Equity analysts call for underweight stocks in Q2 as investors begin portfolio rotation

BY CHARLES ABUEDE

Aggressive stocks, which have the potential for higher returns and equal risks, have always been tipped by equity analysts and investors alike to always perform massively during periods of economic turmoil, but it is without a doubt that equity investors will likely take a cautious approach in their participation in the equities market this quarter as we drive further deep into the election year.

And it is on that note that Seplat Energies, MTN Nigeria and Flour Mills have been picked by equity analysts to yield higher returns for investors going into the second quarter of 2022 with the expectation that the market will continue to be driven by system liquidity, with maturities of government securities dictating its trajectory.

A look at the top stock picks by FSDH analysts shows Seplat Energies’ current P/E ratio is 8.7 times above the average, with MTN Nigeria printing at 14.4X, while the likes of Flour Mills (4.7X), United Capital and Presco Plc are also in the list.

Similarly, the analysts say this second quarter may see the market suffer the lack of positive triggers that may be a bolster for a risk-on approach from investors while investors begin portfolio rotation to underweight equities. They have also recommended commodity-focused firms, such as those within the upstream oil and gas and agricultural sectors to be the top choice of investment as investors continue the march in this new quarter.

Market analysts at FSDH Capital Research, in a research note made available to Business A.M., asserted that, “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.”

Also, analysts at Lead Capital, in their monthly financial markets reports, said, “Depending on what happened to yields in the fixed income market, we expect the turnaround in the equities market to continue for the most of April due to the continued interest in the market by domestic institutional investors and the expectation of first quarter of 2022 corporate earnings given a downturn in the economic activities given the recent increase in fuel cost.

“As part of our recommendation strategy, investors should continue to position in stocks that have good fundamentals and are currently trading below their fair value; take a position in stocks that have a history of good dividend payments and also continue to look for opportunities in telecoms, banking, healthcare/pharmaceutical sector, industrial sector and companies in the agricultural sector with good potentials,” they concluded.

The year saw the market kick off in style and in the green with the benchmark index of the NGX racing to a 9.9 percent gain during the first quarter following the healthy returns posted in January. Similarly, the market consolidated on the performance of the last quarter of 2021 in Q1 of 2022 as it reaped from the expanded liquidity in the system and declining yields in the fixed income market. Though experts and investors desire the positive trend reported for the last quarter to continue as major market players in the industrial, banking, and communication sectors turn in impressive results for the just-ended quarter.

In January, gains recorded on NGX were mainly driven by corporate-specific events such as the listing of BUA Foods 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. Also, there was a strong rally in Seplat Energies, reflecting the impact of the gains in crude oil prices. Moreover, a number of corporates announced positive unaudited results, which triggered broad-based interest in domestic equities. Stocks like Total Energies, Fidelity Bank, Guinness Nigeria and Presco Plc profited 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. The news on Seplat Energies’ acquisition of some of ExxonMobil’s oil assets breastfed some modest bullish streak in what was broadly a mixed month of Nigerian equities as the benchmark NGX-ASI returned 1.7 percent in February.

Entering into March, it was noticed that the gains faded away 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 boosted by negative surprises from a number of large-cap corporates in the downstream oil & gas and banking sectors. In addition, rumours of the expectation of higher yields in the fixed income market from the second quarter of the year further stoked bearish sentiments. As a result, the domestic equities market lost 0.91 percent in March.

During the quarter, gains in many sectoral indices drove the positive performance in the equity market while investors took away over N3.2 trillion in profit from the market. Meanwhile, the gains reported were majorly triggered by expansion in the Banking, Industrial and Oil & Gas sectoral indices that increased by 10.6 percent, 5.41 percent and 29.18 percent, respectively. Also, the NGX 30 index, which tracks the performances of the stocks of top blue ship companies appreciated by 5.52 percent, outperforming the 2020 full-year gain.

In the meantime, across the African equities market, according to the report by Lead Capital Research analysts, the Zambia market (LuSE All Share) led African markets with a 5.75 percent gain followed by the Zimbabwean Market (ZSE All Share) with 4.89 percent in March 2022. While a handful of markets gained, losses were recorded by the Nigerian, BVRM Composite, Tunisian, Moroccan, Malawian, Kenyan, Uganda and the Egyptian markets, respectively.

The year to date numbers reflect the Zimbabwean market (ZSE All Share) leading the pack with a 45.28 percent gain, followed by the Zambia market (LuSE All Share) with a 12.97 percent gain. On the loser’s side, the Uganda market (USE All Share) led with a -6.86 percent loss followed by the Moroccan market (MASI) with a -4.77 percent loss.