Stock investors in Nigeria who are positioning for high yields in the second half (H2) of the year are keenly waiting for listed companies’ half-year earnings to further guide their decisions.
The broader equities market has remained on a bearish trajectory in recent times as investors walk cautiously on Custom Street Lagos following persisting political uncertainties and insecurity in Africa’s largest economy.
While persisting uncertainty in the economy depresses investor sentiments, some stocks in the market are still priced below their target prices, thereby offering attractive entry opportunities for value hunters.
The Bismarck Rewane-led analysts at Lagos-based Financial Derivatives Company (FDC) said in their July 6 presentation at Lagos Business School Breakfast Session that Nigeria’s stock market would trade horizontally this July until second-quarter earnings are released.
They said in their equities market outlook for July that short-term sell-off and long-term value would come to play, adding that institutional investors would rebalance their portfolio for attractive fixed income yields.
While acknowledging that all investors’ eyes are on H1 2022 corporate results season, the analysts noted that second-quarter performance of listed companies would capture the effect of electricity challenges, foreign exchange crisis and political uncertainties.
“Inflationary pressures and heightened borrowing cost to hit the top and bottom-line performance. Corporates are expected to build up inventory to hedge against spike in global commodities prices. Rally is confined to sectors that are not politically sensitive. Growth in NGX to depend on sectors’ level of consolidation. Investors are expected to trade cautiously as political uncertainties and insecurity issues persist,” FDC analysts said.
As other stock markets struggle year-to-date, the Nigerian bourse outperformed its peers with a record positive return of 22.24 percent as of Friday, beating inflation. On Friday, the National Bureau of Statistics released the Consumer Price Index report for June which showed that the inflation rate hit a five-year high of 18.60 percent.
The market sentiments are likely to remain bearish with pockets of cherry-picking activities across the board, as investors await the half-year earnings reports. The All Share Index and market capitalisation of the Nigerian Exchange Limited stood higher at 52,215.12 points and N28.157 trillion as of Friday.
The Guy Czartorysk–led team of research analysts at Coronation Asset Management said in their July 13 note: “There are two things to consider. First, is it likely that any of the largest stocks by market capitalisation (Airtel Africa, MTN Nigeria, Dangote Cement, BUA Cement, Nestle Nigeria and BUA Foods, which together make up 73 percent of the index) will surprise on the upside when they report second-quarter results in a few weeks?
“We think that there is potential for MTN Nigeria and Dangote Cement to do this. We are actually slightly underweight in these stocks at the moment so will make notional trades with the aim of making them 200bps overweight each this week.”
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They added: “Second, international palm oil prices are moving downwards. More than half of our outperformance this year has come from our positions in two palm-related stocks, Okomu Oil and Presco. There is an argument to be had that their Q2 results themselves will support the stocks even if base prices are sliding, but we are not inclined to test it and will start to make notional sales in the direction of neutral weights in either stock going forward, liquidity permitting.
“In addition, there is the question of whether we should also re-balance in favour of the mid-cap stocks that performed well earlier in the year and that have since corrected? Could their Q2 results make them rally again? We will consider this question next week.”
The Coronation analysts said since the beginning of June, they had been reducing their positions in mid-cap stocks, which had earlier rallied hard.
They said: “These tactics paid off last week as we lost less than we would have done with a neutral position. We wrote last week that markets never trend sideways for long, though the NGX All-Share Index has been trying to prove us wrong over the past few weeks. It is down just 0.76 percent since the CBN’s Monetary Policy Committee raised its Monetary Policy Rate from 11.50 percent to 13 percent on May 24.
“We have benefited by avoiding over-exposure to several mid-cap stocks when they corrected, and our high cash position stood us in good stead as the market pulled back slightly after the first week of June. However, our cash position is very defensive and now we must decide how to position ourselves going forward.”
