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NSE recovery may depend on MPC outcome, analyses of Q3 earnings reports
By Investdata Analysts
The nation’s stock market pullback continued on Monday, beginning trading in the last full trading week of November very high volatile and mixed, owing to seeming panic selloffs among investors in what may be market reaction to weekend’s release of critical economic data by the National Bureau of Statistics (NBS) confirming Nigeria’s slip into yet another recession.
Monday’s marginal loss paused the roaring bull market, amidst expectation for the outcome of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MC) meeting to be announced on Tuesday. Although, analysts believe the MPC members now have limited choices given all of the macroeconomic variables, the outcome of the meeting will determine what choices investors would make in the coming weeks.
The little improvement or recovery in the economy as shown by the 3.62% GDP contraction in Q3’20, which was better than the previous quarter’s negative 6.10% was In line with our expectations, as economic activities gradually reverted to pre-COVID levels. Indeed, COVID-19 appears to have worsened structural concerns across a few sectors, but the sustained pickup in economic activities in other sectors suggests that some non-oil contraction may be mostly transient.
Notably, the contraction in manufacturing eased from 8.8% YoY in the second quarter to 1.5% YoY in the third quarter, with CBN data showing improvements in new orders as well as production and inventory levels in the review period.
The manufacturing sector’s Purchasing Managers’ Index also revealed that the sector recovered in November since its contraction in May 2020, leaving legroom for continued recovery compared to the average levels of the last two quarters.
The composite NSE All Share Index closed lower on Monday, extending its losing momentum for the third back-to-back trading sessions, on a less than average volume and negative market breadth. The trading pattern and candlestick formation at the end of session support a reversal, depending on the interplay of market forces on Tuesday.
We note that the COVID-19 market rally has been outside economic realities and the negative macroeconomic indicators that have hovered around the country since April 2020, propelled predominantly by the low interest rates regime and yields in the fixed income side of the financial markets. This was in addition to positive sentiments and the better-than-expected second and third quarter corporate earnings released.
Meanwhile, Monday’s trading opened on the downside and was sustained into the midday before oscillating for the rest of the day due to buying interests in high cap stocks Airtel, Dangote Cement, Nestle, and BUA Cement in the midst of profit-taking. This pushed the benchmark index to an intraday low of 33,582.38 basis points, from its highs of 34,250.45bps, before the session closed slightly lower than it opened at 34,121,78bps.
Market technicals for the session were negative and mixed, with higher volume traded than previous day’s in the midst of a negative breadth and highbuying sentiment, as revealed by Investdata’s Sentiment Report showing 81% ‘buy’ volume and 19% sell position. Total transaction volume index stood at 1.14 points, just as the energy behind the day’s performance was relatively strong as Money Flow Index reading 72.08 from the previous day position of 77.93 points. This is an indication that funds left some stocks as profit taking persist.
Index and Market Caps
At the end of Monday’s trading, the NSEASI shed 17.05bps, closing at 34,121.78bps, representing a 0.05% drop, after opening at 34,136.82bps, just as market capitalization fell by N8.93bn to close at N17.83tr, after opening at N17.84tr, which also represented 0.05% value loss.
The day’s downtrend resulted from panic selloffs in medium and large cap stocks like Zenith Bank, Guaranty Trust Bank, Stanbic IBTC, Lafarge Africa, Guinness, Access Bank, FCMB, FBNH, Flour Mills and Fidelity Bank, among others. This impacted mildly on the Year-To-Date gain, reducing it to 27.11%, while market capitalization YTD returns stood at N5.16tr, representing a 39.00% growth above the year’s opening value.
Bearish Sector Indices
Performance indexes across the sectors were bearish, except for the NSE Industrial Goods that closed higher by 2.72%, while the NSE Banking led the decliners, losing 4.72%, followed by the NSE Consumer Goods which closed 2.07% lower. Insurance and Oil/Gas index were down by 2.07% and 1.62%.
Market breadth remained negative as decliners outnumbered advancers in the ratio of 46:5, whiletransactions in volume and value terms were up by 64.7% and 73.5% respectively, as players exchanged 568.04m shares worth N7.33bn, compared to the previous day’s 344.9m units valued at N4.22bn. The day’s volume was driven by trades in Zenith Bank, FBNH, Access Bank, UBA and Guaranty Trust Bank
Airtel Africa and BUA Cement were the best performing stocks, gaining 5% and 4.77% respectively to close at N525 and N56 per share on the back of market forces and sentiment. On the flip side, Livestock Feeds and Ardova lost 10% each, closing at N1.26 and N13.50 per share,onprofit booking.
Market Outlook
We expect a mixed market, as players react to banks’ earnings which came below expectation in the midst of recession news and November PMI to 50.2 points from 49.6 points in October after six months of contraction according to CBN reports. All eyes are on MPC meeting outcome, just as NSE Index and Fibonacci revealed a ceiling level of 35,814.18bps and 161.8%, that must be broken for the recovery moves to continue.
However, strong and faster recovery may continue, depending on market forces going forward. This will depend on the quality of Q3 score-cards 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 sector and company’s performances.
The NSE’s index action and indicators are in divergent direction on a low traded volume and mixed sentiments.
Again, the current oscillating 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