Monetary policy induced rally turns NSE YtD positive, ahead of q3 earnings

Market Update for the Week Ended September 25 and Outlook for Sept 28-Oct 2

By Investdata Analysts

Equity prices in the last full trading week of September, which has traditionally been a bearish month, turned positive even as the Nigerian Stock Exchange (NSE) All-Share Index recorded the biggest weekly gain over the past four months. Specifically, the benchmark index sustained this bull transition on an increased momentum, halting two weeks of sideways trending on a high traded volume.

The rebound was due to the increased funds inflow from other investment windows due to the further crash in rates that has deepened the negative returns in fixed income investment windows and the low yield environment. There is also the effect of the end-of-quarter window dressing by fund managers and outlook for the Q3 earnings season that kicks off in a fortnight. All these supported the five straight sessions of rally that boosted buy-interest among investors.

One obvious implication that can be deduced from the most recent MPC decision is that savings account deposits will now attract 1.15% interest, while standing lending facility and standing deposit facility rates are adjusted to 11.5% and 4.5% respectively. This reinforces the strong position of the Central Bank of Nigeria (CBN) and MPC at sustaining the low yield environment to encourage low-cost lending that will support domestic production and shorten Nigeria’s stay in recession, should the Q3 GDP contract as expected due to the impact of lockdown that followed the Coronavirus pandemic outbreak.

Ahead of the expected Q3 scorecards, investors should target companies that have surpassed market expectations in the previous quarters and earnings trended up despite the pandemic.  These expected numbers will give an insight as to companies that will likely grow, or slash dividend payout at the end of this financial year.

Market players are advised to tread carefully at this stage of the market rally to avoid a bull trap, because of the short-term overbought region and profit taking that is underway in the early trading sessions of Q4 and before the expected Q3 numbers start hitting the market.

The NSE index at the end of Friday’s trading session recovered from the March dip, breaking out the recent resistance level on a positive sentiment and high traded volume, ahead of the quarter-end accounts rebalancing and window dressing. This suggests that traders should look forward to more price volatility in the earnings reporting season over the course of the coming month.

Movement Of NSEASI

The week under review witnessed mnetary policy induced bull-run with the NSE’s composite index recording five consecutive sessions of up market that short-lived the two previous weeks of marginal decline, extending the market’s recovery move.

The benchmark index started the week with a slight 0.01% gain, which was sustained throughout the period on increased buying interests in consumer goods stocks and others that had earlier suffered losses, gaining 0.31%, 0.50%, 0.79% and 1.28% respectively from Tuesday to Friday. This bought the week’s total gain to 2.92%, as against the loss of 0.08% in the previous week.

Specifically, the key performance index gained 746.77 basis points, opening at 25,572.57bps, touching an intra-week high of 26,327.17bps from its low of 25,525.93bps on positive sentiment for blue chip stocks ahead of this week’s quarter end. The benchmark index closed for the week at 26,319.34bps, while market capitalization gained by N390.32bn, closing at N13.76tr, from the previous weekend’s N13.35tr, representing 2.92% appreciation in value.

During the week, the share prices of Redstar Express, AIICO Insurance and University Press were adjusted for full-year cash and strip dividends recommended by their respectively boards.

Small and large cap stocks dominated the top gainers’ chat, as reflected in the market breadth   were more advancers outnumbered decliners in the ratio of 35:28, on a strong momentum behind the week’s performance stayed high. Money Flow Index read 82.81bps, up from 76.64bps in the previous week.

The market’s money flow index at the end of the week broke out the multiple top which signals a continuation or profit taking as its set to cross a major resistance at 26,319.47bps. The candlestick formation and patterns support a continuation, which is a function of market forces, with the index trading above the 50-Day Moving Average on high traded volume. Just as its set to breakout Fibonacci retracement line of 61.8% that support uptrend.

However, we envisage a resurgence of mixed trend and profit taking, given that the money flow index on a weekly time is looking up to read 82.81 point with MACD remaining bullish zone. The buy volume for the period stood at 99%.

Bullish Sectoral Indices

The performance index across the sectors were largely bullish, led by the NSE Consumer Goods index with 7.44%, followed by the NSE Banking which gained 3.64%; while Industrial Goods, Insurance and Oil/Gas followed with 3.20%, 3.02% and 0.48% respectively. The general market outlook in recent times remains positive in the short-term, following which investors should take sort-term position and diversify their portfolio with long-term trades to protect capital. This they can do especially by considering sectors such as agribusiness, healthcare, industrial goods, insurance and telecoms, which have shown the most strength.

Market activities for the week, in terms of volume and value, were up by 37.72% and 62.02% respectively as stockbrokers crossed 1.57bn shares worth N20.56bn, compared to the previous week 1.14bn units valued at N12.69bn. Volume during the week was driven by trades in financial services, consumer goods and ICT sectors, specifically Sterling Bank, FBNH, Zenith Bank Guaranty Trust Bank and MTNN.

Nigerian Breweries and Cornerstone Insurance were the best performing stocks during the period under review, gaining 25.12% and 16.35% respectively at N52.55 and N0.71 per unit on market sentiments and forces. On the other hand, AIICO Insurance and Red star Express lost 20% and 16.9% respectively, closing at N0.72 and N3.00 per share on market forces and profit taking.

Market Outlook

We expect mixed trends to continue on positioning and profit taking ahead of quarter end and Q3 earnings season expected to kick off with early flier in second week of October. The hike in electricity tariff and fuel price, coupled with proposed strike will further worsen the already negative macroeconomic indices. Recall the nation’s GDP contracted by 6.1%, while inflation remains at 13.22% and PMI at 48.5 points, confirming the contraction in the economy.

Expect a pullback that will support the upside potential, especially with many fundamentally sound stocks remaining underpriced, and the dividend yield of major blue-chips continuing to look attractive in recent weeks, we expect speculative trading to shape the market’s direction, despite the seeming mixed outlook.

To position for the short to long-term, investors should target fundamentally sound, dividend-paying stocks, for possible capital appreciation in the coming months. Also, traders and investors need to change their strategies, because of the NSE’s pricing methodology, the CBN directives, and their impact on the economy in the nearest future.

Ambrose Omordion, Chief Research Officer, InvestData Consulting Limited