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NGSE outlook positive, time to diversify portfolio long-term ahead of possible correction
Market Update for the Week Ended October 2 and Outlook for Oct 5-9
By Investdata Analysts
Nigeria’s equity market turned positive last week, extending its bullish-run for the second consecutive week, thereby breaking out the first major resistance level on strong positive sentiments for high-flyers and growth stocks, ahead of the Q3 earnings reporting season.
The market rally and strong recovery seen so far are the results of increasing interests by smart money comprising foreign and domestic institutional investors, fund managers, pension fund administrators, high net worth individual, as well as retail investors. They are taking advantage of the circular flow of funds, in the midst of the low rates and yields environment to push funds into equity assets, especially blue-chips.
There are also the strong market fundamentals such as liquidity; low valuation as represented by the prevailing attractive price earnings ratio at below 15x; positive sentiment; and continued sector rotation. These are in addition to the high margin of safety among the high dividend paying stocks and many others.
The COVID-19 market rally has naturally ignored all the emanating negative economic data ranging from the 13.22% inflation rate during the month of August, the 6.1% Q2 GDP contraction, and industrial output at below 50 points as shown in the Purchasing Managers’ index for September which further contracted to 46.9point from 48.5 points in August.
The following are what market technicals are saying about the NSE amidst the increasing optimism, while its performance Year-To-Date is turning positive:
- A Bright Cloud chart pattern typically associated with a major breakout setup and a trend continuation.
- Critical resistance levels on the NSE as highlighted by the multiple technical analysis strategies are suggesting a range of 27,800.20 basis points to 32,596.50bps, which is now acting as major resistance levels.
- If the NSE All Share Index stays above the 27,000 level, then we interpret the recovery and trend as strong and healthy to support higher prices.
Consequently, the current market rally is likely to persist, despite the little expected pullback that will offer another opportunity to jump into high-flying and growth stocks which would drive the NSE’s V shape recovery as smart money enters the market. There is also the expected mixed Q3 earnings reports and negative economic data, given that market players are not going defensive at this point, considering the strong market momentum.
Movement Of NSEASI
It was another bullish week that rounded off September, ushering in the last quarter on a positive start, recording four trading sessions of up market, given that October 1 was declared as a public holiday to celebrate Nigeria’s 60thIndependence anniversary. The NSE’s benchmark index extended its recovery move for the week, gaining 2.53%, as against 2.92% recorded in the previous week.
As a result of strong buying interest and positive outing, the composite index gained 666.43 basis points, opening at 26,319.34bps. Within the week, it touched an intra-week high of 26,985.77bps from its low of 26,319.34bps on positive sentiment for blue chip stocks ahead of the quarterly earnings reports. The key performance index closed the week at 26,985.77bps, while market capitalization gained N350.15bn, closing at N14.11tr, from the previous weekend’s N13.76tr, representing 2.56% appreciation in value. The marginal increase in market cap was due to the additional 146,878,241 ordinary shares of Dangote Sugar Refinery listed on the NSE during the week, arising from the Scheme of Merger between Dangote Sugar Refinery Plc and Savannah Sugar Company Limited. The additional units raises Dangote Sugar Refinery’s total issued and fully paid up shares from 12,000,000,000 to 12,146,878,241 ordinary shares of 50 kobo each. Also within the week, the share prices of BUA Cement and 11 Plc were adjusted for dividends recommended by their boards.
The top advancer’s table was dominated by small and medium cap stocks as reflected in the market breadth showing more gainers than losers in the ratio of 36:15 on a strong momentum. Money Flow Index read 88.45bps, up from 82.41bps in the previous week.
The NSEASI chart pattern and candlestick formation at the end of Friday trading signaled high possibility of trend continuation or pullback, as it is set to cross major resistance at 27,800.20bp, 28,000bps, 28,871.91bps and 29,359.40bps. The fact that the index is trading above the 50-Day Moving Average on high traded volume, is another attraction for institutional investors, as it reveals strength in the market, just as the index has cross 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 timeframe is reading 88.45 points, with MACD remaining in the bullish zone. The buy volume for the period stood at 100%.
Bullish Sectoral Indices
All the sectorial indexes were bullish, except for the NSE Consumer Goods index that closed 0.75% lower, while the NSE Banking index led the advancers after gaining 4.24%, followed by the NSE Industrial Goods that chalked 3.25%. The Oil/Gas and Insurance indexes recorded 1.79% and 0.64% gains respectively. The general market outlook in recent times looks positive in the short-term; following which investors should take short-term positions and diversify their portfolio along long-term trades to protect capital. This they can do by considering sectors such as agribusiness, healthcare, industrial goods, insurance and telecoms, which have shown the most strength.
Transactions for the week, in terms of volume and value, were down by 2.55% and 17.80% respectively as traders crossed 1.53bn shares worth N16.9bn, compared to the previous week’s 1.57bn units valued at N20.56bn. Volume was driven by trades in financial services, conglomerates and Industrial goods, specifically Zenith Bank, Sterling Bank, UBA, UACN and Lafarge Africa.
Total Nigeria and Oando were the best performing stocks during the period under review, after gaining 21% and 12.81% respectively to close at N96.80 and N2.29 each on low price attractions and market sentiments. On the other hand, Cornerstone Insurance and University Press lost 15.49% and 12.81% respectively, at N0.60 and N1.24per share on market forces and profit taking.
Market Outlook
We expect mixed trends and pullback on positioning and profit taking ahead of the Q3 earnings season expected to kick off with early filers beginning from the second week of October.
Price corrections at this level of the market 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
