Stocks: Concerns over an upside

LYSTS in the Nigerian equities market who are yet to take a position on the bourse have expressed concerns over the availability of further room for an upside, which will see them take positions in choppy stocks...

INVESTORS AND ANALYSTS in the Nigerian equities market who are yet to take a position on the bourse have expressed concerns over the availability of further room for an upside, which will see them take positions in choppy stocks as the market appreciate further in subsequent trading sessions.

As at the end of September 2020, the total market capitalisation of The Nigerian Stock Exchange stood at N30.51 trillion. The NSEASI inched up by +5.94 per cent as against +2.57 per cent gain recorded in the month of August 2020 while the NASD USI closed northwards with +3.18 per cent gain recorded at the end of the month under review, against +1.47 per cent gain in August 2020, to continue with what seems to be the best 4 months enjoyed by Nigerian equities.

In essence, by the end of the third quarter of 2020, the local equities market recorded forty-two gainers and fifty-five laggards as the NSEASI ended Q3 2020 in the upbeat territory with +9.61 per cent gain as against +14.92 per cent gain in Q2 2020 and -20.65 per cent loss in Q1 2020, while the NASD USI closed the quarter northwards with +2.55 per cent gain as against +3.29 per cent gain in Q2 2020 and -0.69 per cent loss recorded in Q1 2020.

In line with analysts’ expectations, the equities market recorded significant improvement in activity level as value traded on the local bourse (based on the benchmark All Share Index) surged 45.9 per cent month on month to N64.4 billion in September. Similarly, the surge in activity level reflected an improved risk-on sentiment which fed the buying appetite among investors. As a result, the bullish sentiments drove the local bourse higher by 6 per cent, month on month, to settle at 26,837.42 points.

It was a thing to note that since the end of Tuesday’s trading session (6 October 2020), NSEASI appreciated further by +4.92 per cent and the year till date (YTD) stood at +7.70 per cent. However, the concern for many investors who are yet to take a position on the local bourse remains clear: “Is there further room for an upside?”

Factors that would help drive the market higher and maintain the upward trend

In the views of market analysts at FSDH Capital, they expect to see the local bourse sustain the current momentum till the end of the year, as they note that several factors would still help sustain the rally. In their opinion, some key factors that would drive the market higher include:

On the monthly timeframe, the All Share Index (ASI) remains set for a bullish run as it is well below its 50-day simple moving average (SMA) which stood at 30,767.96; 100-day SMA (31,815.51) and 200-day SMA (31,075.86) at 26,985.77 points. As a result, while the market appears to have heated up in recent weeks, there remains a significant room for upside over the next 2 months as the index drives towards the 30,000 points mark.

Secondly, from a relative valuation perspective, the analysts posited that the All Share Index (ASI) remains undervalued relative to historical average and peers in other emerging and frontier markets. The ASI currently trades at a price-earnings (PE) ratio of 10.09x which is a significant discount to its 5-year average PE ratio of 11.89x.

Finally, the FSDH analysts also noted that the economy will still be bolstered with significant liquidity in the coming weeks which would force institutional and retail buyers to continue investing in cheap high dividend yield stocks. Notably, OMO maturities of N1.6 trillion are expected to mature in October 2020. Also, they recall that the liquidity from the N1.3 trillion OMO maturities in September supported activity level.

Analysts pick CBN’s policy easing stance a positive for local bourse momentum

In addition to the foregoing, the apex regulator, the Central Bank of Nigeria (CBN), in 2019 made access to the OMO auction window closed for local non-banking investors in a bid to extend liquidity into real economic activities. As a result of these policies, interest rates across all different money market investment vehicles have trended lower than market anticipations.

These policies have, however, created an unusual liquidity situation coupled with a lower yield environment which has been supportive of rally in risk assets, like equities, the analysts said, adding, “This reconfirms our earlier prognosis which projected a strong rally in Nigerian equities from September.” That said, market analysts at FSDH Capitals continue to see more room for a strong rally for the rest of the year as the CBN continues to maintain its easing stance.

The analysts think the low yield environment would continue to support risk on sentiment among domestic institutional and retail investors as they move funds from low yield assets to equities in a bid to improve risk-reward ratios of their portfolios as well as lack of adequate alternative investments.

“Truly, we have seen improved participation among domestic investors in 2020. For example, the Pension Industry Report for Q2 2020 showed that PFAs increased their stake in equities by N82.8 billion in Q2 alone (we expect this number to be significantly higher in Q3 & Q4) while the NSE Domestic and FPI report shows institutional investors (PFAs, Asset managers, Corporate investors etc.) have increased their participation in the equities market by 10.3 per cent year till date (as at August 2020).

“Despite these improvements, we expect to see significantly improved participation among these investors. This we expect to feed into sustained rally of Nigerian equities,” the analysts revealed.

However, in the past six weeks, the Central Bank of Nigeria (CBN) has adopted an easing of monetary policy stance on the back of a looming recession in the Nigerian economy. This is reflected in a series of policy changes including:

• Cutting the MPR by 100 basis points in its MPC September meeting

• Adjusting the asymmetric corridor to +100bps/-700bps from +200bps/-500bps around the MPR, and

• Cutting the minimum interest rate on savings accounts to 10 per cent of the MPR (i.e. 1.15%) from the previous 30 per cent of MPR (i.e. 3.75%).

Meanwhile, analysts at FSDH Capitals note that prior to that policy easing stance, the CBN had initiated changes in its monetary policy stance via orthodox and unorthodox policies, including maintaining the Loan-Deposit ratio (LDR) at 65 per cent as well as cutting the MPR by 100 basis points in its May meeting earlier in the year.