As the year is drawing to a close, analysts are divided on whether the Nigerian stocks, which pared losses last month, will see a ‘Santa Claus’ rally.
The Santa Claus rally refers to the tendency for the stock market to rally in the week leading up to Christmas (December 25), according to Investopedia.
After a dismal performance in October, equities listed on the Nigerian Exchange Limited rebounded in November with a gain of 8.7 percent.
Abiola Rasaq, an economist and former head of investor relations at United Bank for Africa Plc, told BusinessDay that he has a near-term bearish outlook on the equity market and “I think expectations of Santa and January Effect rally may be dashed.”
“Notably, interest rates are rising very fast and fund managers as well as retail investors are increasingly balancing investment portfolios in favour of fixed income instruments, as the double-digit yields on “risk-free” fixed income securities presents opportunities to satisfy the urge for decent investment returns,” he said.
In the trading week to December 16, the month-to-date positive return rose to 3.48 percent as market’s mixed trading sessions favoured the bulls. Year-to-date, the market rose by 15.45 percent.
“To tame the rising rate of inflation, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) embarked on a contractionary stance this year,” said Chinwe Egwim, chief economist at Lagos-based Coronation Merchant Bank.
This year, the policy rate was hiked by 500 basis points from 11.5 percent in January to 16.5 percent in November.
The impact of the 100 basis-points hike last month was expected to surface in the local bourse, as investors looked to book profits from record rally. Fixed income market yields were expected to continue to respond to the MPC’s persistent policy tightening, driving renewed interest from investors at the detriment of the equities market.
The headline inflation rate for November increased by 38 basis points when compared with the previous month to 21.47 percent year-on-year.
The uptick in the headline inflation was partly attributed to the increased import costs due to naira depreciation and spikes in operational costs on the back of rising energy costs.
“Whilst the elevated inflationary environment still means negative real returns on fixed income instruments, it does also mean corporates may struggle to sustain profit margins in the year ahead, a phenomenon which may exacerbate the investor risk-off sentiment arising from the election cycle. There is little or no positive catalyst on the horizon over the near-term, thus undermining the prospect for fundamental rally,” Rasaq said.
“I like the attractive dividend yields, especially on large-cap financials with stable earnings profile and dividend payment history; nonetheless it may be a choppy, roller-coaster ride for equities over the next couple of weeks into the new year.”
As a leading indicator, liquidity is already weak and market breadth is becoming narrow, thus reinforcing the perspective of a relatively bearish year-end for equities and likelihood of an absent Santa in the equity market, he added.
“We expect the mood in the market to remain positive this week. This is hinged on buying activities on tickers that are still at low valuations, including bellwether stocks such as Nestle and GTCO. We also consider that there are no fixed-income primary market auctions this week, which could limit the flow of funds from the equities market,” Meristem analysts said on Monday.
“However, we do not rule out the possibility of investors taking profit on large-cap stocks that have already gained. Therefore, we expect the market to close up this week.”
Read also: Foreigners pull N171.38bn from Nigeria’s stock market in 10 months
Looking at their year 2022 valuations on banking stocks target prices, Meristem analysts want investors to buy Access Bank, ETI, FCMB, GTCO, Stanbic, UBA and Zenith Bank.
For insurance stocks, they want investors to buy AIICO, Lasaco, Axa Mansard, Cornerstone and Custodian. Also on Meristem ‘Buy’ list for other financial services are United Capital and Africa Prudential, among others.
Other stocks on their ‘Buy’ list include Guinness, Nigerian Breweries, Cadbury, Dangote Sugar, Honeywell Flour Mills, Flour Mills, Nascon, Nestle, UACN, Unilever, Presco, Okomu Oil, Vitafoam, May & Baker, Fidson, GSK, Neimeth, Dangote Cement, Lafarge, Berger Paints, and Total Energies.
“Portfolio rebalancing is another key activity to watch out for from investors as we approach the end of the year,” said analysts at Lagos-based United Capital.
They anticipate profit booking activities from short-term investors “as they seek to close out positions in strong-performing stocks in the past weeks as bullish momentum shows signs of stuttering”.
“While, we expect some profit-taking this week, we anticipate another positive w/w close on the back of positive activity in some of the heavyweights,” Vetiva Research’s analysts said on Monday.
