Stock market to suffer effect of negative earnings from cash crunch

Investors in Nigeria’s equities market are beginning to increase their focus on the quality of first-quarter (Q1) financials of listed companies which are expected to berth on the Bourse from this month.

Amid increasing focus on Q1 corporate scorecard, analysts expect the stock market to suffer the effect of negative earnings from Nigeria’s cash crunch. This negative short-term outlook comes on the heels of record decline in equities prices since last month.

The month of March ended with a negative return of 1.70percent in the absence of positive catalysts to drive buy-interest on the Bourse. As at trading week ended Thursday April 6, the market decreased this month by 2.28percent, pushing the year-to-date (YtD) return low to +3.40percent.

In the build-up to Nigeria’s general election, the equity market maintained an upward trend. In first quarter (Q1) to March 31, the stock market yielded positive return of 7.04percent despite record profit taking activities in March.

Financial Derivatives Company analysts in their recent presentation at Lagos Business School Executive Breakfast Session noted that interest rate hikes drove investors to attractive asset classes.

They also noted that March saw profit taking activities “as stocks get marked down for dividends”, adding that Oil and Gas sector led the laggards in March due to volatile oil prices and price dip in Seplat Energy.

More full year 2022 earnings reports of Nigerian banks are underway and investors are, as expected, positioning ahead for their dividends.

In their outlook for April, the analysts at Financial Derivatives Company noted that stock investor sentiment will be driven by the interest rate movement, first-quarter (Q1) 2023 quality of earnings, and stock specific events.

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According to them, the market will possibly see more days of losses than gains, adding that investors’ appetite for attractive rate on investment will linger. Amid anticipation for Q1 2023 earnings, Financial Derivates Company analysts see Q1 cash challenges putting pressure on corporate earnings.

They also believe that the cash crunch will trigger lackluster top-line figures for manufacturers, “but technology driven stocks will benefit from increased digital transactions while inflationary pressures will remain a threat to operating income”.

In the trading week ended Thursday April 6, the Nigerian Exchange Limited (NGX) All-Share Index (ASI) and equities Market Capitalisation depreciated by 2.28percent to close at 52,994.13 points and N28.869 trillion respectively.

All other indices finished the review trading week lower with the exception of NGX Insurance which appreciated by 2.19percent while the NGX ASeM and NGX Growth indices closed flat.

The market opened for four trading days as Friday April 7, 2023 and Monday April 10, 2023 were Public Holidays to mark the Easter celebration. Sixteen equities appreciated in price during the four-day trading week lower than 37 equities in the preceding week.

Thirty-seven equities depreciated in price higher than 30 in the preceding week, while 103 equities remained unchanged, higher than 90 equities recorded in the preceding week. Investors exchanged 1.054 billion shares worth N10.050 billion in 16,155 deals, in contrast to a total of 2.071 billion shares valued at N17.562 billion that exchanged hands the preceding week in 17,917 deals.

The Central Bank of Nigeria (CBN) last month after the second two-day Monetary Policy Committee (MPC) in the year, raised its benchmark interest rate known as the Monetary Policy Rate (MPR), by 50 basis point to 18percent, the sixth straight time. MPC held other parameters constant.

“The rate increase would further push up borrowing costs, which could result in less manufacturing activities and adversely impact the real sector. We advise fixed-income investors to position in short-duration and high-yield products as we expect fixed-income yields to rise. For the equities market, we note that the current rate hike does not pose any substantial risk as corporate actions become the main focus for investors,” Meristem research analysts had said in a March 22 note.

“In our view, the monetary policy decision, coupled with elevated fiscal borrowings, will likely continue to fuel an uptick in bond yields. Aside from April, wherein elevated maturities may drive bullish sentiment, we see latitude for sustained yield increases for the rest of 2023,” CardinalStone Research analysts had also noted.

“Looking ahead, we retain a positive outlook for the equities market in second-quarter (Q2) 2023. On one end, our prognosis is hinged on our expectation for a depressed yield environment in the fixed-income market, buoyed by the excess maturities (circa N2trillion) expected in Q2-2022.

“On the other end, we expect investors’ risk-on sentiment to be bolstered by strong corporate performance, impressive dividend yield (particularly as the dividend payment season is already underway), and improving economic growth prospects. For equity-vested fund managers, we recommend cherry-picking equities with solid fundamentals and dividend yield,” said United Capital research analysts in their April 6 note.

“Our conviction stocks had a negative return of 1.40percent month-on-month (m/m), reflecting a challenging period for our picks. However, our conviction stocks have performed admirably, returning 10.19percent year-to-date (YtD), outperforming the NGX ASI by 3 percentage points (ppts),” Vetiva research analysts said in their April 3, performance review for March.

“In the banking space, Fidelity Bank emerged as the top performer, providing a commendable return of 4.90percent m/m. However, we observed some sell-side pressure in FCMB and Stanbic, with returns of -6.95percent and -9.83percent m/m, respectively. In the Consumer Goods space, investors were sell-side driven, as profit taking action in Dangote Sugar saw the stock return -3.13percent m/m. However, for Nestle, it was a flat close to the month.

“Moving to the Industrial Goods space, Julius Berger saw renewed interest in March, as the counter surged 10percent m/m. Conversely, it was a negative month for Lafarge as the cement maker returned -5.11percent m/m. In the Telecommunications space, MTNN returned -2.04percent m/m; while in the Agricultural sector, it was modest 1.27percent m/m return for Okomu Oil. Finally, it was a flat close for our Oil and Gas pick Total Energies, as investors continued to monitor developments in the downstream segment,” Vetiva analysts stated.

According to FSDH research, the equity market sustained upward tempo after the election, “however, some negative sentiment trailed the gubernatorial election”.

“The equity market will benefit most from the peaceful round-up of the general election. The anticipation of a market-oriented leader will strengthen the resolve of domestic investors and reawaken foreign investors’ confidence in the market. As such, we expect the equity market to extend its gaining trend deep into the year. For both the equity and fixed income markets, we note, however, that any upturn in the election results by the courts will have a negative impact on both markets. We believe it is too speculative to account for this scenario, for now,” FSDH research noted in their macroeconomic Q1 2023 report.