FSDH Q2 strategy is portfolio rotation, underweight equities

The domestic equities market kicked off 2022 on a positive note with the benchmark NGX-All Share Index (NGX-ASI) racing to gain 9.1 percent m/m in January.

The gains were mainly driven by corporate-specific events such as the listing of BUAFOODS on the stock exchange which led to a 61 percent return in the first month of listing. Also, Dangote Cement announced the resumption of its share buyback programme which fed buying interest in the stock.

We also note the strong rally in SEPLAT in January, reflecting the impact of the gains in crude oil prices. Also, a number of corporates announced positive unaudited results which triggered broad-based interest in domestic equities. Stocks like TOTAL, FIDELITY, GUINNESS and PRESCO benefited from the gains.

By February, the gains slowed as investors appeared to have already priced in most of the upside for Nigerian equities in January. News such as SEPLAT’s acquisition of some of ExxonMobil’s oil assets fed some modest bullish streak in what was broadly a mixed month of Nigerian equities. As a result, the benchmark NGX-ASI returned 1.7 per cent in February.

The gains fizzled out in March as investors began to sell off positions in the equities market in a bid to take some profits off the table. The preference for profit-taking was further bolstered by negative surprises from a number of large cap corporates in the downstream oil & gas and banking sectors.

In addition, rumours of expectation of higher yields in the fixed income market from Q2-2022 further stoked bearish sentiments. As a result, the domestic equities market lost 0.9 per cent in March. Overall, the domestic equities market gained 9.9% in Q2-2022 following the healthy returns posted in January.

Looking ahead to Q2-2022, we advise investors to begin to rotate their portfolios to underweight equities as we approach an extended period of quiet and profit taking in the domestic equities market.

We note that the equities market will likely suffer a lack of positive triggers to boost a risk-on approach from investors. This could lead to a period of extended losses through Q2-2022.

That said, we expect active short term traders would see opportunities to trade oversold stocks for modest profits.

For relatively long term investors, we recommend they restructure their portfolios to include commodity-focused companies such as upstream oil & gas companies and agriculture companies as they are likely to benefit from increased demand and higher global prices for commodities like crude oil, gas and palm oil.