Equities: Will investors sell in May and go away?

The stock market will slide in May as usual. Some stocks will rally especially MTNN, Dangote Cement, Nestle, and Guinness. The above comments, among others were views of analysts at Financial Derivatives Company in their May 5 presentation at Lagos Business School (LBS) executive breakfast session.

While Nigeria’s economic activities and policies are expected to reflect in equities price movement this May, the question remains the possibility of the bulls returning to the market or investors truly selling in May and going away.

“Sell in May and go away” is a well- known financial- world adage. It is based on the historical underperformance of some stocks in the “summery” six-month period commencing in May and ending in October, compared to the “wintery” six-month period from November to April.

If investors follow this “Sell in May and go away” strategy, they would divest their equity holdings in May (or at least, the late spring) and invest again in November (or the mid-autumn).

The stock market performance is sensitive to uptick in the fixed income (FI) space. For long term investors, rising yields are a mixed bag –amid sell pressure, there are opportunities for bargains in value counters.

Recently, the National Bureau of Statistics (NBS) recently released the inflation figures for April 2021. Nigeria’s inflation came as a big surprise beating the analysts’ expectation by slowing first time in 2 years. Inflation slowed to 18.12 percent in April from 18.17 percent in March.

On a segmented basis, food inflation cooled to 22.67percent year-on-year (y/y) for April, from 22.95percent y/ y for March, representing a 28basis points (bps) decline. On a month-on-month basis, the food sub-index increased by only 0.99percent in April, a significant decline from 1.90percent in March.

“In the financial markets, we do not expect this to impact on the upcoming bond auction as dealers await clarity on whether moderation in the headline inflation rate would be the new trend.

“Thus, we do not expect a major change in current yield dynamics, particularly at the long end of the curve, until the MPC decision is known”, said research analysts at United Capital Plc.

Following the positive surprise in inflation, the analysts reckon this may marginally tilt the decision of the Monetary Policy Committee (MPC) at its next meeting.

“We note the probability of a rate hike/hold hangs in the balance given doubts on the sustainability of April’s disinflation, the already precarious high level of inflation and fragile state of economic recovery”, United Capital analysts added.

Breakthroughs in developing Covid-19 vaccines had in recent months raised expectations the economy will bounce back. This is even as improving risk appetite encouraged investors to buy riskier assets such as stocks.

Supported by impressive corporate earnings, the Nigerian stock market’s performance in April shows the value of listed equities went up by 2.06percent to N20.85trillion while the Nigerian Exchange ( NGX) Limited All Share Index (ASI) rose in April by 2.02percent to 39,834.42 points.

Though as first-quarter (Q1) earnings season which had enlivened the market waned, suffix to say that the dearth of bargain opportunities in value stocks will only usher in profit-takers.

Already, many analysts are favouring profit taking activities after positive close to holiday shortened trading week enhanced stock investors wealth by about N147billion.

“Increase in economic and business activities will drive investment in stocks. Institutional investors will be forced to rebalance asset mix. Banking index expected to further contract as investors are pessimistic about rising issues in the banking space. Investors expected to trade cautiously”, Financial Derivatives Company had said in its May outlook.

GTI research analysts said they expect mixed sentiment this week, “amidst profit-taking from the recent price appreciation in major sectors and rising yield in treasury bills.”

“We expect investors to book profits on gains made in the past weeks. We also see muted investor activity later in the week as we expect investors’ focus to be on the bond auction in light of the shock Nigerian Treasury Bills (Nt-bills) Primary Market Auction ( PMA) results”, according to United Capital research.

“We acknowledge the relatively low prices of counters across sectors and the bargain-hunting opportunities this present, however, we expect investors to take profit on stocks that gained last week.

“On this note, we expect the equities market to close on a negative note this week”, Lagosbased research analysts at Meristem also said in the May 17 note.

Vetiva research analysts had in their Monday May 17 commentary anticipated another mixed session after the market opened the new week on a negative note, adding that investors will continue to take profit on some stocks, “while buying up other fundamentally sound names”.

“We expect trading sessions to be a mix of bargain hunting and profit-taking activities”, said Afrinvest research analysts in their May 17 note to investors.