Bull vs Bear:Penny stocks may be in flip-flop
…As M&B remains bullish, Fidson on edge
By Emeka Anaeto, Business Editor
Amidst wide-spread sentiment that equity prices will regress back to bear territory this week after a three-week bullish market, reports have indicated that penny stocks outshined heavily capitalized stocks while the bull run lasted.
But it is also indicated that several investors that trooped to the penny stocks would be caught napping with the impending bear run as they become the first casualties.
Many investors as at last week were already running to safety, returning to stocks with stronger fundamentals, thus exposing the penny stocks to the hits of the bears, too early.
The penny stocks that had led the market capital gains in the just concluded round of bull run include Fidson Healthcare Plc, May & Baker Nigeria Plc, Livestock Feeds Plc and Eterna Oil Plc.
Fidson had led the bullish drive in the second week of the bull’s market chucking up a massive 43.6 per cent gains in just one week and bringing cumulative gains to over 90 per cent in lest then three weeks.
But as at last weekend profit takings had forced a massive reversal, about one of the highest in a first phase of the returning wave of bear run. Total gain is still impressive at about 67.9 per cent as at weekend but there is strong indication of further decline in the days ahead. Last week alone the stock declined 6.8 per cent.
At about 72.9 per cent three-week gain, another drugs maker, M&B appears strongly atop of the capital gains chart within the just concluded bull cycle. Moreover, Last week alone it chucked up about 14.8 per cent. But market analysts are also seeing a massive profit taking in the days ahead and same is seen for Livestock Feeds which had chucked up about 32.25 per cent. Livestock Feeds declined 7.9 per cent last week.
Eterna which had skyrocked by over 40 per cent in the three-week bull run also retracted by 8.7 per cent last week alone.
Analysts at Afrinvest West Africa, a Lagos based investment house, had noted that since the announcement of the Investors’ & Exporters’ (I&E) FX window on the 21st April, 2017, the equities market has witnessed a significant increase in activity level.
Comparing average volume and value of transactions in the 3-weeks preceding the introduction of the new forex policy by the Central Bank of Nigeria, CBN, with the last 3-weeks of its operations suggests that Average volume and value surged 97.7 per cent and 214.7 per cent from 213.4 million and N1.4 billion to 421.7 million and N4.2 billion.
The analysts stated: “This has been on account of the improvements in the forex market as well as some improvement in macroeconomic fundamentals which had hitherto discouraged the inflow of Foreign Portfolio Investments. Consequently, the benchmark index rose to a 10-month high last week Thursday; instigating a round of profit taking by investors on stocks that significantly appreciated.”
Analysts believe that the depressed state of the Nigerian economy over the last two years has been broadly reflected in capital market activities. Foreign investors’ appetite for Nigerian assets has waned significantly on the back of currency crisis which in turn has fundamentally weakened macroeconomic performance, dragged corporate earnings and also impacted on equities market viability.
This condition, according to them, has also lingered into the year 2017 as investors have been dumping equities for less risky investment opportunities in the fixed income market especially given the current relatively high yield environment.
Accordingly, the negative performance of the Nigerian Bourse in 2016 (-16.9%) was sustained as the year-to-date (YTD) return of the benchmark index deteriorated as low as -8.5% in March before marginal improvements were subsequently recorded.
However, in April, investor sentiment strengthened following the commencement of the Investors’ & Exporters’ (I&E) FX window which signalled a possible return of flexibility in FX rate determination; though multiplicity of rates at official windows is still a concern. Additionally, recent improvements in global oil prices above the US$50 per barrel, improvement in domestic production currently above 2.0 million barrels per day, fiscal responsiveness – including the release of ERGP, successful issuance of US$1.5 billion Eurobond, passage of 2017 budget – as well as recent positive readings in manufacturing PMI, suggest possible rebound in economic activities in the second quarter of 2017.
Accordingly, the Nigerian All Share index trended on a 10-day bullish streak majorly due to the improvements in the FX market.
Consequently, the benchmark index has recorded a decline on only two trading days since the launch of the new forex window while appreciating 11.9 per cent post launch with YTD return currently at +4.9 per cent. Interestingly, all the sectors have majorly benefitted from the renewed investor participation in equities as the banking, consumer goods, oil & gas, industrial goods and insurance sector indices have gained 22.3%, 16.7%, 8.4%, 4.1% and 2.7% respectively since the launch of the I&E window.
The analysts at Afrinvest therefore stated: “In our view, the current bullish trend in the market is majorly hinged on foreign investors’ perception on activities within FX market particularly with regards to the sustainability of the newly launched I&E FX window.
“If managed appropriately, we expect to see influx of foreign investors which could potentially spark massive rallies in the market given the comparably cheaper valuation of Nigerian equities at a P/E of 12.6x relative to average P/E of 14.7x for African markets.”