A Good Start for Stock Market

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Goddy Egene writes that the 5.3 per cent gain recorded by the equities market in January is a positive development that is capable of attracting more investors

In line with the expectations of most analysts, the Nigerian equities market ended the first month of 2021 on bullish note. While Nigerian Stock Exchange (NSE) All-Share Index (ASI) rose by 5.3 per cent to close at 42,412.66, market capitalisation gained N1.124 trillion to be at N22.187 trillion.

Having appreciated by 50.03 per cent in 2020, many analysts had expected the positive sentiments to continue January. The factors that drove the market in 2020 remained throughout the first month of 2021, hence the positive close.

For instance, the inflow of funds from the fixed income market, oscillating oil price, corporate earnings expectations and other factors, which had supported the recovery last year, were prevalent in January.

Apart from 5.3 per cent gain recorded by the NSE ASI, traded volume for the period was up 31.73 per cent at 11.79 billion shares compared with 8.95 billion shares recorded in the preceding month. Similarly, market breadth for the month was positive with advancers outnumbering decliners in the ratio of 87:22 to extend the seven months of bull market.

In terms of sectoral performance, all the indexes and other NSE indices were bullish. It is only the NSE Growth Index depreciated by 3.22 per cent.

The NSE Insurance led the performance with 29.77 per cent driven by expected merger and acquisition of smaller insurance companies by big names in the sector and banks currently seeking approvals to adopt the holding company structure that may acquire operators in the underwriting industry.

The NSE Oil/Gas index garnered 12.43 per cent, while the NSE Banking Index went up by 7.89 per cent. The NSE Consumer Index and NSE Industrial Goods Index added 7.04 per cent and 1.41 per cent in that order.

Apart from 5.3 per cent gain recorded by the NSE ASI, some stocks delivered significant gains in the first month of the year. However, the best-performing stocks for the month were predominantly low and medium caps across the consumer goods, insurance, agribusiness and oil marketing sectors. Champion Breweries Plc led with a gain of 261.6 per cent following increased demand by investors on the news that institutional investor had increased its stake to 84 per cent.

Livestock Feeds Plc gained 85.6 per cent while Linkage Assurance Plc chalked up 73.08 per cent. Mutual Benefits Assurance garnered 59.26 per cent, while NCR Nigeria Plc chalked 59.18 per cent. Other top price gainers for the month included: BOC Gases Plc ( 57.9 per cent); Regency Insurance Plc ( 54.55); Royal Exchange Assurance Plc ( 53.85 per cent); Japaul Gold& Ventures Plc ( 46.73 per cent); Northern Nigeria Flour Mills Plc (43.6 per cent); Ardova Plc (40.5 per cent); Lafarge Africa Plc (33.9 per cent); NEM Insurance Plc (31.6 per cent) and Consolidated Hallmark Insurance Plc (31.6 per cent).

Explaining the performance in January, analysts at Investdata Consulting Limited, said there was also the impact of the better-than-expected third quarter (Q3) numbers from March year-end accounts and unaudited 2020 full year earnings released so far in the midst of a lingering economic downturn resulting from the Coronavirus (COVID-19) pandemic and the lingering second wave.

According to them, irrespective of ongoing recession, positive buying sentiments for blue-chip and growth stocks continued to wax strong as the earnings reporting season draws closer.

They said the positive responses to the mixed numbers release dates and positioning in mispriced stocks by investors haves pushed many equities to new 52-week highs, confirming the high liquidity and confidence in the market.

They said the possibility of prices rallying further from here is high, amidst portfolio reshuffling on the strength of the Q3 and unaudited 2020 full year numbers, just as investors would be assured of reward in the form of dividends when the audited full-year score-cards begin to flow into the market, despite the possibility of dividend cuts.

Investdata Consulting explained that the market is still trading within the V-shape recovery pattern, despite the likely mixed trend on profit taking and price correction, any moment from now, depending on market forces.

“The benchmark index has entered the overbought region on a weekly and daily time frame, reflecting an increased inflow of funds that pushed stock prices up in the first month of 2021, going against the age-long January effects tradition, while maintaining the pattern of uptrend during the month in recent year,” they said.

According to them, the trading patterns and momentum going forward are likely to change, as investors react to the expected audited full-year earnings news, portfolio rebalancing and repositioning, with early filers kicking off the season in February with dividend news.

But the growth recorded in the first month of 2021 was not unexpected because most market and investment analysts had predicted a sustained bull run in the greater part of the first half of the year.

For instance, analysts at Norrenberger Financial Group, a leading financial services group, had said equities market are likely to remain favoured in 2021.

“The Nigerian equities market in 2021 will be shaped by system liquidity, corporate earnings, attractive corporate dividends, foreign exchange and foreign portfolio investors. The fixed income market may likely return to higher yields on the back of overbought in the equities securities market, local borrowings, and monetary policies,” they said.

Analysts at Cordros Securities Research stated that the market performance would be primarily determined by domestic participation which will be supported by the low fixed income yield environment, liquidity surfeit, investors positioning for dividends and stronger corporate earnings growth (mostly on the low base in 2020).

“We expect the Nigerian Stock Exchange (NSE) All-Share Index (ASI) to record a positive performance in 2021, albeit substantially lower when compare to 2020. ASI currently trades at a P/E (x) of 12.5x, making it just about fairly valued compared with its seven years average of 12.2x, but still cheaper compared to frontier market peers of 15.1x,” they said.

In the last week of January alone, the market appreciated by 3.3 per cent with analysts at Greenwich Merchant Bank envisaging a continuous uptrend.

According to them, increased bargain hunting across top counters was witnessed in the course of last week, as investors positioned across fundamentally sound counters in anticipation of the full year corporate earnings releases.

“We also note the key policy rate was left unchanged at the Central Bank of Nigeria (CBN) Monetary Policy Committee’s meeting in week, alongside the other policy parameters. Hence, we expect factors like the kick-off in the earnings season, and the persistently low yields in the fixed income space should drive activities next week. We envisage the market will maintain its uptrend, countered by pockets of profit-taking by contrarian investors,” they said.

Similarly, analysts at Cordros Securities said with the outcome of the MPC meeting aligning with market expectations amid negative real returns in the fixed income market, they expect risk-averse investors to recalibrate their portfolio towards fundamentally sound stocks with attractive dividend yields.

“However, we advise investors to take positions in only fundamentally justified stocks as the fragility of the macroeconomic environment remains a significant headwind for corporate earnings,” they said.

In their assessment, analysts at Meristem Securities Research had said the equities market recovered from deep selloffs to finish as the best performing equities market last year. According to them, unattractive yields in the fixed income market, excess liquidity and relatively resilient corporate performance in the middle of a pandemic were the major factors which drove the market.

They said they expected this to continue, thereby sustaining the positive momentum of the market through the better part of the year.

“We see a correction on the horizon given the overbought status of the market, especially for major bellwethers. Nevertheless, the first half is expected to be dominated by attractive dividend yields and the low yield in the fixed income market, which we expect to persist through the first half of the year at the very least,” Meristem Securities said.

Looking ahead, the analysts Investdata Consulting said volatility was expected to continue in the new month, even as the outlook remains mixed due to likely price corrections, or pullbacks for a few days due to profit taking and portfolio reshuffling ahead of year-end and 2021 corporate actions.

“The anticipated correction in the new month will strengthen recovery. Despite the rising inflation, insecurity and the second wave of coronavirus, as this wave will further boost the healthcare sector due to government and Central Bank of Nigeria (CBN) commitment to enhance public health.

Investdata advised that investors at this point should not be greedy, but let their decisions be guided by their investment goals and exit strategies, even as the healthy inflow of funds into the equity assets due to prevailing low rates in money market is likely to continued even as the last MPC meeting has reduced fear of funds leaving the market in the interim.

“Again, the current breakouts of resistance levels offer traders opportunities to position for the short term, while investors should target fundamentally sound, and dividend-paying stocks for possible dividend income and capital growth,” they said.