Tight June call for NGX after dead cat bounce April, choppy May

• FDC‭, ‬FSDH analysts express strategy bias‭ ‬for best-buy‭, ‬best-sell stocks in June

Following the dead cat bounce recorded in April and the weak performance posted by the Nigerian equities market in May, analysts have expressed the view that in the absence of any major catalyst to investors’ investment in the market, the local bourse will continue to trade in a tight range through the month of June. Also, they have highlighted that although a choppy performance is expected to persist, attractive fixed income market yield is still expected to drive investor sentiment in June and probably extend to July.

The local equities market posted a choppy performance in the month of May despite starting off the month with some heavy profit-taking as investors sold to book some of the gains recorded in April. Subsequently, the market recorded a temporary rebound before sellers resumed selling into strength. Overall, the All-Share Index (ASI) shed 3.5 per cent month on month to print at 38,437.88 points. Consequently, the market capitalisation dipped 4.32 percent to N19.95 trillion while the market price to earnings (P/E) ratio was down 6.74 per cent to 13.01 times, and the market year-to-date return further worsened to 4.55 per cent due to investors’ cautious trading, following the continuous uptick in the fixed income space.

This was also despite seeing that all the negative performance in May was largely driven by selloffs in highly capitalised stocks (Dangote Cement and BUA) in the industrial goods sector by -3.5 per cent month-on-month, as well as telecoms stocks, such as MTN Nigeria and Airtel Africa. Other sectors recorded a bullish close for the month, with the oil & gas sector recording the highest gains by 14.2 per cent month-on-month, and leading the way as a result of rising oil prices with the 15.7 percent gain in Seplat Petroleum; while the insurance sector, with 1.4 percent month-on-month, banking (+1.2% m/m) and consumer goods (+0.6% m/m) followed.

Still on the timeline of May, inflationary pressures dominated market headlines, feeding sentiments that the Monetary Policy Committee (MPC) could hike its policy rate in its May meeting. This anticipated decision was expected to fuel negative knee-jerk reactions in the equities market. However, the MPC opted to hold its policy tools at its meeting after signs of disinflation began to surface in the consumer price index (CPI). Following the MPC decision, market investors have generally been unsure about market directions with the fixed income market and equities market trading in a tight range since the MPC’s decision.

Meanwhile, a comparative performance analysis of the Nigerian stock market (NGX) in the month of May with its African peers, such as the Johannesburg Stock Exchange (JSE) and the Ghana Stock Exchange (GSE), shows NGX’s year to date (YTD) return (4.55) performing below its peers. However, with the continuous increases in economic and business activities in South Africa, the JSE recorded a year to date return improvement to 14.26 per cent, spurred by optimism among investors for possible listing of Coca-cola on the exchange. In the same vein, investors’ optimism about attractive investment options following the launch of a 10-year capital market master plan and the hunt for higher returns on investments by investors, the Ghana stock market saw its market year to date return improve to 24.7 per cent.

Analysts’ NGX June expectations: Bears vs Bulls supremacy after choppy May

Following the outcome from the MPC meeting, analysts at FSDH Capital Research and Financial Derivative Company (FDC) contended that they struggled to see an improved appetite for risk assets like equities in the near term as foreign investors remain averse to Nigerian equities, considering lingering foreign exchange (FX) issues and macroeconomic vulnerabilities in the Nigerian economy, while domestic investors, particularly asset managers and other key institutional investors, remain attracted to rising fixed deposit rates with commercial banks, who are grappling with severe liquidity constraints.

In their projection for the trading month of June, FSDH analysts opined thus: “We note that inflationary concerns remain, while the possibility of policy normalization by systemically important banks continues to garner pace, thus retaining some risks of policy tightening by the MPC. This is expected to keep investors on the edge creating significant indecision with regards to the capital market. Overall, we expect the equities market to trade sideways in a tight range with a mild bearish bias in June.

“On the technical analysis, the NSE-ASI will continue to trade below its key moving averages (20-MA, 50-MA and 100-MA), indicating a bearish bias. In addition, key indicators (Bollinger bands & MACD) show the NSE-ASI appears stuck in a tight range, indicating sustained sideways trading. Thus, in the absence of any major catalyst to investors’ sentiment, we expect the equities market to continue to trade in a tight range in June,” they noted.

For analysts at the Financial Derivative Company, the uptick in the fixed income space continues to weigh on stock market performance with reduced participation by institutional investors in the equities market and sustained investor preference for risk-free securities brought about by the negative return on the benchmark index.

“The choppy performance witnessed in May will persist in June as attractive yields in the fixed income market will continue to drive investor sentiment. Also, economic policies expected to reflect in share price performance with possible days of gains to be driven by increased economic and business activities aimed to drive investment, a decline in the inflation rate – to boost investors’ confidence as institutional investors will be forced to rebalance asset mix,” they asserted.

Top stock picks for June? Strategy bias prevails for non-banking stocks

As the month of June nears its midpoint, FDC’s market analysts have highlighted what they consider as their top stock picks based on strong fundamentals and sectors with good prospects. Their call is as follows: Banking sector (Access Bank and Zenith Bank) continuous expansion strategy and increased customer base; Strong earnings growth and profitability; Robust capital structure; consistent dividend payment and very prudent risk management, which has seen their non-performing loans ratio below 5 per cent. However, these stocks have a price to earning (P/E) ratio of 4.8x and 3.87x, while their price to book value (P/B) are 0.36x and 0.66x, respectively.

Also, in the telecoms sector, the analysts pick MTN Nigeria, with a price to earnings ratio of 12.7x, saying it will be a great buy as the telecom giant will continue to benefit from the activation of the acquired 800MHz spectrum in a bid to increase its network capacity and the plans to aggressively leverage on fintech and digital services.

And in the industrial sector, Dangote Cement, with a price to earnings ratio of 21.02x and dividend yield of 7.48 percent is described as another best buy in June as the company has a consistent dividend payment, consistent earnings growth and increased production, as well as, increased construction activities come into play.

On the flip side, the FDC analysts assert that Flour Mills of Nigeria should be on the list for a sell this June as a result of the forex pressures and restrictions, commodity price volatility, constrained consumers’ spending; while also pointing at GlaxoSmithKline as a good sell on the premise of reduced revenue source, coming from the divestment of its drinks subsidiary, a meagre product mix, operating cost remaining a threat to its profitability and the intense rivalry from local manufacturers.

However, the stocks tell of soft fundamentals as their price to earnings ratio stood at 5.91x and 49.66x with the dividend yields at 5.68 per cent and 8.87 percent apiece.

Meanwhile, for FSDH analysts, “In view of the examined factors, we affirm our strategy bias for non-banking stocks, particularly for listed companies in the FMCG, Brewery, Food Processing, Telecoms and Cement sectors.”