After bullish November, FSDH analysts say domestic equities set for a pullback

By Charles Abuede

• Reversal imminent after best-of-34-months for local market
• CBN’s special muted threat to long-term bullish sentiment

Following the bearish run at the start of December, the domestic equities market in Nigeria may be finally set for a pullback, after a bullish November, from which a possible reversal now seems imminent, analysts at FSDH Merchant Bank made this call in an outlook note on the market.

The last 34 months have been the best of months enjoyed by the domestic equities market in which the market rallied significantly in November due to sustained fall in money market and fixed income yields, which saw local institutions rotating their portfolios from fixed income to riskier assets like equities.

The bullish sentiment was further shored up by increased participation among retail investors, largely due to the ‘Fear of Missing Out’ effect; and as a result, the All-Share Index was pushed into gaining 14.8 per cent month on month to close at 35,042.14 points in its best month in 34 months ended November 2020.

As such, market analysts at FSDH Capital Limited have said the month of December would be bearish due to rebalancing activities among portfolio managers which can drive the market higher by the close of the last two trading days of the year.

“Looking at market sentiments, investors do not have any positive driver to regain risk-on appetite while retail investors appear to be interested in liquidating positions ahead of the festive celebrations. Thus, we anticipate that proceedings in the market would be largely bearish in the final month of the year. That said, we expect that the year-end rebalancing activities among portfolio managers could drive the market higher in the final two trading days of the year.  By way of strategy, we advise investors to gradually pick high yield dividend stocks at low prices as the market corrects ahead of dividend motivated rally in January and February,” the analysts wrote.

Meanwhile, sentiments in the bourse have been weak in line with expectations as the benchmark ASI is down 1.3 per cent on month to date within the first few days in December. A cursory analysis of the current state of the market portends that the market is very close to the overbought region with 14-day relative strength index (RSI) on the daily chart printing at 63.0. In addition, the moving average convergence and or divergence (MACD) indicator confirms sentiments in the market have turned bearish.

Bullish November spurred by N61 billion surges in equity holdings by PFAs in Q3

In a related development was the Q3 industry report released by PenCom, which showed the buying interest exhibited by pension fund administrators in local equities. The report revealed how local PFAs have aggressively increased their positions in Nigerian equities with the percentage of pension assets in domestic ordinary shares climbing to 5.1 per cent at the end of Q3 2020 from 4.7 per cent at the end of the previous quarter. Thus, PFAs were net buyers of domestic equities by N61 billion which marks the second-highest in 10 quarters.

FSDH market research analysts assert that “Despite the perceived aggressiveness of PFAs in Q3, we anticipate a rise in the percentage of pension assets allocated to equities by the end of Q4 2020. Also, CBN’s accommodative stance on monetary policy which has depressed yields coupled with the lack of access for domestic investors to the Open Market Operation (OMO) window has prompted local institutional investors like PFAs to invest in more risky assets.”

CBN special OMO bills: A spanner or muted threat to the long-term bullish sentiment of the equities market.

At the start of December, the apex bank announced its intentions to issue special OMO bill to commercial banks with cash reserve ratio above the 27.5 per cent regulatory threshold following intermittent CRR debits for non-compliance with a loan-to-deposit ratio requirement. This declaration by the CBN raises uncertainties with regards to the yields at which the bank intends to issue the bill. As a result, money and bond market investors were perched on the sidelines as activity level took a rain check in the face of elevated uncertainties. The refusal of investors to bid for bills filtered into the recent PMA conducted by the CBN as stop rate on the 364-day bill closed at 3.2 per cent. This prompted a panic reaction with yields in the money market and bonds market climbing higher while equity investors significantly sold down positions.

“However, the CBN conducted its first special OMO bills on Thursday and selling N4.1 trillion worth of bills at a yield of 0.5 per cent for 81-day tenor. The yield on the bill is priced similarly to identical tenor instruments in the secondary NT-Bills and OMO market, thus, we do not anticipate a significant shift in interest rate dynamics. That said, we consider the events at the last PMA an aberration that will be corrected in subsequent auctions while knee jerk reactions in the equities market will most likely be reversed. Indeed, we consider the new CBN special OMO bills window a muted threat to the long-term bullish sentiment of the Nigerian equities market,” the analysts stated.