy of note that no sectoral index closed in red during the month.

Sources: NGX, Investedata Research

Best And Worst Performing

The month’s best-performing stocks were low and medium cap stocks across the banking and oil marketing sectors, led by University Press, which gained 93.75% as reacted to its impressive Q2 numbers, followed by Ecobank Transnational Incorporated’s 64.81%; and the 43.54% notch by Champion Breweries. FBN Holdings climbed 37.27%, on insider buying and positive sentiment for the group; just as the share price of AIICO Insurance soared 30.53%; among others.

Source; Investdata Research

The worst performing stocks for the period was Academy Press, which lost 15.38%, amidst sell-offs and mixed earnings performance in the recent numbers released; Linkage Assurance shed 11.67% also due to selloffs; just as Morison Industry declined by 10%; ahead of BOC Gas’s 9.87% price decline during the month.

Source: Investdata Research

Technical View

The NGX’s index action for the month reveals an uptrend and a bullish chart pattern that is set to breakout 42,412.66bps and its 50-Day Moving Average on a monthly chart with positive sentiment and high traded volume. The market is still trading within the up channel and above the 40-day moving average, despite the high buying interests, with the benchmark index entering the overbought region on a weekly and daily time frame to reflect an increased inflow of funds that pushed stock prices up in October, which was also the earnings reporting season. With the impressive numbers released, trading patterns and momentum, going forward, are likely to change amidst portfolio rebalancing and repositioning ahead of year-end and seasonal cycles. Market technicals for the period were positive and this is expected to remain unchanged in the new month. 

Market Outlook

Volatility is expected to continue in November, even as the outlook remains mixed due to likely price corrections, or pullbacks for a few days due to profit-taking and portfolio reshuffling ahead of year-end and 2022 corporate actions. The anticipated correction in the new month will, however, strengthen recovery.

But investors at this point should not be greedy, but let their decisions be guided by preset investment goals and exit strategies, even as the healthy inflow of funds into the equity assets due to prevailing low rates in the money market is likely to continue as the market look to the last MPC meeting for the year in the new month of November.

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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Ambrose Omordion

CRO|Investdata Consulting Ltd

info@investdataonline.com

info@investdata.com.ng

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