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Bear reign to persist on weak H1 earnings outlook

Despite that Nigerian stocks still offer relatively attractive entry prices, the market looks good to sustain current bearish momentum in the near term.

With another half-year (H1) earnings season in the offing, market watchers expect negative sentiments to persist on the Nigerian Bourse as the odds favour weak corporate performance due to the impact of Covid-19 pandemic on economic activities.

In line with the bleak outlook for H1 corporate performance, Guinness Nigeria recently notified market regulators and the investing public on material circumstances with impact on its full year financial results for financial year 2020.

The brewer said that the adverse impact of the sharp contraction in economic activities and the knock-on effect of the Covid-19 lockdown took a toll on the on-trade segment of the business across all our markets. “Production and revenues have thus been negatively affected”, it said.

Nigeria’s listed stocks lost about N257billion in the trading week ended Friday July 3 as investors approached the market with caution. Week-on-week (wow), the market closed lower by -1.98 percent following last Friday’s 0.16percent dip. The market opened this week with year-to-date (YtD) negative return in excess of -10percent.

Though many companies first-quarter (Q1) results were not totally negative, but were obviously affected by the Covid-19 pandemic and the lockdown across states. Their second-quarter (Q2) results are expected to more precisely reflect the impact of the Pandemic-driven decline in economic activity.

“Going into July, we remain very cautious on the equities market in the short term, due to a number of factors. From a fundamental perspective, July is an earnings reporting month which would span the April to June period where the coronavirus pandemic hit the economy and many businesses hard. Thus, we expect many companies to report significantly weak numbers save for Telecoms, Logistics, Pharmaceuticals and Food focused companies, FSDH Research said in their July 2 note.

FSDH research analysts noted that “from a technical analysis perspective, the All Share Index (ASI) remains very close to the overbought region… This indicates the market in July has more downside potential than upside potential. In addition, investors have not been enthusiastic about taking positions in the market, with average activity level in June remaining below 2020 monthly average”.

MSCI issued a warning on a possible reclassification of the Nigerian equities market from a frontier status to a standalone status, citing FX illiquidity as the major challenge.

“Investor sentiment was soured by the recent MSCI review that placed Nigeria on a watch list due to FX illiquidity. Thus, we expect minimal activities from index fund managers, while we expect any resumption of FX sale to foreign portfolio investors (FPIs) could trigger a strong sell-off”, FSDH analysts further said.

Nigeria’s major source of dollar revenue is crude oil and its price has not been relatively stable lately.

In their July 7 note to investors, research analysts at Lagos-based United Capital said they see the dynamics on the demand side for crude oil dependent on the progression of the COVID-19 pandemic and how soon global economic activities can return to normal.

“With several economies gradually easing restrictions, as well as stimulus measures by governments to spur business and industrial activities, demand is likely to improve in second-half (H2) of 2020”, United Capital research analysts added.

“As COVID-19 continues to spread fast across the country, we foresee further headwinds. While the first-quarter (Q1) 2020 GDP growth outturn was surprisingly positive, it is difficult to argue against an economic recession this year should the outbreak persist for an extended period”, said Cordros analysts in their July 3 note.

In the analysts’ opinion, risks remain on the horizon due to a combination of the increasing number of COVID-19 cases in Nigeria and weak economic conditions. So, they continue to advise investors to trade cautiously and seek trading opportunities in only fundamentally justified stocks.

Ahead of the earnings season, more listed companies have scheduled their Board meetings to consider their half-year financial results for the period ended June 30, 2020.

“Our sense is that the market will continue to drift downwards over the coming week”, said research analysts at Coronation Merchant Bank. They added, “Stock markets are fickle things. A glance at global equity markets during June shows a worrying trend, namely a sideways pattern. For the Nigerian Stock Exchange All-Share Index (NSE-ASI) June also showed a more-or-less sideways trend, with the market losing 3.1percent gradually over the month. Where is it going to go next?

“One worrying aspect is the drop in turnover. Turnover surged during the bull run of January 2020, then again during the panic of March. So, high turnover does not mean that an equity market will go up, only that it will go somewhere. If the turnover in the NSE returns to its mean, then it turnover must rise, and the market will take a new direction. One strange characteristic of the lull in stock market turnover is the absence of Nigerian institutional investors”, said Coronation analysts.

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