Volatility, negative sentiments ahead of Q2 earnings decline, asset revaluation

By Ambrose Omordion

Trading on the Nigerian Stock Exchange (NSE) last week recorded the highest weekly loss since May 29, extending the distribution phase of market correction as selloffs and profit taking persisted across the various segments of the market.

The mixed performance and volatility witnessed in the period were due to uncertainties surrounding the economy, especially in the second half of the year amidst a marked resurgence of the novel coronavirus infections, which remains a threat to the global economy.

Market players continue to price in the expected impact of the lockdown into the second quarter corporate earnings reports, given that many companies could present heavily impaired numbers. The growing concern among investors about inconsistencies in government policies, made worse by the declining price of crude oil, rising insecurity and macroeconomic indices, remain unattended.

Technically, the NSE’s composite All-Share index is set to breakdown the 50 and 20-Day Moving Average on a daily time frame and weekly chart respectively, thereby confirming the bearish wave on low traded volume and high selling pressure.  CCI indicator shows there is sell down already in the market.

As we have always noted, in any market situation there are opportunities, especially with the earningsseason around the corner to change the market momentum and action. You don’t have to be smart before you can make moneyin the stock market because the way it moves is always changing. As such, whatyou need is to think differently and educate yourself, using home study packs and videos, especially mastering the earnings season for profitable trading and investing in any market situation/cycle. That means we do not equate an “up” market with a “good” market and vice–versa. Markets present different opportunities to make money at different times but to manage risk diversification across assets class, sectors, region and currency.

Movement Of NSEASI

The bear run continued in the week under review, wiping away the previous week’s marginal gains as negative sentiment dominated trades, resulting in three sessions of down market. The NSEASI opened positively on Monday gaming 0.12% before pulling back on Tuesday, when it lost 1.53% as selloffs that resurfaced, before being halted at midweek when the NSE index was up by 0.82%, but reversed on an extended profit taking on Thursday and Friday, shedding 1.24% and 0.16% respectively. This brought the week cumulative loss of 1.99%, as against the previous week’s 0.01% marginal gain.

The NSE’s key performance index, during the week shed 492.90 basis points, after opening at 24,829.02bps, touching an intra-week high of 24,859.88bps, from its low of 24,332.36bps on selloffs and cautious trading. With the market extending to the decline  phrase, it is necessary for investors to go defensive by targeting stocks with high possibility of posting positive numbers in the face of coronavirus pandemic  ahead of the Q2 corporate earnings. Despite the drop in Friday’s lost position the market closed below its opening level at 24,336.12ps, compared to previous week’s close.

Similarly, market capitalization dropped by N257.13bn during the week, closing at N12.7tr from the previous weekend’s N12.95tr, representing a 1.99% loss in investors’ portfolio. In the review period, the share prices of Nahco, Ikeja Hotel and McNichols were adjusted for cash dividends of 30K, two kobo and 0.03 kobo respectively.

With the expiration of the two month extension by the NSE for submission of Q1 corporate earnings expired last month,  there were three late filers: Smart Products, Conoil and C/I Leasing released their scorecards comprising three 2019 audited results and two  quarterly earnings that came below expectation. Conoil and C/I Leasing declared dividend of N2.00 and 20 kobo respectively for their shareholders.

Low priced stocks dominated the advancers table during the week, despite the fact that decliners were more in the ratio of 59:13, while the impetus behind the week’s performance was relatively strong, as Money Flow Index read 58.58bps, compared to 58.77bps in the previous week, despite the continued selloffs.

The NSE’s index action has slipped into decline stage on a daily time frame as revealed by magical trend chart above, while the weekly chart showed extended distribution phase that equally supports pullbacks, considering the selling pressure in the midst of low traded volume.  All the momentum indicators on daily and weekly are looking down which are strong signs of weakness, despite the weekly bullish MACD which has crossed the signal line but sliding down The index rest on 20-Day Moving Average, as its set to breakdown the Fibonacci retracement line of 38.2, just as sell volume stood at 99%, and money flow index up at 58.85 point.

Relative Strength Index for the period is looking down to read 44.80, just as momentum behind the market’s correction is increasing as selloffs and profit taking continued on the ground that investors are discounting the happening in the economy and Q2 economic and earnings data, as portfolio repositioning continues at a time of global economic reset and fear of covid resurgence in second half to delay global economic recovery.

The strength behind the NSE’s index movement on a daily and weekly chart have been weakened with the ADX reads 20.48 points from last week 21.78points, on positive sentiments as revealed by Investdata’s Sentiment Report for the week, showing 85% ‘buy’ volume and sell position of 15% with the transaction volume index at 0.49.

Bearish Sectoral Indices

All the sectoral performance indexes closed the week red, led by the NSE Banking which lost 7.52%, followed by the NSE Industrial Goods and Insurance that closed 6.43% and 2.67% down respectively.

Activities for the week in terms of volume and value were up by 30.09% and 7.24% respectively, as investors traded 961.83m shares worth N9.18bn, from the previous week 739.38m units valued at N8.56bn. The week’s volume was boosted by trades in financial services, consumer goods and oil/gas stocks, especially FBN Holdings, Guaranty Trust Bank, UBA, Nestle and Transcorp.

Okomu Oil and Royal Exchange Assurance were the best performing stocks during the period, gaining 20.94% and 13.04%respectively, closing at N77.40 and N0.26per unit on positive sentiment and market forces.  On the flip side, Nahco and Learn Africa lost 24.34% and 21.48% respectively, closing at N2.00 and N1.06 per share on the price adjustment for a dividend of 30 kobo and selloffs respectively.

Market Outlook

We expect the volatility  and negative sentiment to continue ahead of expectedly Q2 earnings decline that are  being factored into the ongoing asset revaluation by fund managers and individual investors after one month of distribution  as selloffs gains momentum.  This correction is, nonetheless, creating opportunities for short-term trading, using the value area called resistance and support level in the midst of earnings reporting season.

We cannot also rule out investors pricing in government inconsistent policies and weak macroeconomic data from May Inflation rate of 12.4% and June PMI of 41.1 points which thrown returns on most investment classes into a negative with yields below the level which showed that inflation has risen close to the Central Bank of Nigeria’s benchmark Monetary Policy Rate (MPR) at 12.5%.  Declining industrial productivity that points to recession.

The sectoral rotational wave will help investors to cash in on low cap stocks and sectors that have suffered huge losses before now. Already investors are looking the way of healthcare, Airline services providers, among sectors likely to be impacted positively in the much anticipated global and domestic economic reset.

Also, the possibility of continued funds inflow to the low priced stocks is high, due to the higher yields and upside potentials, considering the low rates on offer in the money and bond markets. In the meantime, investors should also look out for developments around the implementation of the CBN’s funding plan for small and medium scale businesses.

Already, we notice that investors are taking position in healthcare and other defensive stocks likely to survive this meltdown, as seen in the increased trading in them, even as the global markets continue on the recovery path, with the gradual easing of the lockdown.

While discerning investors should prepare to take advantage of stocks revaluation to position for the medium to long-term, it is noteworthy that the Nigerian equity market is selling at a discount and therefore offers high upside potential.

Expect a pullback that 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.

(This is Market Update for Week Ended July 3, And Outlook for July 6-10)

Ambrose Omordion is the Chief Research Officer, Investdata Consulting Ltd