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The Nigerian stock market: Investors' expectations about future performance
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Introduction
After a record breaking performance of the Nigerian stock market last year when it posted 74.8 percent annual returns outperforming other major stock exchanges in the world, the market became a toast of all -offshore and home-based investors- and expectations were rife about greater years of prosperity. However, the first quarter of this year has witnessed a drastic change in the investment climate. The market terrain has assumed a momentously frightening dimension with the stock market inching continuously into negative territories. Investors and the general public continue to watch in awe the prolonged recession in stock prices and for some, losses are counted on a daily basis. Many are wondering whether we are about to witness a meltdown, similar to the experience of countries like USA in 1929 and 1987, Kuwait in 1982, Japan in 1990, UK in 1992 and China in 2007. The fear becomes more pronounced when one considers the spill-over effect that the collapse of the Nigerian market might have on the African market especially West Africa region. But pertinent question remains whether the "strength" of the market can sustain it in this period of continuous round of plunge such that a phenomenal or severe dip in market returns is avoided. In what follows, we present a critical review and analysis of market events and activities from the beginning of this year till date. With a blend of fundamentals and sentiments, we will attempt to gain an insight into the outlook of the stock market in the medium term.
Market fundamentals
Stock Market Depth
We measure Market Depth in terms of volume and value of trades on the floor of The Nigerian Stock Exchange (The Exchange). The performance between January and February was quite impressive as the average daily volume of stocks traded on the floor of The Exchange inched up by 30.2 percent. The total volume of stocks traded increased by the same margin just as the value of stocks traded surpassed that of January by about 27.5 percent. However, between February and March aggregate volume of stocks traded on the floor of The Exchange nose-dived by 37 per cent from N26.65bn in February to N16.73bn in March. This decline is reflected in the drop in the average daily value and volume traded which plunged by 12 per cent and 22 per cent respectively though the average number of equities traded daily rose from 154 to 164. We also observed from a weekly performance analysis, that, though lower than February, the second week of March was the most boisterous in term of value of transactions with investors staking 37 per cent of the total value for the month. However, the last two weeks of March 2008 witnessed deep erosion of prior gains of earlier weeks. Lacking enough strength to recover from the bears' assaults, market trading statistics dipped further in April with the average daily value and volume traded shedding weights by 28 per cent and 27 per cent respectively while the average number of equities traded daily also fell from 164 to 159.
In general, the Nigerian stock market became deeper in February relative to its performance in January. All measures of market depth show considerable improvement with an average increase of 22.4 percent. It is also observed that depth performance by value for the period in review is more impressive than that by volume indicating a free flow of money as well as positive changes in share prices on the floor of The Exchange. Conversely, the market experienced a slow down in activity in March relative to its performance in February. All measures of market depth showed considerable erosion with an average decline of 25 per cent. Also, depth performance by volume fell more precipitously during the period under review than by value. This is indicative of the sensitivity of volume traded to the general stock market pulse. Hence, we deduce that the value of trade, which has share price as a vital variable, still carries more weight and the effect of the perceived "market correction" was made lighter by investors' willingness to hold their positions.
Though similar scenario of erosion in measures of market depth was observed in April, we discovered that, in contrast to previous months' experience, depth performance by volume fell almost by the same margin as depth performance by value. This indicates investors' willingness to hold their positions as reactionary sells became less rampant thereby pushing volumes further down. This trend was more entrenched by the freer fall in prices experienced during the month.
The experience in the past month in the Nigerian stock market supports analysts' optimism that there is an imminent end to the current downturn. This position is supported by the Relative Strength Index (RSI) of The NSE All-Share Index. Currently, the RSI perches below the 25 percent line which defines the oversold region. It is noteworthy that the last time the RSI dipped to a low ebb as we have today was in February, 2005 when it oscillated around 16 percent in the oversold region. This position corroborates the prevailing market psychology that the current dip in major trading statistics is just a passing fad.
Advance-Decline Behaviour:
Fundamental analysis of the stock market based on market breadth focuses on daily price appreciation/depreciation of equities on the floor of The Exchange. We measured the net change in the number of gainers and losers on a daily basis using the cumulative Advance-Decline Line. The hype generated by the impressive performance of the market last year resulted in a bullish trend in the first two months of the year. Between January and February, the daily average number of advancing stocks increased by 34.6 percent while the decliners fell by 15.81 percent. However, in March, there was a trend reversal. On the average, the number of daily advancers plunged by 22 percent from 91 stocks in February to 71 in March while the daily decliners surged from 38 stocks to 66 in the same period, representing a rise of 74 percent. The bearish tempo was further heightened in April as the number of daily advancers fell by 12.26 percent from 71 stocks in March to 62 stocks in April while the daily decliners shrank insignificantly from 66 stocks to 64 in the same period, representing a decrease of 3.03 percent.
A benchmark analysis of stocks' performance relative to index returns shows that contrary to the experience between January and February, stocks began to perform below market's expectations as underperforming stocks headed northward by 88 percent in March. In contrast to a marginal rise observed in March, there was a 6.45 percent fall in the number of outperformers in April but hope is kept alive as the number of underperformers rose only by about 3 percent.
Further, we used the Advance-Decline ratio (A-D ratio) to measure the relative strength of daily advancers compared to daily decliners. The indicator has exhibited a falling trend from March till date. The fall is however attributable to reduction in the number of advancers reflecting an overall slide in stock market profitability. Within the period under review, the NSE ASI moved in the same direction with the A-D ratio.
Submission:
Our analysis shows that the stock market exhibited "good" breadth from January through February as the A-D line shows a consistent rise and was effectively tracked by movements in the ASI. However, we noticed divergences on the 13th, 18th and 26th of February indicating a temporary weakness of the market as the A-D line failed to move in tandem with the index. The market later regained the initial momentum in the last three trading days of the month.
There were no signs of recovery between February and March, the stock market exhibited "fair" breadth as the A-D line fell to the growing pressures of bearish rallies but was effectively tracked by movements in the NSE ASI. This decline, which was largely attributable to market correction of over-valued equities, was much stronger in the last trading week in March just as the index returns dipped for 7 consecutive trading days.
The stock market exhibited a "fairly healthy" breadth between March and April. Although the A-D line further assumed a downward trend owing to continued bearish rallies, it was effectively tracked by movements in the ASI implying unremitting market correction of over-priced equities.
On the strength of our findings from the above analysis, we submit that bearish momentum in the market may be weakening as breadth indicators for April show a considerable improvement compared to previous months' experience. While we may not expect a sharp resurgence, the situation certainly is not likely to get worse.
Liquidity and Volatility
Liquidity is an important determinant of stock market performance as it measures the ease with which securities are traded. We observe an erratic trend in market liquidity in January and February. However, on the average, the market became relatively more liquid in February as the average turnover ratio of stocks (measured by value of stocks traded over market capitalisation of listed equities) inched up by 8.3 percent. It is important to note that liquidity dropped sharply in the middle of February. This trend is attributable to a decline in value of stocks traded which produced a very low turnover ratio as the market capitalization rose quite insignificantly.
Volatility is one measure of risk that analysts rely on to gauge the health of the stock market. To capture the stock market volatility, we employ a simple measure of volatility: the rolling standard deviation in index returns. Though market capitalisation maintained relative stability throughout March, the rise and fall in value traded exerted a pressure on the market liquidity making it display an erratic trend in March as obtained in February. However, on the average, the market became relatively less liquid in March as the average turnover ratio of stocks dipped from 0.0016 in February to 0.0013 in March, representing a fall of 15.5 percent.
For a large part of the month of April, market capitalisation of listed equities was relatively stable, but there was an irregular movement in the value of stocks traded. As a result, market liquidity assumed an erratic trend throughout the month. On the whole, just as experienced in March, market liquidity measured by the turnover ratio dropped by 43.66 percent implying that the market became less liquid in April than in March as the average turnover ratio of stocks plunged from 0.0013 in March to 0.0010 at the end of April.
Our volatility measure shows a surge in market volatility in April with a trend that was very similar to that of February and March. On the whole, the market became more volatile in April compared to March as the average market volatility inched up by 22.37 percent from 0.0046 in March to 0.0058 in April.
Submission
Our analysis shows a decline in market volatility in February by 21.8 percent while the stock market became more liquid (up by 8.33 percent). The implication of a rise in liquidity is that stocks became more readily available and easily traded in February than in January.
Statistics available in March showed a general decline in both market liquidity and volatility by 27 percent and 17 percent respectively. The observed positive relationship between liquidity and volatility negates the expected inverse relationship which underscores market soundness at least in the short run.
Our analysis of market activities in April showed a further decline in market liquidity by 44 percent and a rise in volatility by 22 percent.
The rise in volatility portrays more erratic stock price movements. However, there is a sign of recovery as we observe a negative relationship between liquidity and volatility. This we believe underscores the fundamental soundness of the market at least in the short run.
SECTORAL PERFORMANCE ANALYSIS
Market trading metrics, represented by the trio of deals, volume and value are good starting points in the diagnosis of stock market health and the health of the sectors making up the substratum of the entire market. Volume and value traded have exhibited negative trajectory from January through April. To zero-in on sectoral performance, market activities in April brought about a major rearrangement in terms of the most active sectors measured by volume of shares traded. The insurance sector, largely driven by obsessive transactions in the shares of UNIVINSURE, MBENEFIT, EQUITY ASSURANCE, GOLDINSURE, CONTINSURE and NEM were the most boisterous. This sector dwarfed the banking sector in terms of volume traded from January through March. However, investors' psychology, shaped by the second thought on the plausibility of the much expected top and bottom line improvement of the insurance sector, sets in motion a market behavior that saw the ascendancy of the banking sector in top value and volume chart in most part of April. On the aggregate, the insurance sector slightly maintained a lead in market turnover in April as it recorded 6.4bn shares transactions representing 39 percent of the aggregate market turnover while the banking sector trailed closely behind propping up 6.3bn shares (38 percent). Other sectors in the top 5 include conglomerates, commercial/services and food & beverages sectors. These sectors accounted for 4 percent, 2.3 percent and 2.2 percent of market turnover respectively.
In terms of values of transactions, the banking sector captured a disproportionately large quantum of total value of equities traded for the month ended April despite its slump to the insurance in terms of volume transactions. This is adduced to the huge discrepancy between the average equity price in the two sectors (N24.55 for banking sector and N5.33 for insurance). In sum, the banking sector generated transactions worth N163bn representing 61percent of the total market value of transactions for the month. A closer look at 2-month comparative analysis of value traded by sectors revealed a dip in April compared to March. This is indicative of the bearish mood of the market and the resultant plunge in average sector prices. It is note worthy that the top 4 sectors by value traded in March (banking, insurance, food and petroleum/marketing) reaffirmed their dominance in April and captured 81 percent of the aggregate value for the month compared to 74 percent in March. This further strengthened the observed skewness of market metrics in favour of few sectors.
Analysis of sector-based stock price movement revealed a general downward trend. The average sector prices of chemicals and paints, automobiles, air service and construction shed weight by an average of 22 percent in April. Average equity prices in insurance, conglomerates and banking sectors trailed similar path dropping 8 percent, 7 percent and 5 percent respectively. This has a far reaching effect on price multiples that guide investment decision making across sectors. The industry average PE for the Banking Sector, for instance, dropped to 25 xs from above 26 xs despite impressive quarterly results posted by some banks during the month.
Submission
The diagnosis of market behaviours in April measured by the prevailing sectoral performance revealed an arrangement that bears a close similitude to what exist in the past. The top sectors, insurance, banking, food & beverage, petroleum/marketing, conglomerates, commercial services still reaffirmed their long standing dominance in volume and value charts. This finding points to a crucial fact that the recent downturn in stock market activities is eclectic and has little effect in changing the traditional performance hierarchy.
MARKET SENTIMENTS:
Contrary to conventional market trend in prior years most especially in 2007, equities market exhibited a strange behaviour early in 2008 till date. Market participants' appetite shifted to insurance stocks which are low-priced and other pennies with outright disregard to fundamentals and intrinsic worth of these stocks. Market recorded unexpectedly high returns of 12.09 percent between January and February 2008 compared to 10.73 percent recorded in 2007 during same period. However, this feat could not be sustained in March as the index plummeted abysmally to a level of 63,016.56 points, dipping by about 4.52 percent to return 7.57 percent for the month as a result of unanticipated bearish runs that hit the market. Total market return for first quarter 2008 was 8.67 per cent contrary to 31.03 per cent posted in the same quarter of 2007. Worse still, the free-fall lingered on the heels of impending CBN regulatory directive on margin lending by banks which saw The NSE ASI nose-dived to 59,440.91 points on April 30, 2008 from xxx points in March 31, 2008, translating to a negative return of 5.67 percent in April against 8.44 percent posted in similar period 2007.
Market participants are in serious bewilderment and apprehension about the state of the market in the past 8 weeks. Investors of all classes are moaning about continuous stock price free fall which has culminated into deep capital erosion. A number of participants are anxious to know whether the continuous dip in prices is long term or a mere market hiccup. However, investment analysts and market watchers adduce a number of reasons to this trend. A cross section opines that though the recent policy directive of the apex Bank, the CBN, might have worsened the situation, but market activity had already headed for a lull in prior weeks. They posit that the market is already experiencing a technical correction after the bullish regime in January and February 2008. A technical correction occurs when there is no evidence that the increasing price trend should persist. It is often caused when investors temporarily slow down their purchases of securities, which commonly leads to a pullback toward a short-term support level.
Technical analysts maintain that after a steady increase in value, investors may become more cautious buyers at the higher prices and look to reevaluate the market, resulting in a decrease in purchases. The drop in purchase volume will stop the upward price trend from continuing while the market re-evaluates the short-term direction. In general, analysts agree that a healthy market will correct from time to time as corrections are temporary price declines, interrupting an uptrend in the market or asset.
Another perspective to the cause of the market downturn is the quantum of activity in the primary segment of the capital market. From January till date, over N200bn had been raised through private placement activity as telecoms giants-MTN, Starcomms, Reltel (on-going), confectionary merchants such as Tantalizers, Chicken Republic and others such as Charm Nigeria Plc source for more equity capital from the capital market. Market watchers are assertive that there is no end in sight for primary market activities in coming months as some blue chip companies such as African Petroleum (AP) Plc, Oando Plc and a few other insurance companies are gearing up fresh capital raising exercises. In the same vein, Zenith Bank's 3 in 1 mutual funds- namely: Zenith Income Fund, Zenith Equity Fund and Zenith Ethical Fund are already in the market. Besides, a number of private placement activities are also in the 'pipe-line' and these are also expected to shift investors' attention to the primary market and crowd-out investible funds from secondary market segment. However, some experts are optimistic that though sharp resurgence may not be in view in coming months but the dips in equities prices may soon be abated. Bye and large, a couple of stocks still look attractive for medium term investment consideration.
Meristem Securities Limited market analysis and sentiments and its attendant recommendations are prepared based on publicly available information and are meant for general informative purposes. Meristem Securities Limited can neither guarantee the accuracy or completeness of the information as they are an expression of our analysts' views and opinions. Meristem Securities Limited cannot be held responsible for any loss suffered by relying on the said information as this information as earlier stated is based on estimates and opinions and is meant for general information purposes and not as solicitation to buy securities and financial instruments © Meristem Securities Limited 2008.
After a record breaking performance of the Nigerian stock market last year when it posted 74.8 percent annual returns outperforming other major stock exchanges in the world, the market became a toast of all -offshore and home-based investors- and expectations were rife about greater years of prosperity. However, the first quarter of this year has witnessed a drastic change in the investment climate. The market terrain has assumed a momentously frightening dimension with the stock market inching continuously into negative territories. Investors and the general public continue to watch in awe the prolonged recession in stock prices and for some, losses are counted on a daily basis. Many are wondering whether we are about to witness a meltdown, similar to the experience of countries like USA in 1929 and 1987, Kuwait in 1982, Japan in 1990, UK in 1992 and China in 2007. The fear becomes more pronounced when one considers the spill-over effect that the collapse of the Nigerian market might have on the African market especially West Africa region. But pertinent question remains whether the "strength" of the market can sustain it in this period of continuous round of plunge such that a phenomenal or severe dip in market returns is avoided. In what follows, we present a critical review and analysis of market events and activities from the beginning of this year till date. With a blend of fundamentals and sentiments, we will attempt to gain an insight into the outlook of the stock market in the medium term.
Market fundamentals
Stock Market Depth
We measure Market Depth in terms of volume and value of trades on the floor of The Nigerian Stock Exchange (The Exchange). The performance between January and February was quite impressive as the average daily volume of stocks traded on the floor of The Exchange inched up by 30.2 percent. The total volume of stocks traded increased by the same margin just as the value of stocks traded surpassed that of January by about 27.5 percent. However, between February and March aggregate volume of stocks traded on the floor of The Exchange nose-dived by 37 per cent from N26.65bn in February to N16.73bn in March. This decline is reflected in the drop in the average daily value and volume traded which plunged by 12 per cent and 22 per cent respectively though the average number of equities traded daily rose from 154 to 164. We also observed from a weekly performance analysis, that, though lower than February, the second week of March was the most boisterous in term of value of transactions with investors staking 37 per cent of the total value for the month. However, the last two weeks of March 2008 witnessed deep erosion of prior gains of earlier weeks. Lacking enough strength to recover from the bears' assaults, market trading statistics dipped further in April with the average daily value and volume traded shedding weights by 28 per cent and 27 per cent respectively while the average number of equities traded daily also fell from 164 to 159.
In general, the Nigerian stock market became deeper in February relative to its performance in January. All measures of market depth show considerable improvement with an average increase of 22.4 percent. It is also observed that depth performance by value for the period in review is more impressive than that by volume indicating a free flow of money as well as positive changes in share prices on the floor of The Exchange. Conversely, the market experienced a slow down in activity in March relative to its performance in February. All measures of market depth showed considerable erosion with an average decline of 25 per cent. Also, depth performance by volume fell more precipitously during the period under review than by value. This is indicative of the sensitivity of volume traded to the general stock market pulse. Hence, we deduce that the value of trade, which has share price as a vital variable, still carries more weight and the effect of the perceived "market correction" was made lighter by investors' willingness to hold their positions.
Though similar scenario of erosion in measures of market depth was observed in April, we discovered that, in contrast to previous months' experience, depth performance by volume fell almost by the same margin as depth performance by value. This indicates investors' willingness to hold their positions as reactionary sells became less rampant thereby pushing volumes further down. This trend was more entrenched by the freer fall in prices experienced during the month.
The experience in the past month in the Nigerian stock market supports analysts' optimism that there is an imminent end to the current downturn. This position is supported by the Relative Strength Index (RSI) of The NSE All-Share Index. Currently, the RSI perches below the 25 percent line which defines the oversold region. It is noteworthy that the last time the RSI dipped to a low ebb as we have today was in February, 2005 when it oscillated around 16 percent in the oversold region. This position corroborates the prevailing market psychology that the current dip in major trading statistics is just a passing fad.
Advance-Decline Behaviour:
Fundamental analysis of the stock market based on market breadth focuses on daily price appreciation/depreciation of equities on the floor of The Exchange. We measured the net change in the number of gainers and losers on a daily basis using the cumulative Advance-Decline Line. The hype generated by the impressive performance of the market last year resulted in a bullish trend in the first two months of the year. Between January and February, the daily average number of advancing stocks increased by 34.6 percent while the decliners fell by 15.81 percent. However, in March, there was a trend reversal. On the average, the number of daily advancers plunged by 22 percent from 91 stocks in February to 71 in March while the daily decliners surged from 38 stocks to 66 in the same period, representing a rise of 74 percent. The bearish tempo was further heightened in April as the number of daily advancers fell by 12.26 percent from 71 stocks in March to 62 stocks in April while the daily decliners shrank insignificantly from 66 stocks to 64 in the same period, representing a decrease of 3.03 percent.
A benchmark analysis of stocks' performance relative to index returns shows that contrary to the experience between January and February, stocks began to perform below market's expectations as underperforming stocks headed northward by 88 percent in March. In contrast to a marginal rise observed in March, there was a 6.45 percent fall in the number of outperformers in April but hope is kept alive as the number of underperformers rose only by about 3 percent.
Further, we used the Advance-Decline ratio (A-D ratio) to measure the relative strength of daily advancers compared to daily decliners. The indicator has exhibited a falling trend from March till date. The fall is however attributable to reduction in the number of advancers reflecting an overall slide in stock market profitability. Within the period under review, the NSE ASI moved in the same direction with the A-D ratio.
Submission:
Our analysis shows that the stock market exhibited "good" breadth from January through February as the A-D line shows a consistent rise and was effectively tracked by movements in the ASI. However, we noticed divergences on the 13th, 18th and 26th of February indicating a temporary weakness of the market as the A-D line failed to move in tandem with the index. The market later regained the initial momentum in the last three trading days of the month.
There were no signs of recovery between February and March, the stock market exhibited "fair" breadth as the A-D line fell to the growing pressures of bearish rallies but was effectively tracked by movements in the NSE ASI. This decline, which was largely attributable to market correction of over-valued equities, was much stronger in the last trading week in March just as the index returns dipped for 7 consecutive trading days.
The stock market exhibited a "fairly healthy" breadth between March and April. Although the A-D line further assumed a downward trend owing to continued bearish rallies, it was effectively tracked by movements in the ASI implying unremitting market correction of over-priced equities.
On the strength of our findings from the above analysis, we submit that bearish momentum in the market may be weakening as breadth indicators for April show a considerable improvement compared to previous months' experience. While we may not expect a sharp resurgence, the situation certainly is not likely to get worse.
Liquidity and Volatility
Liquidity is an important determinant of stock market performance as it measures the ease with which securities are traded. We observe an erratic trend in market liquidity in January and February. However, on the average, the market became relatively more liquid in February as the average turnover ratio of stocks (measured by value of stocks traded over market capitalisation of listed equities) inched up by 8.3 percent. It is important to note that liquidity dropped sharply in the middle of February. This trend is attributable to a decline in value of stocks traded which produced a very low turnover ratio as the market capitalization rose quite insignificantly.
Volatility is one measure of risk that analysts rely on to gauge the health of the stock market. To capture the stock market volatility, we employ a simple measure of volatility: the rolling standard deviation in index returns. Though market capitalisation maintained relative stability throughout March, the rise and fall in value traded exerted a pressure on the market liquidity making it display an erratic trend in March as obtained in February. However, on the average, the market became relatively less liquid in March as the average turnover ratio of stocks dipped from 0.0016 in February to 0.0013 in March, representing a fall of 15.5 percent.
For a large part of the month of April, market capitalisation of listed equities was relatively stable, but there was an irregular movement in the value of stocks traded. As a result, market liquidity assumed an erratic trend throughout the month. On the whole, just as experienced in March, market liquidity measured by the turnover ratio dropped by 43.66 percent implying that the market became less liquid in April than in March as the average turnover ratio of stocks plunged from 0.0013 in March to 0.0010 at the end of April.
Our volatility measure shows a surge in market volatility in April with a trend that was very similar to that of February and March. On the whole, the market became more volatile in April compared to March as the average market volatility inched up by 22.37 percent from 0.0046 in March to 0.0058 in April.
Submission
Our analysis shows a decline in market volatility in February by 21.8 percent while the stock market became more liquid (up by 8.33 percent). The implication of a rise in liquidity is that stocks became more readily available and easily traded in February than in January.
Statistics available in March showed a general decline in both market liquidity and volatility by 27 percent and 17 percent respectively. The observed positive relationship between liquidity and volatility negates the expected inverse relationship which underscores market soundness at least in the short run.
Our analysis of market activities in April showed a further decline in market liquidity by 44 percent and a rise in volatility by 22 percent.
The rise in volatility portrays more erratic stock price movements. However, there is a sign of recovery as we observe a negative relationship between liquidity and volatility. This we believe underscores the fundamental soundness of the market at least in the short run.
SECTORAL PERFORMANCE ANALYSIS
Market trading metrics, represented by the trio of deals, volume and value are good starting points in the diagnosis of stock market health and the health of the sectors making up the substratum of the entire market. Volume and value traded have exhibited negative trajectory from January through April. To zero-in on sectoral performance, market activities in April brought about a major rearrangement in terms of the most active sectors measured by volume of shares traded. The insurance sector, largely driven by obsessive transactions in the shares of UNIVINSURE, MBENEFIT, EQUITY ASSURANCE, GOLDINSURE, CONTINSURE and NEM were the most boisterous. This sector dwarfed the banking sector in terms of volume traded from January through March. However, investors' psychology, shaped by the second thought on the plausibility of the much expected top and bottom line improvement of the insurance sector, sets in motion a market behavior that saw the ascendancy of the banking sector in top value and volume chart in most part of April. On the aggregate, the insurance sector slightly maintained a lead in market turnover in April as it recorded 6.4bn shares transactions representing 39 percent of the aggregate market turnover while the banking sector trailed closely behind propping up 6.3bn shares (38 percent). Other sectors in the top 5 include conglomerates, commercial/services and food & beverages sectors. These sectors accounted for 4 percent, 2.3 percent and 2.2 percent of market turnover respectively.
In terms of values of transactions, the banking sector captured a disproportionately large quantum of total value of equities traded for the month ended April despite its slump to the insurance in terms of volume transactions. This is adduced to the huge discrepancy between the average equity price in the two sectors (N24.55 for banking sector and N5.33 for insurance). In sum, the banking sector generated transactions worth N163bn representing 61percent of the total market value of transactions for the month. A closer look at 2-month comparative analysis of value traded by sectors revealed a dip in April compared to March. This is indicative of the bearish mood of the market and the resultant plunge in average sector prices. It is note worthy that the top 4 sectors by value traded in March (banking, insurance, food and petroleum/marketing) reaffirmed their dominance in April and captured 81 percent of the aggregate value for the month compared to 74 percent in March. This further strengthened the observed skewness of market metrics in favour of few sectors.
Analysis of sector-based stock price movement revealed a general downward trend. The average sector prices of chemicals and paints, automobiles, air service and construction shed weight by an average of 22 percent in April. Average equity prices in insurance, conglomerates and banking sectors trailed similar path dropping 8 percent, 7 percent and 5 percent respectively. This has a far reaching effect on price multiples that guide investment decision making across sectors. The industry average PE for the Banking Sector, for instance, dropped to 25 xs from above 26 xs despite impressive quarterly results posted by some banks during the month.
Submission
The diagnosis of market behaviours in April measured by the prevailing sectoral performance revealed an arrangement that bears a close similitude to what exist in the past. The top sectors, insurance, banking, food & beverage, petroleum/marketing, conglomerates, commercial services still reaffirmed their long standing dominance in volume and value charts. This finding points to a crucial fact that the recent downturn in stock market activities is eclectic and has little effect in changing the traditional performance hierarchy.
MARKET SENTIMENTS:
Contrary to conventional market trend in prior years most especially in 2007, equities market exhibited a strange behaviour early in 2008 till date. Market participants' appetite shifted to insurance stocks which are low-priced and other pennies with outright disregard to fundamentals and intrinsic worth of these stocks. Market recorded unexpectedly high returns of 12.09 percent between January and February 2008 compared to 10.73 percent recorded in 2007 during same period. However, this feat could not be sustained in March as the index plummeted abysmally to a level of 63,016.56 points, dipping by about 4.52 percent to return 7.57 percent for the month as a result of unanticipated bearish runs that hit the market. Total market return for first quarter 2008 was 8.67 per cent contrary to 31.03 per cent posted in the same quarter of 2007. Worse still, the free-fall lingered on the heels of impending CBN regulatory directive on margin lending by banks which saw The NSE ASI nose-dived to 59,440.91 points on April 30, 2008 from xxx points in March 31, 2008, translating to a negative return of 5.67 percent in April against 8.44 percent posted in similar period 2007.
Market participants are in serious bewilderment and apprehension about the state of the market in the past 8 weeks. Investors of all classes are moaning about continuous stock price free fall which has culminated into deep capital erosion. A number of participants are anxious to know whether the continuous dip in prices is long term or a mere market hiccup. However, investment analysts and market watchers adduce a number of reasons to this trend. A cross section opines that though the recent policy directive of the apex Bank, the CBN, might have worsened the situation, but market activity had already headed for a lull in prior weeks. They posit that the market is already experiencing a technical correction after the bullish regime in January and February 2008. A technical correction occurs when there is no evidence that the increasing price trend should persist. It is often caused when investors temporarily slow down their purchases of securities, which commonly leads to a pullback toward a short-term support level.
Technical analysts maintain that after a steady increase in value, investors may become more cautious buyers at the higher prices and look to reevaluate the market, resulting in a decrease in purchases. The drop in purchase volume will stop the upward price trend from continuing while the market re-evaluates the short-term direction. In general, analysts agree that a healthy market will correct from time to time as corrections are temporary price declines, interrupting an uptrend in the market or asset.
Another perspective to the cause of the market downturn is the quantum of activity in the primary segment of the capital market. From January till date, over N200bn had been raised through private placement activity as telecoms giants-MTN, Starcomms, Reltel (on-going), confectionary merchants such as Tantalizers, Chicken Republic and others such as Charm Nigeria Plc source for more equity capital from the capital market. Market watchers are assertive that there is no end in sight for primary market activities in coming months as some blue chip companies such as African Petroleum (AP) Plc, Oando Plc and a few other insurance companies are gearing up fresh capital raising exercises. In the same vein, Zenith Bank's 3 in 1 mutual funds- namely: Zenith Income Fund, Zenith Equity Fund and Zenith Ethical Fund are already in the market. Besides, a number of private placement activities are also in the 'pipe-line' and these are also expected to shift investors' attention to the primary market and crowd-out investible funds from secondary market segment. However, some experts are optimistic that though sharp resurgence may not be in view in coming months but the dips in equities prices may soon be abated. Bye and large, a couple of stocks still look attractive for medium term investment consideration.
Meristem Securities Limited market analysis and sentiments and its attendant recommendations are prepared based on publicly available information and are meant for general informative purposes. Meristem Securities Limited can neither guarantee the accuracy or completeness of the information as they are an expression of our analysts' views and opinions. Meristem Securities Limited cannot be held responsible for any loss suffered by relying on the said information as this information as earlier stated is based on estimates and opinions and is meant for general information purposes and not as solicitation to buy securities and financial instruments © Meristem Securities Limited 2008.
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