Analysts’ overall fundamental tilt favours cyclical

There is a possibility of witnessing slight bumpy terrain in the stock market beyond this week, despite that recent Middle Eastern countries’ investors’ decision to buy into Nigerian equities further proves that Nigerian market offers potentials for high returns.

Though, most market analysts recently favoured the Nigerian stock market witnessing cyclical movement, but many schools of thought within the market believe that recent sell-off offers investors a strategic point to take positions in value stocks whose prices were eroded recently.

“With outlook clouded by local and global risks events and less than bumptious earnings expectations, we continue to expect valuation considerations to influence investor choices. In particular, we envisage that the focus of domestic money on high quality large cap stocks would also help shape the selections in defensive space but overall fundamental tilt favours cyclical as a class,” according to investment analysts at ARM, a Lagos-based asset management firm.

They note that based on the domestic attraction in the anticipated mild improvement in equity market performance, “we expect even greater stock selectivity going into H2 14.” Last week, the stock market recorded a turnover of 3.280 billion shares worth N52.808 billion in 25,592 deals in contrast to a total of 1.342 billion shares valued at N16.086 billion that exchanged hands the preceding trading week in 22,481 deals. Amid this, the market’s performance indicators –NSE All-Share Index and market capitalisation depreciated by 0.89 percent to close at 41,160.62 and N13.591 trillion, respectively, in the trading week-ended September 5, 2014.

Accordingly, ARM analysts while reviewing H1 performance note that while still-high valuations and weak earnings outlook mean they remain bearish on defensives, “we see some opportunities in names left out of the recovery and which have better-than-average earnings outlook.

“With the relatively unchanged profile at the broad sector level and, especially for the latter category, stock specific factors will play a more dominant role in investment cases going forward. Specifically, we believe tighter competitive landscape perhaps puts the larger banks on the front foot.”

In their view, investment analysts at UBA Capital plc, a Lagos-based investment company, also note that “the bearish mood in the market last week was largely driven by sell-offs in large cap stocks as Access, FBN Holdings, Nestle, and Zenith closed in the red.”

The equities market kicked off in September on a negative note, declining by 89 basis points (bps) last week to put the Year-to-Date (YtD) return at -0.41 percent.

Accordingly, these analysts say, the inclusion of the FGN 2024 instrument and the decision of the European Central Bank (ECB) may have led to increased demand in the bond market as yields were pressured by 10bps on average to 10.60 percent.

On the equities market this week, the analysts say: “We note the rebound in the market on Friday, after four consecutive bearish sessions and see the possibility of investors taking position in stocks due to attractive pricing and position taking ahead of Q3.”

“We also believe the negative mood will persist this week, at least to some level; we therefore expect the market to close relatively flat for the week at the negative,” say market analysts at UBA Capital plc.

While reviewing the market performance last week, research analysts at Access Bank plc note that, “activities at the Nigerian stock market continued to witness sloppy movements as sell pressure persisted. Equities remained unattractive for investors as risk appetite for fixed income securities broadened.”

The analysts say further that “this week, there are strong indications that current trend may reverse due to expectations that investors’ interest in juicy stocks may be renewed.”

Market analysts at Morgan Capital say that “as a new trading week commences we expect further declines in the market as the 2015 general elections draws near.”

“This week, we anticipate a mixture of buy and sell pressure as investors seek to flip for profits amid expected bargain hunting,” according to investment analysts at Cowry Asset Management Limited, a Lagos-based investment company.

Iheanyi Nwachukwu