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NSE index declines faster, offers entry opportunities ahead of earnings season



Stock index closes flat amidst falling turnover

NSE index declines faster, offers entry opportunities ahead of earnings season


Nigeria’s stock market closed lower still at the midweek, extending its negative stance for the eighth consecutive session of profit taking and selloffs that deepened the distribution phase, ushering in decline. The composite All-Share index broke down the strong support level of 41,228.16 basis points, testing 40,658.98bps in a seeming warn of a new bear stance ahead of the much anticipated corporate earnings season.

The current situation or sustained pullbacks have further created huge opportunities for discerning investors and traders to reposition in high yield and dividend paying stocks, especially given that the unaudited fourth quarter 2020 results being released have offered insights to which sector and companies to position before the audited accounts start flooding the market along with their corporate actions.

Looking at the seemingly improved fixed income yield with midweek’s Treasury Bills auction rates at 1%, 2% and 4% for 91, 182 and 364-Day bills respectively, the ongoing corrections in the equity market makes it much more attractive for smart fund managers. This is considering the shorter time frame, given that many stocks have dividend yield at above 8%, as well as the upside potential for capital gains as we speak.

A breakdown of the 40,000 psychological line will confirm a new trend as high cap stocks and sectors that pushed the market index up sharply are suffering losses due to profit booking and price corrections.

To survive and profit from the expected new trend, if the full year earnings reports and dividend news fail to impact and change the current trend, a big rotation in sector trends should guide your investment decision as the earnings season draw closer still.

Here, looking at how the global and domestic economies will behave, post-COVID as vaccines and other measures are being put in place to propel economic recovery, how soon will Nigeria return to normalcy, 12 months… 24 months….? This question is salient at this time, considering the plethora of policy summersaults and very often poor implementation style of the government and its economic managers.

Meanwhile, midweek’s trading opened on a gap down and oscillated slightly in the afternoon on position taking in mispriced stocks, profit and even selloffs across sectors. This situation pushed the benchmark index to intraday low of 40,659.98 basis points, from its highs of 41, 510.16bps, after which it closed lower at 40,696.01bps on a low traded volume.

Market technicals were negative and mixed, with higher volume traded than previous day’s in the midst of breadth that favoured the bears on a high selling pressure as revealed by Investdata’s Sentiments Report showing 96% ‘sell,’ and4% buy position. Total transaction volume index stood at 0.66 points, just as the momentum behind the day’s performance remained relatively weak, with Money flow index looking up to 45.66pts, from the previous day’s 41.24pts, indicating that funds entered the market despite the continued selloffs,

Index and Market Caps

At the end of midweek’s trading, the benchmark NSEASI lost all of 814.15 basis points, closing at 40,696.01bps after opening the session at41,510.16bps, representing 1.96% decline. Market capitalization similarly lost N425.92bn, closing at N21.29tr from N21.72tr, also representing1.96% value loss.

Wednesday’s downtrend was attributed to continued profit taking and selloffs in Dangote Cement, Flour Mills, Guaranty Trust Bank, Zenith Bank, UBA, Presco, Lafarge Africa, FBNH, Dangote Sugar and Ecobank Transnational Incorporated, among others. This impacted negatively on the market, leaving Year-To-Date gain at 1.06%, just as YTD gain in market capitalization stood at N233,14bn, or 1.11%.

Bearish Sector Indices

Performance indexes across sectors were bearish, except for the NSE Oil/Gas that closed flat, while the NSE Industrial Goods index led the decliners after losing 3.70%, followed by the Banking, Insurance and Consumer Goods with 3.36%, 1.25% and 0.38% lower respectively.

Market breadth turned negative, as decliners outpaced advancers in the ratio of 13:37; just as activities in volume and value terms climbed 19.92% and 38.73% up respectively, as players exchanged 366.86m shares worth N5.48bn, as against previous day’s 305.93m units valued at N3.95bn. Volume was driven by trades in Zenith Bank, FBNH, Guaranty Trust Bank, Courtville and Access Bank

Niger Insurance and Champion Breweries were the best performing stocks, gaining 10% and 9.82% to close, at N0.22 and N3.02 per share, on market forces, while on the flip side, CAP and Fidson Healthcare lost 10% each, closing at N18.00 and N5.40 per share, on profit taking.

Market Outlook

Oil at its longest two-year winning streak and the market is pulling back, a situation that suggests that the ongoing correction may not last, but creating entry opportunities for investors and bargain hunters ahead of earnings expectations and reaction to numbers that would be unveiled. Given that dividend yield remains relatively high, we advise that you target dividend-paying stocks and fundamentally sound companies with growth prospect in 2021, looking way of mispriced ones. This is especially given the rising oil prices that had so far supported the economy and equity market, despite the seeming improvement in the fixed income yield which had remained at negative real rate of return due to the subsisting high inflation.

There is, nonetheless, also the likelihood of a reversal in trend and continuation, as investors position in high yield stocks ahead of the earnings season. Also, important is the fact that technical indicators reveal overbought on the weekly and daily chart, while the RSI read 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 expected 2020 full earnings reports, especially now that the outcome of the MPC meeting has given the market a direction, until the next gathering in March.

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

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