Thread by @Ayo_Akinloye, NSE IN 2021...MY PLENTY COINSSo, like I love to do, I will [...]

NSE IN 2021...MY PLENTY COINS

So, like I love to do, I will be examining the Nigerian Stock Market from my tripod (Technical, Fundamentals & Sentiment Analysis) to guide expectations for 2021.

TECHNICALS:
The chart in the picture is a trend analysis of the All share index movement from 2011 till date. Examining the trend, it is clear to see the up moves and down moves that follow.

2011 - 2014 rally (19,414.89 - 43,030.30 pts)

2014 - 2016 dip (down to 22,550.8)

2017 - 2018: Rallied to 45,321.82 points

2018 - 2020: Long term bear market as ASI dipped

2020: Market recovers strongly with ASI rallying to 40,120.22 (as of 8 Jan 2021)

Clearly, from the earlier points, we can see Nigerian equities are on the last lap of the bull market but with some legs to run to test the 45,000 points resistance (space circled in the earlier picture)

2. The relative strength index of the ASI stands at 73.91, a clear indication that the market is overbought.
ASI - This is an index of Nigerian shares (an aggregator of all the shares)
RSI - A technical indicator to gauge when market is too high (overbought) or too low (oversold)

PRICING & VALUATION

Here, I attempted to gauge how expensive Nigerian equities have become following the rally in 2020. I discovered that the ASI trades at a PE ratio of 15.12x which is a premium to historical average of 13.07x (10 year average) & 11.90x (5 year average)

From the earlier point (on PE), it is clear, Nigeria equities have become expensive and possibly prime for a sell.

Comparing to frontier peers (from the perspective of a foreigner) shows Nigerian shares are still expensive. MSCI FM index currently trades at 14.68x.

MSCI FM Index is an index that aggregates shares of several frontier markets or countries like Nigeria. So you can always benchmark Nigeria to its peers using that index. It is curated by Morgan Stanley.

So, let's continue.

Sentiments & Drivers:
Let's take a ride down memory lane to see some very important factors

2011 - 2014 rally
This was driven by higher oil prices, strong production and high economic growth. FPIs had enough USD to come into NGA equities.

Whereas, in developed markets, QE was in full swing forcing rates to record lows. As a result, FPIs sought for more returns in EM and FM equities. Nigeria benefitted and rallied significantly for 3 years.

2014 - 2016 (Oil Glut, FX crisis)
In this period, oil prices plummeted

The Niger delta crisis was back and Oil production dipped leading to severe FX rationing. Macro fundamentals weakened (we entered a recession in 2016). As a result, FPIs fled. NGA equities tanked.

2017 - 2018 rally (Oil recovery & I&E window)
Here, oil prices began to recover

PYO somehow struck a deal with the ND group and production recovered. We had more USD, Meffy created I&E window and FPIs returned back in droves. Nigerian equities jumped.

In all these prior years, locals (PFAs, Retail investors and HNIs) came into the market only after FPIs.

2018 - early 2020
Nigeria's rebound from recession was sluggish. Meanwhile QE (remember 2011 - 2014) was ending in developed markets, rates were trending higher. FPIs wanted more, so they left. Nigerian equities tanked, locals followed suit.

Now, in all these history, notice these common themes:

1. Oil prices
2. Oil Production
3. USD
4. FPIs

These were the fundamentals of the Nigerian market prior to 2020...In 2020, power changed hands (suspense... Drum roll)

Thanks to Uncle Meffy and is MPC dem dem... Yields in the fixed income market crashed, locals no longer found easy ways to invest their money, they had to take risk. As a result, equities benefitted in 2020 and rallied by an historical 50% in 2020.

Now, we had different themes:

1. Yields
2. Liquidity
3. Locals

The is important to understand where the market is headed because unlike prior bull runs driven by FPIs, this is driven by locals who MAY not run at the first sight of trouble unlike FPIs who are hot investors.

Now, I want to point out something... The rally in Nigerian equities was uneven in 2020. The rally was magnified by large cap Cement stocks (DangCem and BUA) and Telecom COYS (Airtel) for several reasons I don't want to mention now.

Thus, though banking stocks gained, they remain underpriced relative to the broader market.

Also, oil & gas and consumer stocks are trading significantly below the broader market.

Insurance stocks rallied towards the end of the year and are overpriced IMO.

Now, my expectations:

1. I see the market rallying into Feb/Mar as banking stocks and some specific consumer names catch up with the broader market rally. This should push the ASI to test 45,000 points

2. But market should retrace upon mark downs. In addition, I expect fixed income yields to recover in Q2 2020 which comes just in time for locals to reduce equity positions and begin buying treasuries and bonds.

Now, I have to emphasize I don't expect a similar bear market to what we have had in the past. This is because the market is now controlled by locals rather than FPIs who are still muted due to FX issues. Thus, I think any correction should not be prolonged unlike in 2018 - 2020

3. Also, performance of listed companies would be a strong determinant of market direction in 2021. I expect investors to reward coys with decent earnings and profitability.

Lastly... All technicals and pricing points to a possible bearish market.

RSI at 73.9, trend analysis showing limited upside and highly priced PE points to higher downside than upside

Thank you... Would do another thread with charts to show some of the stocks I am buying ATM

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