As equity investors continue to position ahead of interim dividend while also cherry picking across different sectors, a look at some of research analysts’ views on the market’s possible direction in this second half (H2) could provide a guide for those seeking higher returns.
For the Philip Anegbe-led team of analysts at Cardinalstone, “the dark clouds could linger”. They believe that savvy equity investors would also have to ferret the market for opportunities amidst expected broad market weakness driven by elevated yields and tighter liquidity.
“We expect this class of investors to opt for fundamentally sound stocks trading at deep discounts to market and boasting consistently high dividend yields. In addition, investors could watch out for opportunities likely to be created by strong rebound in sectors like Oil and Gas and Brewery that were battered by the pandemic”, Cardinalstone said in its half-year outlook tagged “The Big Bounce”.
Cardinalstone believes that the trajectory of yields, the pace and extent of economic recovery, and the quality of companies’ earnings’ growth will likely to be the critical drivers of equity market sentiments in the second half of the year.
“Oil price has had a positive correlation with the market, but with foreign players unhappy about the CBN’s FX policy stance, they have largely remained on the sidelines leading to a distortion of the trend. With oil prices reaching new highs (with the latest OPEC+ imbroglio suggesting that prices may remain elevated in the near term), it is likely that the market could lose out on any potential implication.
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“Over the next year, pre-election year political risks could come to bear. Add to that, the likelihood of a lull in oil prices following a much anticipated easing of OPEC+ production cuts. Yields could also remain elevated to account for a potentially higher country risk premium (from socio-political stability fears), keep FX in check and combat inflation from a politically-induced surge in spending. These indicators are likely to weigh on the overall market sentiment going into 2022”, Cardinalstone analysts further noted.
The analysts who stated that yields will have biggest say in equities, noted: “Following the fast rise in yields since the beginning of the year (for instance, the 10-year bond yield has jumped 520 bps since the start of the year), there are indications that bond yields will remain elevated through H2’21, which could portend further concern for equities in the near term.
“Already, equities have lost circa 6percent this year, and the recently observed bond yield moderation has hardly had a positive impact on risk asset prices. As highlighted in the fixed income section of this report, there are indications that the moderation in yields could be short-lived, leaving for a somewhat bleak outlook for equity valuations”.
Also in their H2 outlook report titled “Walking a slippery note”, United Capital research analysts said: “Clearly, sentiments in the equities market remained dull through H1-2021 due to a lack of key positive catalysts. However, heading into H2-2021, investors seek to understand what direction the market is headed. In this section, we discuss the factors we expect to shape investors’ sentiment and consequently provide guidance on the direction of the equities market.”
For the United Capital analysts, the key themes to watch out for in H2-2021 remain: the direction of the yield environment; earnings expectations in H2-2021; market players and preferences – local and domestic players; what is the direction for yields in H2-2021?
“Heading into H2-2021, we expect to see periods of oscillation in the yield environment, albeit with an overall downward bias. Our expectation is built on three key factors; improved system liquidity via instrument maturities, deployment of financial repressive tactics by sovereign debt managers and status quo stance on monetary policy.
“That said, despite our expectation of a moderation in fixed income yields, we do not see a rate crash similar to that of 2020. As a result, we expect demand for fixed income instruments to remain upbeat particularly among domestic investors, limiting prospects for improved flows to risk assets like equities”.
Capital Bancorp research
“Generally, the local bourse was bearish in the first half of 2021 as YTD recorded -5.87percent this is due to increased yield at fixed income market as investors take position in the market. Inflation and its impact on interest rates will be a huge issue for equities”, Capital Bancorp research said in their H1 review and H2 Outlook of the Nigerian economy.
“We expect a negative impact on equities markets if interest rates rise significantly. Furthermore, not all industries would be affected in the same way, as some businesses are less affected by inflation. Overall, while profit-taking will definitely occur, we remain positive of the potential value in selected stocks”, Capital Bancorp research added.
Also, Luke Ofojebe-led team of research analysts at Vetiva in their H2 outlook titled “No country for old policies” said: “As the economy remains in a steady recovery from the COVID-induced recession, we maintain a cautious outlook for the Equity market in the second half of the year.
Given current firm valuations, the macroeconomic environment, and the rates in the fixed income market, we expect investors to favour select counters across the market. For the rest of the year, we expect the banks to post stronger H1’21, 9M’21 and FY’21 numbers, as we expect Gross Earnings to grow due to slightly higher rates in the Fixed Income (FI) market. Meanwhile, we retain modest expectations for other sectors across the market, notably the consumer goods space, amid rising inflation and its impact on consumer demand,” Vetiva research analysts further stated.
“The Nigeria market has underperformed its African and Frontier market peers since the start of 2021, after leading the way in 2020. South Africa, Ghana, and Kenya are up 12.10percent, 32.64percent, and 8.97percent respectively despite having higher P/E multiples than Nigeria. Given where yields currently stand in the fixed income (FI) space and current macros, we are sticking to our cautious outlook for the year, as we expect to see limited gains across the market for H2’21”.
“The downturn in market performance has been driven primarily by rising yields in the fixed income space which has led to an outflow of liquidity from the equity market. In the second half of the year, we do not forecast a change in the current monetary policy stance by the Central Bank, and as such expect yields to continue to rise, weighing on equity activity. However, we do foresee pockets of buy-side activity across the market, especially in fundamentally sound names with high possibility of dividend payouts.
“We expect counters like SEPLAT to continue to outperform the market in H2’21 hinged on our expectations of improved crude demand in the second half of the year as the global recovery continues. We project that the banking sector will also have a strong H2, primarily driven by interest income due to higher yields offered across the fixed income space. Finally, with foreign investors remaining net sellers for a second consecutive year, we expect this to further strain liquidity in the market, further weighing on market valuations across the space”, Vetiva analysts further stated.
