Analysts favour market correction as money begins to ignore fundamentals

by | January 25, 2018 12:23 am

The awareness of stocks rally by over N2trillion in early trading this year has already gone viral with traces of wild enthusiasm; enquiries from all classes of investors who suddenly became daily and weekly speculators.

Taking a cue from this scenario, most stock market analysts foresee a near-term correction as profit-taking technically starts.

Currently at the Nigerian Stock Exchange (NSE), most blue chip stocks are overvalued and trading at an extreme new high price. For other value stocks, their holders have chosen to take ‘Hold’ decisions.

More shockingly in the whole equities trading space are penny stocks with no traces of fundamentals or unimpressive fundamentals topping gainers chart.

This is an indication of extreme optimisms and wild enthusiasm from both investors and speculators whose monies have begun to ignore fundamentals.

At this point, it is important to advise investors to approach the market with cautious despite their bargain tendencies.

Already, after recording over N700billion in cumulative gains last week, the stock market opened this week with N64billion value loss in just Monday’s trading as investors moved into Customs Street to take profits.

“We are of the opinion that market needs a correction, but we cannot force it to come, though the strong negative divergence seen on Friday appeared very instructive despite the NSE-ASI moving above the 45,000 psychology mark”, MarketSmith intelligence group said in a recent insight.

“The anticipated market correction is likely to be massive, it may shed close to 3,000 basis points (bpts) that is 6percent to 7percent reversal – we consider this necessary, important and healthy for the market- and if this fails to happen any time soon, we may be switching into bubble mode,” MarketSmith said.

Within the first two weeks of trading in 2018, the Nigerian equities market broke-out from the 43,000point resistant level last witnessed in July 2014.

Even though the market has sustained a 3-week long bullish momentum on the back of increased investor participation following the uptrend in global oil prices and an expectation of improved corporate earnings at the commencement of fourth quarter earnings season, analysts at Afrinvest Securities expect some level of profit taking this week.

This rapid growth prompted analysts at Lagos-based United Capital Plc to ask a few questions, such as: Is a further uptrend likely for Nigerian equities in 2018? If so, how high can the benchmark index climb? And, what are the fundamental factors that will drive this uptrend?

Though the analysts are of the view that recent rally, as observed in the last three weeks, has been partly driven by bandwagon effect, they however say “a short-term correction is highly probable due to profit taking.”

“Yet, we maintain that fundamental justifications for a sustained bull run in the Nigerian equities market are very compelling. These include improvement in global and domestic macroeconomic environment which should drive assumptions for cost of equity should lower as risk-free rate and equity risk premium moderate.

“An improving oil market outlook, stable currency market environment, lower interest rate expectation, and solid earnings outlook, all point to minimal negative volatility and robust return, especially in H1-18. The only downside risk is the on-set of uncertainties associated with a pre-election, especially in H2-18, as the build-up to be 2019 election takes center stage.”

Vetiva Capital research analysts, who noted in their market commentary that demand remains strong, foresee more aggressive profit-taking to continue.

Despite making case for a correction, analysts’ overall sentiment within the market remains in favour of equities sustaining uptrend in 2018, though at a moderating pace.

There is no doubt that the bullish sentiments remain very strong in the market and analysts remain optimistic that all other things been equal, the party is just starting.

Iheanyi Nwachukwu