Cautious trading trails Nigerian equities as bears reign

Amid a negative take-off this week by the Nigerian stock market, many investment analysts are advising investors to approach the market with caution.

As their pessimism over Nigerian equities plays up, it comes on the heels of further 2.11 percent decline witnessed last week, which pushed the market’s benchmark performance indicators lower when compared with the preceding week.

As bears reigned supreme at Customs Street, the benchmark indicators like NSE All Share Index (ASI), market capitalisation, and other market indexes like the NSE-30 that tracks the performance of large cap stocks were all on the decline last week, pushing the market’s year-to-date (ytd) return down to 29.86 percent.

Looking at this unattractive trend, research analysts at UBA Capital plc said, “while we look forward to tail-end sell-off from foreign investors, we are upbeat on current market valuation. Thus, we re-rate the Nigerian market, with a moderate appetite to “Buy Low.””

According to them, “we are upbeat on financials at 7.4x Price-Earnings (P/E) and 5.9 percent dividend yield. Except Stanbic IBTC, which we believe is “overbought,” our coverage banks in Nigeria are low hanging fruits.”

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The NSE ASI depreciated by 2.11 percent to close at 36,464.39, while the market capitalisation of the listed equities on the main board also declined by 2.11 percent to close at N11.715 trillion. Also, the NSE 30 Index sheds 1.99 percent to close at 1,744.40.

Week-on-week (w-o-w), index movement showed that all the NSE indices depreciated last week except one. NSE Consumer Goods was down by 2.21 percent, NSE Banking (0.97%), NSE Oil/Gas (0.96%), NSE-Lotus II (1.59%), NSE Industrial Goods (1.60%), and NSE-ASeM (1.27%). NSE Insurance rose by 0.54 percent to close at 144.23.

“While recognising market bearishness on this sector on fears of regulatory-induced earnings headwinds, we believe current pricing is a significant discount to the sector fundamentals. That said, we believe Consumer Goods stocks are yet to bottom-out; thus we seek better bargains,” UBA Capital plc analysts, add.

In their recent report titled “Nigerian top 5 equities league,” market analysts at Morgan Capital say that for value investors who are constantly on the look-out for bargains, the market has yet again provided good entry points into companies with good fundamentals, some of which were before now considered fully priced.

“We continue to implore investors to ensure that while they hunt for bargains, sound fundamentals must continue to be the guiding principle to ensure the safety of their investments. We must also state clearly that the capital market is a long-term market and as such, long-term investors who invest based on sound fundamental principles are almost certainly going to see their investment portfolio perform better than any other investment class,” these analysts say.

They further note that this market correction is necessary and may continue going into this week. The analysts add: “It is our opinion that some companies, particularly in the consumer goods sector are trading at ambitious Price-Earnings (P/E) multiples on the back of potential earnings that have been priced too far into the future, and may not justify their P/E ratings anytime soon despite good growth in their top line and bottom-line. The risk factor is that a lot of things which are out of management control may go wrong fast. The need for moderation is heightened. Overall, we still think that the market is awash with companies trading at decent P/E multiples with strong fundamentals.”

Also, researchers at Proshare expect the sell pressure to completely wane off in the coming sessions, taking clue from slight renewed bargain initiatives observed last week. “We advise investors to tread with caution as breadth still weak –an indication of bears still at work.”

According to Jimi Ogbobine, research analyst with Consolidated Discount Limited (CDL), “with the earnings season and annual general meeting season over, the market could gradually start to experience the second quarter lull.”

He notes: “On the other hand, as bond yields start to widen, institutional investors especially pension funds could gradually start to reduce their exposure to equities and seek to enter the bond market at this attractive prices. Being the largest pool of investors within the equities market, their actions could largely stimulate more price corrections in some of the big names. However, weak liquidity in some of these big names like Dangote Cement, Netsle, PZ and Unilever will still stymie the long overdue price corrections.”

Before the recent decline in equities, analysts at Financial Derivatives Company had foreseen a return to rationality in the market “as correction occurs in equities prices.” These analysts had also expected a decline in equities prices “as stocks are adjusted for corporate actions. This is in addition to their view that there would be profit taking on consumer goods and industrial goods companies.”