Cautious Optimism Still On NGSE, As Investors Position In High Yield, Dividend Stocks

Market Update for January 12

By Investdata Analysts

Nigeria’s stock market on Tuesday extended its bullish transition for the second consecutive session on positive sentiments for blue-chip stocks and undervalued companies that investors perceive as those that will rally this year as the nation economy recovers, and inflation expectedly declines on increased national industrial output.

Despite the changing market holding structure, as domestic institutional investors play deeper, the Money Flow Index and other technical indicators signal a bearish divergence from the composite index’s action. This is notwithstanding the fact that the market closed higher on a higher traded volume and positive breadth that indicates strength.

The market pickup as revealed by the candlestick at the end of Tuesday’s trading was expected, with the index resisting a decline in the midst of historic low interest rates, recovering oil prices at $55 per barrel in the international market, just as the continued sector rotation away from high cap stock that started in the Q4 of 2020.

The sectors with high upside potentials and yields include banking, healthcare, oil/Gas, consumer goods and services, particularly transport and airline service and related businesses. The expected recovery from these sectors made investdata Research to recommend them to investors seeking buy opportunities. The discovery and distribution of vaccines for the Coronavirus pandemic will, expectedly, drive and support global and domestic economies to influence the stock market positively in the coming earnings reporting season.

Investors should target stocks offering strong sales or revenue growth in 2021, as this is expected to support an increased Earnings Per Share, that should ultimately become the main driver of returns, as we project 15% EPS growth in 2021 and 25% in 2022. The reasons for this wide rotation to value is due to positive sentiments, improvements in liquidity, faster vaccines approvals/ distribution, anticipated GDP rebound, and restoration of consumption in the oil economic wheel. Others include: higher oil prices, sustained intervention by the Central Bank of Nigeria (CBN) and a resultant low rates, supportive fiscal policies (intervention in critical sectors, coronavirus packages and others), as well as the mixed earnings expectations.

Tuesday’s trading opened slightly in the green, and oscillated between the mid-morning and afternoon, on accumulation in stocks that have a history of dividend payments. This pushed the NSE index to an intraday high of 40,295.95 basis points, from its low of 39,724.26bps, after opening at 40,150.78bps.

This session market technicals were positive and mixed with volume traded higher than the previous day’s in the midst of breadth favoring the bulls on a high buying pressure as revealed by Investdata’s Sentiments Report showing 100% ‘buy’ volume. This was on a total transaction volume index of 2.79 points, just as momentum behind the day’s performance remained strong, with Money flow index looking down at 60.16pts, from the previous day’s 75.33pts, indicating that funds left the market, despite closing higher.

Index and Market Caps

The All Share index at the end of Tuesday’s trading, gained 145.17 basis points, after opening at 40,150.78bps representing a 0.36% up, just as market capitalization rose by N75.9bn, closing at N21.07tr, from opening value of N20.99tr, representing a 0.36% appreciation in value.

The day’s upturn was driven by the buying interests in stocks like Dangote Cement, Unilever, National salt, Ardova, Dangote Sugar, May & Baker, and United Capital, among others. This impacted positively on Year-To-Date gain, which stood at 0.06%, just as YTD gain in market capitalization, represented a 0.90% growth.

Mixed Sector Indices

All the sectorial performance indexes were mixed, with the NSE Banking and Oil/Gas closing 0.62% and 0.05% lower, while the NSE Insurance led the advancers after gaining 3.61%, followed by Industrial and Consumer goods that were higher by 0.99%, and 0.36% respectively.

Market breadth remained positive, as advancers outweighed decliners in the ratio of 27.20; just as activities in volume and value terms were up by 247.46% and 220.11% with investors trading 1.17bn shares worth N7.97bn, compared to the previous day’s 335.7m units’ value at N2.97bn, boosted by UPDC REIT, Mansard, Transcorp, and sterling Bank.

National Salt, and Mutual Benefits were the best performing stocks, as they gained 9.79% each, closing at N17.95 and N3.51 per share, on earnings expectations and market sentiments. On the flip side, Cutix and BOC Gases lost 10% and 9.96% respectively, at N2.16 and N11.38 per share, on profit taking and market forces.

Market Outlook

We expect the mixed performance to continue on profit booking and buying interests in undervalued and dividend-paying stocks ahead of the market major earnings reporting season, especially as low interest rates and oil price have so far supported the Nigerian economy and equity market. There is also the likelihood of a reversal in trend and continuation, as investors position in high yields stocks in the New Year. Also, important is the fact that technical indicators reveal overbought on the weekly and daily chart, while the RSI reads 70 points and above, a situation that supports the likelihood of another correction.

However, the strong and faster recovery may continue, depending on market forces, going forward, as propelled by the quality of Q3 earnings presented, especially by the tier-1 banks, even as analyses of numbers released so far have helped repositioning of investors’ portfolios on the strength of sectoral and company’s performances.

The NSE’s index action and indicators are looking up in the same direction on a very high traded volume and positive buying sentiments.

Again, 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 rest of the year.

Ambrose Omordion, Chief Research Officer, InvestData Consulting Limited