February 21, 2023/Coronation Research
The first seven weeks of the year have provided equity investors with a gain on the NGX All Share Index. As has often happened in the past, investors are faced with the question of what to do following a January rally. Our analysis of 14 past January rallies suggests that, as long as there are no obvious problems or obstacles ahead, January rallies tend to imply full-year rallies. Therefore, any nervous trading over the election period may provide a buying opportunity, especially for dividend-hungry investors looking to be paid a few months from now.
Do January Equity Rallies Mean Full-Year Rallies?
How should investors react to the fact that the equity market has risen during the first seven weeks of the year? Or, more particularly, how should investors react to a January rally? Past January rallies offer an important guide.
To begin with, January rallies are quite common, but they are by no means the rule. Over the past 14 years, there have been eight January rallies, so they have occurred just over half (57%) of the time. On six of these eight occasions (75%), the market went on to post a full-year gain that was, in every case, greater than what was achieved in January. So, at first sight, it seems sensible to hold onto January’s gains.
There are two important qualifications to this view. First, while six out of eight January rallies went on to become full-year rallies, there were two that were followed by market reversals, and the experience of holding onto equities after January was costly. In 2011 the discovery of a large non-performing loan in the oil marketing industry cast a shadow over the banking sector and depressed the market as the year wore on (in those days the major telecoms companies were not listed, so the effect of bank stocks on the overall market was greater than it is now).
The January rally of 2018 followed the extraordinary rally of 2017 (in 2017 the foreign exchange crisis was finally resolved and money flowed into the country again) but this turned out to be a case of irrational exuberance: earnings growth was mediocre and market interest rates rose from mid-year onwards, taking investors away from equities.
The second point is that in every year after a January rally, with the exception of 2013 (the market kept on going up after January that year), it was possible to buy the market more cheaply later on in the year. Of course, in 2011 and 2018 there was little point in doing this (these two years are highlighted in the bar chart); but in five cases it was possible to sell in January, enter the market at a lower level later in the year, and make more money by year-end.
Should investors do this now? The problem is that it is difficult to time the reinvestment (the post-January low was not reached until 8 November last year, for example) and quite often, the money to be saved by doing this would have been outweighed by holding onto equities and collecting dividends, which in recent years have given approximately an extra 5.0% gross to pure stock price returns, on average. This argues for holding onto stocks after a January rally.
As elections approach, the equity market does not seem to be in any way nervous (see our study of past elections in Coronation Research, Investment Outlook, Better times in 2023, 11 January). There is a possibility that the equity market could be nervous over the coming weeks, but the post-election period coincides with the season for recording and paying full-year dividends. If the market does turn out to be nervous over the election period then short-term weakness would provide a buying opportunity a little later on, in our view. So long as there are no good reasons for the equity market to fall (as there were in 2011 and 2018) January rallies have a habit of becoming full-year rallies.
FX
Last week, the exchange rate at the Investors and Exporters Window (I&E Window) closed stronger at N461.25/US$1. Elsewhere, the foreign exchange (FX) reserves of the Central Bank of Nigeria (CBN) slipped by 0.11% to US$36.78bn, as the CBN continues to intervene across the various FX windows. General elections are due to start this weekend and the CBN can at least be satisfied that its policy of gradual depreciation of the I&E Window rate is being applied consistently. And with a high level (by historical standards) of FX reserves, we think it is unlikely to change its course over-the coming two months.
Bonds & T-bills
Last week, the Federal Government of Nigeria (FGN) bond secondary market was bearish as the average benchmark yield for bonds rose by 19bps to close at 13.26%. Across the curve, the yields on the 3-year (+27bps to 11.38%), 7-year (+1bp to 14.11%) and 10-year (+9bps to 14.39%) bonds expanded. At the FGN bond auction, the Debt Management Office (DMO) allotted a total of N770.57bn (US$1.67bn). Demand was strong, as reflected by a total subscription of N992.11bn and a bid-to-offer ratio of 2.76x (vs 2.24x at the last auction). Consequently, the yields on the April 2037 (+10bps to 15.90%) and April 2049 (+10bps to 16.00%) bonds expanded. In contrast, the yield on the February 2028 bond declined (-1bp to 13.99%) while the yield on the April 2032 bond (14.99%) closed flat. Our view remains that elevated Federal Government domestic borrowing will continue to drive yields upwards over the course of the year.
Activity in the Treasury Bill (T-Bill) secondary market was bearish as the average yield for Tbills rose by 257bps to 4.05%. However, the yield on the 356-day T-bill settled at 3.79%. At the T-bill auction this week, the CBN is expected to offer maturities worth N263.5bn and we expect sizeable subscription. The average yield for secondary market OMO bills rose by 248bps to 3.77%; the yield on the 74-day bill closed flat at 3.02%.
Oil
Last week, the price of Brent relapsed, down 3.92% to settle at US$83.00/bbl, the lowest level since 6 February. As a result, Brent is down 3.39% year-to-date and is trading at an average of US$83.98/bbl, 15.25% lower than the average of US$99.09/bbl in 2022.
Oil prices declined following an announcement by the United States of an additional 26.0 million barrels of crude sale from its Strategic Petroleum Reserves (SPR). In addition, data from the US Energy Information Agency showing crude output from the US’ seven biggest shale basins is expected to rise to a record 9.36mbpd in March, up 75,000 bpd from February.
Elsewhere, the Organization of the Petroleum Exporting Countries (OPEC)’s monthly report confirmed its upbeat view of 2023 global oil demand, particularly on the back of Chinese demand recovery while Russia takes steps to impose a US$20 per barrel discount floor forits benchmark Urals grade. We maintain that prices are likely to remain well above the US$75.00/bbl set in Nigeria’s government budget.
Equities
Last week, the NGX All-Share Index lost 0.96% to settle at 53,804.46 points. Consequently, its year-to-date return fell to +4.98%. Fidelity Bank (-14.70%), FCMB Group (-6.96%), and Airtel Africa (-6.02%) closed negative while Guinness Nigeria (+7.14%), Geregu Power (+6.82%) and Cadbury Nigeria (+4.80%) closed positive . Performances across the NGX sub-indices were broadly positive as the NGX Insurance (+1.18%) led the gainers, followed by NGX Oil/Gas (+0.91%), NGX Consumer Goods (+0.67%) and NGX Industrial Goods (+0.06%), while the NGX Banking (-1.34%), NGX-30 (-1.05%) and NGX Pension (-0.95%) sub-indices closed negative.
Model Equity Portfolio
Last week the Model Equity Portfolio fell by 0.96% compared with a fall in the NGX All-Share Index of 0.96%, thereby performing exactly in line with the market (which is rare). Year-to-date it has risen by 5.06% compared with a rise of 4.98% in the NGX All-Share Index, outperforming it by 8bps.
