The bulls are running out of steam on the Nigerian stock exchange as analysts say there is an indication of weaker investor sentiment emerging after a bullish run that saw the stock market reach a record 41 percent return before reversing on Customs Street.
The Nigerian equity market has been on an uptrend since the introduction of the Investors and Exporters FX window (I&E window) on the April 21. Furthermore, expectations of improved half-year (H1) corporate earnings helped justify the sustained rally, as the impressive numbers submitted by listed companies helped propel stocks even higher.
Kayode Tinuoye–led team of research analysts at United Capital Plc said in an investment note on Friday, that “the strength of sell pressure over buy pressure will guide the index lower in the interim, in the absence of a fundamental driver to stoke investors’ sentiment.
“Fundamental argument for further uptrend seems weak, as a top name across the sectors within our coverage universe already trade ahead of our year-end targets. Though, our medium-term outlook is still upbeat on the back of improving economic data and strong full year 2017 earnings”, the analysts said.
Even though the Nigerian stock market still trades at a discount, compared to its emerging market peers, analysts still feel some listed stocks are due for “pull-backs”, making them to advise investors to tread cautiously.
Analysts at Financial Derivatives Company (FDC) have described the recent bullish run as another “irrational exuberance”. Despite their expectation that corporate earnings will be positive, FDC expected corporate result will be lower than expectations, thereby “forcing the stock market rally into a correction”.
From a valuation standpoint, some stocks have stretched beyond some analyst’s full year target price (TP), raising questions on whether their current valuations will stretch further or that the market will only re-pricing self. Having touched a record high of 38,198.60 points corresponding to year-to-date (YtD) return of 41.9percent on the 11th of August 2017, the Nigerian equities witnessed three straight days of a bearish trend in the week ended August 18.
It was evident last week that profit-taking had taken over the market after investors booked cumulative loss of over N440billion with the market capitalisation closing at N12.72 trillion market capitalisation against week open level of N13.166 trillion.
The All-Share Index at 36,920.56 points on August 18 indicated a decline of 1,278.04 points or 3.35percent from week-open level of 38,198.60 points.
Research analysts at Lagos-based FSDH Securities expect to see further profit taking in the equity market this month especially on stocks that have recorded strong appreciation in their share price. They had expected the Nigerian equity market to appreciate this month, though at a slower pace than the last five months due to profit-taking activities.
On the positive side, the factors FSDH Securities analysts expect may impact the performance of the equity market include expectations of improved second-quarter (Q2) results from quoted companies, the stability in the macroeconomic environment, improved business and consumers’ confidence in the Nigerian economy, the sustained liquidity in the foreign exchange (FX) market leading to the inflow from foreign investors.
“We recommend that investors should maintain a medium-to-long-term position in stocks that have good fundamentals. Investors should also take strategic positions in stocks that pay interim dividends. Building materials, food and beverages, agro-allied processing and banking stocks offer attractive returns”, FSDH Securities analysts told equity investors.
Iheanyi Nwachukwu
