Profit-taking opportunities seen ahead H2, despite MPR hike

BY Business A.M.

After closing with a strong gain of 5.7 percent month on month in April 2022, the month of May 2022 was again upbeat on Nigeria Exchange with lots of positives for traders and investors, who, in their profit taking activities, gained N2.16 trillion from equities trading in all the sessions of the month.

The profit taking moment was buoyed by gains recorded in some of the tickers within the consumer goods, breweries, cement companies, oil-palm and oil and gas sectors, plus the continued rally in oil price to above $115 per barrel, which was also reflected in some of the oil and gas stocks on the exchange during the month.

Heading into the second half of the year, equities analysts have expressed the view that there exist attractive buying opportunities for profit taking in the market on key sectors like consumer goods (FMCGs and Brewers), oil palm, cement, telecoms and oil and gas, while the expectation for interest rates increase, which is likely going to weigh on broad based sentiments in the market.

“In recent days, the equities market has slipped into a bearish pattern as investors continue to take profits off the market in light of the recent MPC rate hike. In our opinion, this has created an attractive buying opportunity for investors as we approach the H1-2022 earnings and dividend season. We remain bullish on key sectors like Consumer goods (FMCGs & Brewers), Oil Palm, Cement, and Oil & Gas etc. While we expect the risk of higher interest rate to likely weigh on broad based sentiments, we project the previously highlighted sectors will outperform the broader market on the back of robust earnings performance and dividend declarations,” FSDH Capital Research analysts opined.

Underpinning this is a clear indication, and in line with the notions from Business A.M. Intelligence and equities analysts, that the bets by domestic investors on the market since the start of the year will begin to pay off with the local bourse returning over 24 percent year to date and a market capitalization return of 28.01 percent year to date. In a strong-willed consideration of the positive rally during the month of May, there was a revered change witnessed across boards based on the high expectation for a continued spook in yields in the fixed income space, and causing equity investors to increase reallocations to equities.

Also, a cursory analysis points to the fact that the stellar outing was majorly precipitated by improved investor sentiment: a strong buying interest which was spurred on by bullish expectations on corporate earnings, slow movement in interest rates, as well as fear-of-missing-out (FOMO) factor, from investors; plus the positive price appreciations and movements on the index which gained 8.1 percent month on month and crossing the 50,000 psychological points mark to close the month at 53,772.35 points (almost a 14-year high) from 49,638.94 index points at the close of the previous month.

Just like witnessed in the prior month (April 2022), where the rally in the local bourse was broad-based with all the major sectors closing higher and in the green zone, led by the oil and gas, consumer goods, banking sector, industrial goods, insurance and information technology sectors, respectively. These gains recorded by major counters across sectors comes on the back of huge buying interests and pressures on major tickers on the exchange, while the month of May was not left out of the party after the continued churning out of impressive earnings for the first quarter by some top counters in the banking, oil and gas, consumer goods and the industrial goods indices in that order, drove gains across boards.

Across the sectoral front, an analysis showed that the consumer goods sector led the rally, gaining 5.4 percent month on month following buy interest in stocks like Nigerian Breweries (+9.3% m/m), International Breweries (+54.9% m/m) and Cadbury (+78.1% m/m). Next on the line was the Oil & Gas sector which gained 5.3 percent month on month, and supported by gains in Conoil (+30.7% m/m) and Eterna Plc (+12.5% m/m). Also, the Industrial goods sector gained four percent month on month, pulled higher by investor interest in Dangote Cement which gained 1.6 percent from the prior month, followed by Cutix Plc with 17.6 percent month on month and BUA Cement (+8.2% m/m).

Still on positive drivers during the month, oil palm stocks and telecom stocks rallied significantly as reflected in Okomu Oil (+46.3% m/m), MTN Nigeria (+7.2% m/m), Airtel Africa (+27.5% m/m) etc. On the other hand, the Insurance and Banking sectors lost 6.1 percent month on month and 2.1 percent month on month in that order, reflecting sell pressures in Aiico Insurance (-10.4% m/m), NEM Insurance (-8.6% m/m), Zenith Bank (-4.3% m/m) and UBA (-6.1% m/m).

Moreover, the month of May was greeted by the surprising hawkish outcome of the Monetary Policy Committee (MPC) gathering for the third session this year, where the apex bank hiked rates by 150 basis points for the first time in about 5 years to 13 percent while leaving constant, the other parameters around the policy rate. This, however, threw a spanner in the works as investors feared a subsequent surge in interest rates. As a result, the mood of the equities market changed in the final 10 trading days with investors taking profits off the market.

Overall, the outlook for the global equities market is still downbeat as the global markets continue to experience lukewarm investor sentiment mainly due to the synchronised shift in monetary policy stance across most central banks that has triggered upward pressure on interest rates, forcing investors to reduce their equities exposure. Thus, equities analysts see scope for further downside across global equities, and as a result, recommend investors remain broadly underweight across US and European equities.