The Nigerian Stock Exchange (NSE), on Wednesday broke a bearish trend with a 1.11% gain. The index lost 3.4% last week, and 3.3% this week, before today’s gain. Year to date gains have however narrowed to 10.27%.
The gains recorded today was driven by banking stocks, which made up about 8 of the top gainers. Apart from GT Banks the rest of the FUGAZ made the list while the remaining 4 were tier 2 banks.
Does the day’s gain signify the return of the bulls? Perhaps not, especially if you consider why stocks have been dropping of late.
Why the drop?
The bearish trend was due to several factors. Global stock markets were heavily bearish last week. The Dow Jones Industrial Index lost 1000 points for the first time ever. The MCSI index which measures a basket of developed and emerging markets lost 6.2% last week.
Crude oil prices also fell to $60 a barrel, for the first time this year, due to increased US production. This led to investors pulling funds from the equity markets, into dollars due to the inverse relationship between both assets.
Investors are also anxious about a possible increase in the US benchmark interest rate, due to higher inflation levels.
On the domestic front, Nigerian investors are also taking profits off the table. The Nigerian stock market tends to show some form of correlation to trends in crude oil prices. The performance of the bourse tends to decline when crude oil prices fall and vice versa.
Will the trend continue?
This is dependent on the performance of global equity markets and crude oil prices. If equity markets in advanced countries continue the decline, the NSE may follow suit.
Oil is on a bearish trend since refining maintenance season has started. Lower oil demand and rising US production will send prices further down. Foreign investors read this decline in oil price as a decline in Nigeria’s dollar earnings and ability to support repatriation of earnings so they start to sell down.
Most of the reactions have been priced in already so traders are taking profit. Furthermore, dividend & bonus paying stocks will be marked down for dividends and bonus
Some analysts, however, see the dip as a temporary one, till earnings season commences. Tier one banks will likely kick off the release of results by late February.
What should investors do?
Investors that have made significant gains, could decide to cash out and wait on the sidelines. Others not yet in the market could also take positions.
At Nairametrics, we typically advocate medium to long term stakes when investing in stocks. However, not too savvy investors wary of bearish markets can cut their losses and get out until things improve.
It is interesting to note that the market may experience a revolving door scenario between bulls and bears and investors find opportunities in the volatility that is likely to ensue. We might continue to see stocks eke our gains after days of losses.
This is where targeted stock picking becomes very useful.
