Portfolio Adjustments Likely, As Investors Target Strong Potentials For Q3 Earnings Growth

By Investdata Analysts

Trading on the Nigerian Stock Exchange (NSE), on Tuesday, gathered more gaining momentum, extending its bull transition for the third consecutive session on a high traded volume and strong buying sentiment that pushed the benchmark All-Share index higher, despite the negative market breadth.

The stock seeming recovery or rally by the market is likely to continue after side trending for some weeks, breaking out the recent strong resistance level of 25,618.65 basis points on positive buying interests. This may continue, given the further rates crash due at the end of the Monetary Policy Committee (MPC) meeting on Tuesday, with members voting for a 100 basis points cut in MPR to 11.50%, from 12.50% to avail cheaper funds that would drive productivity in the economy. This, the committee noted, is the most potent way to mitigate the impact of rising inflation made worse by the recent hikes in electricity tariff and pump price of fuel, in addition to the previously subsisting insecurity, lack of infrastructure, naira devaluation and scarcity of foreign exchange.

One obvious implication that can be deduced from the decision is that savings account deposit will now attract 1.15% rate, even as the yield on most investment windows have been further thrown into negative, while standing lending facility rate and standing deposit facility rate are adjusted to 12.5% and 4.5% respectively. This reinforces the strong position of the Central Bank of Nigeria and MPC at sustaining the low yield environment to drive borrowing that will support domestic production and shorten Nigeria’s stay in recession, should the Q3 GDP contract as expected because of the impact of the Coronavirus pandemic induced lockdown.

Despitedisconnection from economic realities, the market is expected to benefit from the further crash in interest rates, compelling stock valuations, as investors seek higher yield opportunities in the face of negative real returns in the fixed income environment. The major take away from the MPC decision is that the Nigerian stock market will expect an inflow of funds from other investment window into equity assets.

Tuesday’s trading opened slightly in the downside and rebounded by the mid-morning, oscillating for the rest of the session on profit and position taking in MTNN, Dangote Sugar, FBNH, and Redstar Express, among others. This pushed the composite index to an intraday high of 25,655.18bps, from its low of 25,525.93bps, and thereafter closed at 25,654.90bps.

The day’s market technicals were positive and mixed, with higher volume traded than the previous session in the midst of negative breadth and strong buying pressure as revealed by Investdata’s Sentiment Report showing 100% ‘buy’ volume. Total transaction volume index stood at 1.12 points, just as energy behind the day’s performance remained relatively strong, with Money Flow Index reading 65.14 points, from the previous day’s 64.26 points, an indication that funds enter the market.

Index and Market Caps

At the end of Tuesday trading, the NSE All Share Index gained 80.55 basis points to close at 25,654.90bps, after opening at 25,574.35bps, representing 0.31% growth, just as market capitalization rose by N42.1bn to N13.41tr, after opening at N13.37tr that represented 0.31% appreciation in value.

The upturn during the session impacted positively on the index, reducing Year-To-Date loss to 4.42%, while market capitalization YTD gain stood at N450.95bn, representing 3.37% above the year’s opening value.

Bearish Sector Indices

Performance index across sectors closed in red, with the NSE Insurance losing 1.11% to top decliners table, followed by Banking Oil/Gas, Industrial and Consumer Goods that lost 0.60%, 0.15%, 0.11% and 0.10% respectively.

Market breadth was negative, with decliners outnumbering advancers in the ratio of 17:9, while activities in volume and value terms rose by 33.61% and 154.63% respectively while investors exchanged 262.05m shares worth N4.4bn, compared to Monday’s 196.12m units valued at N1.73bn. This volume was driven by trades in Zenith Bank, FBNH, Transcorp, FCMB and Guaranty Trust Bank.

Redstar Express and Consolidated Hallmark Insurance were the best performing stocks, gaining 9.80% and 9.68% respectively, closing at N3.25 and N0.34 per share on their low price attraction and market forces. On the flip side, UBN and Cornerstone Insurance lost 6.54% and 6.25% respectively, closing at N5.00 and N0.60 respectively on profit taking.

Market Outlook

We expect the current trend and repositioning to continue ahead of third quarter-end window dressing and corporate earnings season despite the negative macroeconomic indices, given the further crash in money market rates, with inflation at 13.22%, deepening the negative returns on many investment windows. Recall that banks have kept the market above its 50-day moving average on a daily time frame, which is equally at overbought zone in the short term.

The mixed intraday movement is likely to persist as the month of September progresses in the midst of profit booking, mismatch of economic policies and negative macroeconomic indices. This is also against the backdrop of the fact that the capital wave in the financial market may persist in the midst of relatively low-interest rates in the money market, high inflation, negative Q2 GDP of 6.1% and unstable economic outlook for the rest of 2020 as government and its economic managers are going front and back with mismatch polices and implementation.

Also, investors and traders are positioning amidst the changing sentiments in the hope of improved liquidity and positive economic indices which may reverse the current trend.

We see investors focusing on portfolio adjustment and rebalancing by targeting companies with strong potentials to grow their Q3 earnings and dividend on the strength of their earnings capacity as the year last quarter is at the corner.

Again, the current undervalue 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 for the rest of the year.

Ambrose Omordion, Chief Research Officer, InvestData Consulting Limited