Here’s how stock market reacts to strong Q3 earnings

Amid record-breaking profits posted by listed companies in the third quarter (Q3) of 2024, the Nigerian stock market has shown little excitement in the past one month.

According to market data collated between October 8 and November 7, there was a 0.68 percent drop in the NGX All-Share Index, from 97,584.81 points to 96,924.86 points.

While Nigerian companies, especially those in the financial services sector, have posted impressive earnings, a combination of macroeconomic factors and valuation concerns have affected their stocks’ reactions.

Read also: Oando, VFD Group, Dangote Sugar, others dip NGX-ASI by 0.12%

With an inflation rate of 32.7 percent as of September 2024, up from 32.2 percent in August, the NGX’s 30 percent year-to-date gain reflects a negative real return that has been affecting investor sentiment in the market. The market’s underperformance is also tied to declining overseas interest in the market, as foreign participation in the NGX dropped in September 2024.

The continued devaluation of the Naira over the past few months has been a contributory factor to foreign portfolio investment (FPI) decline in the NGX. Between June and September 2024, the Naira depreciated by 12 percent, leading to further erosion in the actual value of FPIs in the market.

Adetola Freeman, an analyst with FBS Brokers noted, “The reaction of the market to the impressive earnings profile of the companies is driven majorly by broader economic conditions. Investors are not impressed because Nigeria, over the past few months, has not proven to be investment-worthy.”

A sectoral analysis shows that in the first nine months of 2024, financial institutions led in terms of profitability, as banks posted triple-digit growth in net earnings. Despite this, investor interest in banking stocks remains tepid, with the NGX Banking Index recording only a 4.17percent gain year-to-date as of November 7.

For the banking stocks, there is a bigger story of how government regulations can switch investor sentiment. In Q2 2024, banking stocks suffered their worst decline in a long while, with the NGX Banking Index dropping by 10.2 percent during that period. The decline was the market’s reaction to the CBN’s recapitalisation mandate.

Following the Q3 earnings releases, the NGX Banking Index rose 11 percent between October 8 and November 7. Key stocks like Zenith and GTCO gained 15 percent and 13 percent, respectively, during this period. However, in a broader year-to-date view, the stock performance of these banks lagged behind other companies.

Similarly, investors have also held a bearish sentiment towards industrial goods despite also posting record profits in their nine-month earnings results. In the second half of 2024, NGX Industrial Index declined by 26.7 percent, driven by massive sell-offs of Dangote Cement and BUA Cement stocks, despite the earnings posted by these two companies.

Read also: Aradel, other major advancers cause NGX positive start to new week

Year-to-date, Dangote Cement stock has appreciated by 49.7 percent. Although the stock hit an all-time high share price of N763 in February, it has steadily declined since then. In the second half (H2) of 2024, Dangote Cement has declined so far by 27 percent, from N656.7 to N478.8 as of November 7.

Although BUA Cement was profitable in the first nine months (9M) of 2024, its net profit of N49 billion marked a 36 percent year-on-year decline from the N76.1 billion posted in 9M 2023. This drop in profit was reflected in investor sentiment, as its share price has declined by 1.21 percent since the release of its earnings.

In one month between October 8 and November 7, the NGX Oil and Gas Index appreciated by 9.9 percent, driven majorly by the listing of Aradel Holdings Plc on October 14. Also, Seplat’s share price appreciated by 9 percent to hit N5700 as investors reacted to the government’s approval of its MPNU purchase.

Aside from the positive performance of Aradel and Seplat, investor sentiment toward other oil and gas stocks remains tepid. TotalEnergies, despite posting a record nine-month profit of N27.4 billion, saw no change in its share price, which remains at its peak of N673.9.

MRS Oil Nigeria reported an impressive 81 percent year-on-year increase in net profit. However, the strong performance did little to tilt investor sentiment, as its share price slipped by 1 percent since releasing its earnings.

In the consumer goods sector, an unexpected trend emerged, as most companies reported nine-month losses that had little impact on investor sentiment. Between October 8 and November 7, the NGX Consumer Goods Index saw a 0.5 percent increase, despite significant losses reported by many of its constituent stocks.

For instance, Nestle Nigeria’s loss surged by 328 percent year-on-year in 9M 2024, reaching N184.3 billion, up from N43.1 billion in 9M 2023. Despite this steep rise in losses, the company’s stock on the NGX only declined marginally by 0.56 percent.

BUA Foods, with a N78.5 billion net profit during 9M 2024, posted a 3,783 percent year-on-year growth from the N2.0 billion net profit posted in 9M 2023. This massive profit gain was insufficient to shift the needle for BUA Foods as its share price stayed the same at N394.9 before and after the result release.

Read also: We’ve traded N2.3trn assets on NGX in 2024 – CEO

Another significant factor influencing the market’s reaction to earnings is the performance benchmarks that investors set, which often dictate how stocks respond to financial results. A case in point is Presco Plc, which exceeded the expectations of many analysts by breaking the N300 per share threshold in June 2024. Despite posting record-breaking financial results, the company’s stock has remained stagnant at its all-time high of N485.4, with no upward movement since.

Analysts attribute this lack of movement to the stock being heavily overbought. An overbought scenario creates a situation where further upward price actions are restrained, as demand at the current price may not be strong enough to sustain or push the stock further.