Q2 2021 Equity Market Tea Leaves - Bearish Sentiments to Linger

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Friday, April 09, 2021 / 09:02 AM / by United Capital Research/ Header Image Credit: Nirmal Bing

 

Q1-2021 Review: Yield reversal trips bullish momentum

The first quarter of FY-2021 proved to be somewhat soft for equity investors trading the Nigerian market. In Q1-2021, the benchmark All Share Index (ASI) lost 3.0% q/q to print at 39,014.82 points. A slew of interesting events shaped the performance of the market through the quarter.

The quarter kicked of on a positive note in line with our outlook and strategy for the year. In our 2021 outlook publication, we stated that value remained to be extracted from Nigerian equities, as headroom remained for the benchmark index to reach the resistance level of previous rallies (42,000 - 45,000 points region). Truly, the index gained 5.3% in January, peaking at 42,412.66 points, as broad-based gains driven by active dividend hunt and the FOMO effect catalysed buying interest in Nigerian equities. By this point, market technical indicators posited the market was significantly overheated with RSI at 82.7% while the ASI had outstretched its upper Bollinger level indicating the market was due a correction.

 

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By February, sentiments soured as sell pressures began to filter into the bourse, driven by the accelerating pace of reversal in fixed income yields at primary auctions. The reversing primary market yields also triggered upward repricing of yields in the secondary market. Consequently, investors began to reduce their equity exposures, booking profits to stay at the short end of the yield curve as cash became king. This reflected in the performance of the ASI as it declined 6.2% m/m in February, recording the steepest monthly loss since the Covid-induced dip of Mar-2020 and its first monthly loss in eight months.

The pace of selloffs remained in March but buying interest was boosted by some decent corporate actions, thus limiting the damage of the paced selloffs on Nigerian equities. Yields on fixed income instruments sustained their uptrend, weakening sentiments on risk assets like equities. However, as corporate actions rolled in (barring a shock from UBA), buyers resumed activities in the final weeks of the month, erasing some of March's prior losses. However, it was inadequate as the ASI closed March lower by 1.9% m/m.


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Hawkish monetary policy, new concern on the horizon
Like we noted, the bearish sentiment in the equity market has been stoked by fast-paced reversal in the yield environment. The peak of the reversal appears to be distant even though the pace of increase at recent auctions (Bonds & T-bills) seems to have slowed. We expect upward pressure on yields to garner pace later in Q2-2020 depending on the outcome of the May MPC meeting as well as data from economic recovery. The failure of the MPC to implement further cuts to its main policy rate despite the fragile nature of the recent limp out of recession indicates an unwillingness to go full time pro-growth in the face of elevated inflationary pressures and FX instability. Thus, we think should the economy sustain its recovery in Q1-2021 GDP numbers, the MPC will be inclined to focus on taming the wild inflationary pressures. This could lead to a possible hawkish monetary policy tone from the MPC. This, we expect to drive the renewed yield reversal pressures.  

Furthermore, we note that while Q1-2021 numbers are expected to come in during the first month of the quarter, investors' sentiments may not necessarily be moved by solid business performance considering its early days in the year.

The technical crystal ball; Lower highs, lower lows
Looking into our technical crystal ball, the ASI appears to be forming a downward trend narrative with lower highs and lower lows. On 19 March, the ASI closed at a new low of 38,382.39 points (prior low was 40,295.95), before closing at new short-term high of 39,267.11 points (lower than the prior high of 42,412.66 points. These lower highs and lower lows indicate the market is setting up for a mid-term downward trend. 

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Our price action strategy indicates the ASI is poised to break below its 100-day MA while the 20-day MA is on track to cut the 100-day MA from above, indicating the market may be entering a mid-term lull in Q2-2021. We watch the 36,500 - 37,500 region as a short-term support (through Apr-2021) for the equities market. That said, we think the risk of a hawkish monetary policy may see the ASI flirt with the 34,000 - 35,000 support in the mid-term (by end of Q2-2021). 

 

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In view of our outlook, we advise our clients to significantly cut down on their equity market exposure and keep their funds at the short end of the money market (60 - 90 day bills preferably) till May/June after which more clarity will be gotten on the direction of monetary policy. In addition, we would be approaching the earnings season for H1:2020 which would see tier-1 banks and some large cap consumer goods firms declare interim dividends.


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Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

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