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Profit Taking, Positioning Lingers In Mispriced, High Yield Stocks, As Earnings Season Beckons



Nigerian equities extends gain on Tuesday to cross N20trn market value
Profit Taking, Positioning Lingers In Mispriced, High Yield Stocks, As Earnings Season Beckons
  • By Investdata Analysts


Volatility and profit taking continued on the Nigerian Stock Exchange on Tuesday as equity prices dropped across board, following which the benchmark index closed lower on a negative market breadth and low traded volume. This extended the bearish stance for the second successive session as players cashed out their short-term profits from the uptrend recorded year-to-date.

Looking at the rate and pattern of profit booking across all the sectors, one can safely conclude that players in the market are indecisive and cautious, even as traders are uncertain about the next direction, as the composite All-Share index entered into distribution phase after forming a double top at 42,412.72 basis points same as the March 7, 2014 position.

Recall that the Central Bank of Nigeria left its rates low, a situation that attracted cheap funds to the market, as part of helping the economy to recover from recession; a decision that pulled funds to the stock market as funds gravitated towards it for better returns. This was to be expected, in view of the continued spike in inflation. In the process, the NSEASI jumped steadily to its current level. We note that all the factors responsible for this growth have remained largely intact, including the Primary Market Auction rates of the government saving bond that closed at 4% and 5% respectively over the past two years.

This may have been another factor behind this price correction, especially as the market is ripe for profit taking, or a pullback knowing that it has stayed at this overbought state for so long now.

We believe that the 4% saving bond rate for two years is still low and unattractive, when compared to stock yields at over 7% in less than 90days, especially at this time that corporate actions of listed companies with December year-end kickoff with early filers any moment from next week.

Nevertheless, given the trading pattern and sharp uptrend that brought the key performance index to this current level, we once again suggest that investors should take profit in positions that they have made between 15-30% so far and wait to re-enter later. This is based on the belief that February is not always a favourable month for the stock market, given that the bulk of audited financials hit the market in March.

The change in trading pattern and pullback, considering the funds exiting the market as revealed by money flow index reading 65.45 points, indicates profit taking activities in the market.

Tuesday’s trading opened slightly on the downside and oscillated throughout the session on profit taking and positioning in mispriced stocks that have high dividend yields as the earnings season draws closer. This situation pushed the All Share index to an intraday low of 42,023.46 basis points, from its highs of 42,374.14bps, before closing session below its opening level at 42,043.79bps.

Market technicals for the day were negative and mixed, as volume traded was lower than the previous day’s in the midst of breadth that favoured the bears, and selling pressure as revealed by Investdata’s Sentiments Report showing 94% ‘sell,’ and 67% buy position. Total transaction volume index stood at 1.00 points, just as the momentum behind the day’s performance remained relatively strong, with Money flow index dropping to 65.45pts, from the previous day’s 71.15pts, indicating that funds left the market as profit taking continued.

Index and Market Caps

The benchmark index, at the end of Tuesday trading, shed 314.11 basis points, closing at 42.043.78bps after opening at 42,357.90bps representing a 0.74% decline. Similarly, market capitalization fell by N164.31bn, closing at N21.99tr, from its opening value of N22.16tr, representing a 0.74% depreciation in value.

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The session’s downtrend was driven by selloffs in stocks like Guaranty Trust Bank, Zenith Bank, Ecobank Translational Incorporated, UBA, Dangote Sugar, UBN, Flour Mills, Cadbury, Lafarge Africa, Ardova and Access Bank, among others. This mildly reduced the NSEs Year-To-Date gain to 4.40%, just as YTD gain in market capitalization stood at N981.94bn, or 4.47%.

Bearish Sector Indices

All the sectorial performance indexes were bearish, as the banking index led the decliners after losing 3.06%, followed by Insurance, Consumer, Energy and Industrial goods with 2.26%, 0.90%, 0.52%and 0.51% lower respectively.

Market breadth turned negative, as decliners heavily outweighed advancers in the ratio of 51:8; just as activities in volume and value terms were down by 5.25 and 20.43% respectively as investors exchanged 556.02m shares worth N4.79bn, from the previous day 586.81m units valued N6.02bn. This volume was driven by trades in UBN, Transcorp, FBNH, Zenith Bank and UBA.

The best performing stocks for the session were Champion Breweries and Unilever after gaining 9.94% and 5.19% respectively, closing at N3.70 and N12.20 per share, on market sentiment and forces. On the flip side, Linkage Assurance and BOC Gas lost 10% each, closing at N0.81 and N13.61 per share, on market forces and profit taking.

Market Outlook

We expect a mixed performance and profits taking, even as the NSE index is expected to rebound on expectation that earnings season momentum and reaction to support uptrend as dividend yield remain relatively high.  We advise you target dividend paying stocks and fundamentally sound companies with growth prospect in 2021, looking the way of mispriced companies. This is especially as the low interest rates regime and oil price rally have so far supported the economy and equity market.

There is, nonetheless, also the likelihood of a reversal in trend and continuation, as investors position in high yields 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.

MPC outcome

Ambrose Omordion, Chief Research Officer, InvestData Consulting Limited

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