ISSN 1597 - 8842 Vol. 1 No. 40


“Nigerian Equities recorded 21.81% growths in six months amidst bull and bear striving”.

The fortunes of the Nigerian Stock Exchange (NSE) have not turned around as anticipated. Indeed, activities in the equities market for H1 2010 indicate a market long on rhetoric and expectation but short on measurable execution.


A review of the current market climate indicates that the downtrend of the NSE starting in Q2 2010 after the improvements recorded in Q1 2010 has all but fettered out. Of key significance was the expected role of the AMC in addressing the fundamental concerns, which has not materialised due to the non-take off and agreement on execution imperatives by the responsible bodies.


In our Q1 2010 report, we noted that by the week ended March 12, 2010, it was certain that the NSE was going into a full throttle http://proshareng.com/blog/?p=243. The signs were ominous and the results for the quarter confirmed this third stage of the recovery phase; hence our prediction that we should expect a stable market in Q2 2010 – as the market will be in heading towards the fourth level of recovery http://proshareng.com/reports/view.php?id=2447 – Pg 5.


This position was universally shared by local and international analysts and investors who had predicted a 40% rally over the year as a whole, driven by the quick resolution of banking reforms and an infusion of fiscal policies to stimulate economic activity and growth. The progress (hinged on a committed implementation of a rescue and reform plan for the economy starting with the banking interventions, toxic asset clean up and subsequent resolution of the political impasse that was brewing) has however been slower than anticipated – due to several factors.


With expectations faltering, Q2 2010 posted a negative performance to bring down the year to date performance of the ASI to 21.81% as at June 30th 2010, reversing the +24.60% appreciation recorded by March 31, 2010. This decline was driven by a combination of factors such as the inability to have an operational AMCON despite the assent from the legislature (which occurred on June 22, 2010 and still awaits a presidential assent); erosion of in investors’ confidence, flip-flops in regulatory directives; the financial crisis in Europe, the depressive outlook of some bank’s financial condition; and the general de-linkage that has occurred in the economy since August 14, 2009.


Figures from the Nigerian Stock Exchange showed that as at 30th June, 2010, the All-Share Index that closed at 25,384.14 traded below its 20 days, 50 days and 100 days moving averages of 25,566.62, 26,386.50 and 25,437.09 respectively but above its 200 days moving of 23,586.17.


Though the trend is trading above its 200 days moving average, the market it would appear is now technically weak.


The ASI has been observed to be exhibiting bouts of sporadic rallies since it started the current decline from the peak of April 19, 2010. Each of such successive rally has failed to break above the previous high; thereby creating a high-low technical phenomenon, which indicates a bearish trend and lack of confidence in the market by investors. For further insight, review the comments here - http://www.proshareng.com/articles/2094.


Presently, the market remains volatile as incessant interchange of northward and southward price movements remained predominant due to some of the factors earlier listed. Investors are now more disposed to speculative trading, and even much more careful with where they placed their funds.


The general condition of the economy does not seem to help matters, just as the growing belief that an era of over-regulation has creped in to stifle the business enterprise driving the financial market.


While we remain hopeful that the market will not descend to Dec-2009 levels, the recent pronouncements from the Central Bank of Nigeria (CBN) with regards to the three-months extension in getting the AMCON approved by the President and agreeing on a workable execution of the buy-up of toxic assets; has all but assured that the market may not witness a marked reversal of fortunes to pick up from the March 30, 2010 levels.


Investors are advised to watch out for the H1 2010 results from firms (70% of which is dominated by the banking sector that have all but dropped in economic linkage relevance to firms in the breweries, conglomerates and the non-quoted telecoms sector). For some other banks in the sector, these represents interesting times for expansion and retooling and one or two financial institutions should end the year with a marked improvement in their relevance and future, something investors are in short supply of at this time.


If performances improve (or stays in line with growth in gross revenues and net profits declared so far); investors may be treated to declarations of interim bonus and dividends which may rekindle interest and enthusiasm.


The direction of the NSE at this time remains uncertain (despite not factoring the leadership challenges playing out in the media into the mix). Technically, it is not very promising. It appears that there is currently a capital flight from the market; judging from the dwindling daily volume trend. Even some of the large cap stocks have seen their volume dry up, or volume increased on sell off. A recommendation to remain on the sidelines until the indicators improve will not be out of place at this time.


“NSE ASI remained technically weak due to volatility predominance”


The decline in the market performance tempo that resumed after the January relative better performance has remained through till the end of June 2010; when measured on a month by month performance basis with the exception of the impressive performance recorded in the month of March 2010.


The dynamism of both investors and speculators remained predominant for most of the six months under review; with the month of June recording the highest volatility. The same interplay of investors and speculators activities repeated itself in Q2 of the year as indicated by the price movements across the sectors.


Getting Here

For a market that resumed on a technically bullish note on February 3, 2010 (after it recorded an ASI upswing to 23,595.59 to trade above its 200 days moving average of 23,420.22 as at that that date) dropped two trading days after with a -2.56% decline on the March 5th, 2010.


Consequently, the equities market remained in the bearish mode for 22 trading days from February 5th, 2010 till March 10th, 2010 after which a bullish mode resurfaced on the 11th of March 2010 (note that the market made an upswing of 1.08% to close at 23,666.33 above 23,460.75 200 days moving average recorded on that day).


Here are four technically problematic trends observed:

1) HIGHER LOW & LOWER LOW PHENOMENON:
Though the ASI has exhibited sporadic rallies since it started the current decline from the peak of April 19, 2010, each of such successive rally has failed to break above the previous high; thereby creating a high low technical phenomenon, which indicates a bearish trend and lack of confidence in the market by investors (see – b, c, & d as highlighted in the graph below).


 


Finally, a look last the most recent three (3) pull backs indicates (i.e., 1, 2 & 3) a lower low phenomenon which is very bearish. To break this trend, the current pull back must not fall below the last one (i.e., # 3).


2) INCREASED VOLUME ACCOMPANIED BY SUBSEQUENT SELL OFF
An important point that should be noted is that the climax of the NSE (28,029.78) on April 19, 2010 was driven by heavy volume. The traded volume for the 5 days prior to April 19, 2010 and on April 19, 2010 was 4.7 billion, the highest traded volume for any other period since January 1, 2010.


Precisely, the traded volumes for April 12th, 13th, and 19th were 932 million, 996 million, and 967 million respectively. The increased volume (as indicated by “e: & “f” below) which were accompanied by subsequent sell offs, indicate that institutional investors probably sold into the peak.


The trend has been downward since the climax as shown in the graph below:

 


3) DWINDLING DAILY VOLUME
Another worrisome trend is the dwindling volume at the NSE. The average daily volume is down 176% from its peak as shown in the graph below. Furthermore, the recent volume spike has been followed by a sell off.


For example, on June 16, 2010, 506 million shares were trade, but the NSE all share index closed down. Finally, some of the recent high volume traded stocks were stocks we can refer to as non-essential.


On April 21, 2010, 349 million shares were traded at the NSE. If you exclude 86 million Capoil shares, a penny stock trading at 0.51k, only 249 million shares were actually traded.


 


4) ALL SHARE INDEX BELOW ITS 20 AND 50 DAYS CUMULATIVE MOVING AVERAGES
The NSE all share index is currently trading below its 20 day and 50 day moving averages of 25,757.13 and 26,659.7 respectively. The Index initially dropped below these averages on May 21 and 24, 2010 respectively.


On June 19, 201, the all share index broke above the 20 day average indicating a short term reversal only to slip back below the average on June 21, 2010. Although the NSE all share index is trading above its 200 day moving average, the current all share index trading below the 20 and 50 day moving averages indicates short-term weakness.

 


On June 02, 2010; Proshare published an analysis of an emerging trend in the market titled– “Market turns south after three days of appreciations: Observations” http://www.proshareng.com/articles/2086. The publication spotted a worrying development that would require more than a passing commentary. It was the upswing that resurfaced the following week (though not sustained for a longer period) that saved the market from slipping into the bearish mode as observed in the report as many of stock prices maintained southward directions for most of the trading days.

Happenings in the market were attributed to the following factors hinged on the observed fact that retail investors are out of the game - http://proshareng.com/blog/?p=393.
 i. The retail market has all but disappeared as a consequence of the illiquid status of investors – who are still smarting from the huge wipe-out suffered from the market crash;
 ii. The access to non-savings leverage (margin loans) hitherto available from banks and brokerage firms is no longer available to all and sundry for obviously risk-based reasons;
 iii. The estimated market is now about eighty per cent dominated by institutional investors with foreign investor influence;
 iv. Local market participation is dominated by pension fund managers who have the liquidity to continue to play in the market on a short term basis, leading to necessary book balancing adjustments.


The progress made during Q2 with the management of the passage of the AMC Bill on the floor of the National Assembly also contributed in building a positive momentum that seemingly galvanised the imagination and enthusiasm of the investing public who were all too eager for a resolution of the problem that has held both quoted firms, stockbrokers and investors down for a long period - with serious un-anticipated consequences.


Recently, the Central Bank of Nigeria (CBN) Governor Sanusi Lamido Sanusi said the profits declared by banks in the first quarter although encouraging, still requires a lot of efforts by the banks to improve on their financials.“If a bank with negative capital of N100 billion makes a profit of N2 billion, it still has a long way to go before it comes back to positive territory,” he said.


The CBN Governor said the profits so declared resulted from loan recovery and improvement in efficiency through staff rationalisation and shared services, and not by growth in their loan books.


Sanusi Lamido pointed out that there would be more recovery of the bad loans of the banks and pressure on debtors to pay when the Asset Management Company (AMCON) comes on stream. “For those loans that remained ‘hard-core,’ they are being valued now by the technical team from the CBN and Ministry of Finance for the purpose of being purchased by the asset management corporation. So there’ll be recovery through AMCON where they have collateral,” he said.


He noted with satisfaction continued macroeconomic stability but said that there is still threat of inflation from the budget deficit and the operationalisation of the proposed AMCON.


This re-echoes our market view about the AMC as the ultimate solution to the twin challenge of toxic assets by banks and the illiquidity of capital market players. We reiterate the view that the said Asset Management Company is just one of the many monetary and fiscal policies needed to stimulate recovery - Reiterating the Notion That the AMC Is Not a Panacea for the NSE (http://proshareng.com/blog/?p=383).


With a June end disclosure by the Central Bank of a postponement in the timeline for a successful take-off of the AMCON, it is more likely that Q3 2010 may witness a downturn in market activities due to continuing massive sell pressures; at a time we would have been optimistic about the market assuming an uptrend movement.


We spotted the possibility of such in our daily market report of Tuesday 29th June, 2010 (http://www.proshareng.com/news/singleNews.php?id=11162) where we stated that the upbeat of the last two trading days might not last due to the fact the postponement of Asset Management Company takeoff will slow down the expected enthusiasm that should follow if the company had taken off – another reason why investors may not be keen about the banking stocks, accounting for majority of the market capitalisation.


The Market – Game On

The market in the first six months of the year recorded a total of 54.908bn units valued at N436.977bn (US$2.913bn) exchanged in 1.174 million deals compared with 45.871bn units valued at N294.890bn (US$1.843bn) exchanged in 910.042 million deals in the previous year’s first six month trading period.  


Comparing, the volume and value traded in the 2010 six months reveals a +19.70% and +48.18% rise above the volume and value recorded in the previous year’s six months period respectively.




In the same vein, comparing the volume traded month by month basis (using the years 2009 and 2010) showed that volume transactions in all the months with the exception of June that recorded lower figures with the previous year’s comparable volume closed on higher notes, as revealed by the chart below.


Also, measuring transaction value on a monthly basis revealed that transaction value continued on upward trend in the first four months and began to descend in the month of May till June.


The All-Share Index (ASI) recorded a +21.81% appreciation in the first six months of the year compared with +24.60% appreciation recorded in the first three months of the year to March 31st, 2010. In the first six months of the previous year, the All-Share Index posted negative growth of -4.36% performance compared with -36.69% negative growth recorded in the first three months of the preceding year.


The ASI trend in the second quarter recorded negative performance of -2.24% with the performance in the month of June being the worst to record -3.05%.


Market capitalisation in the six months period appreciated by N1.185 trillion (US$7.916bn), below the +N1.288 trillion (US$8.607bn) appreciation recorded in the first quarter.











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