Some analysts are anticipating a pullback on the Nigerian Exchange over concerns that it may have reached the overbought region.
The market capitalisation of the NGX closed in the green zone in the past week with investors gaining N6.29tn last week.
The benchmark index recorded a 13.84 per cent week-on-week gain, closing at 94,538.12.
According to analysts at Cowry Asset Management Limited, the ASI’s current movement pattern indicates that the market is persistently in the overbought region with stock valuations and prices significantly exceeding intrinsic values.
“This signals a potential imminent pullback, suggesting the market requires a correction in the short term,” they said in their weekly market report.
In a chat with The PUNCH, stockbroker and the Executive Vice Chairman of Highcap Securities, David Adonri, expressed similar concerns that the bullish run in the market was driven more by sentiments than economic fundamentals.
He said, “The secondary market for equities, which started its bull run last year, has continued with undiminished intensity. The boom has principally been propelled by sentiment rather than sound economic fundamentals. As a result, when realities of the economy dawn on the market, which may occur as dividend payouts fall below expectations in due course, perhaps correction may set in to expunge current exuberance.”
Adding a caveat, Adonri said, “We only hope that the correction will be orderly when it starts.”
Providing another perspective, the Managing Director of Marble Capital, Akeem Oyewale, said, “There obviously has been a re-rating of the ASI based on the bullish run being experienced since Q2 2023. A more realistic view of whether the market is in the overbought region will emerge as the audited financials of the listed firms are published in the next few weeks.
“Investors are rational and research analysts are watching the stocks’ performances with keen interest and reviewing their views on a regular basis.
“We also have to be aware that there are sentimental views that also drive market performances, some of them are currently positive, such as the Central Bank of Nigeria clearing some substantial outstanding FX demands, confirmed flows from the AFREXIM deals, commencement of the operations of Dangote Refinery and Port Harcourt refinery, release of the MPC calendar of the CBN for the year, positive governance changes in some listed entities, etc.”
The MD of ARM Securities Limited, Mr Rotimi Olubi, agreed with the argument that the market was in the overbought region and that a pullback was imminent.
He reasoned that any pullback would be an opportunity for smart investors.
“The market is still within a bullish region. A pullback is an opportunity for a re-entry by smart investors,” he stated.
Meanwhile, last week’s bullish momentum was fuelled by buying interest in bellwether stocks and those with strong fundamentals.
Analysts observed that funds continued to flow into the capital market reflecting portfolio repositioning in response to the recent inflation record, which hit a 21-year record high of 28.92 per cent.
It was largely bullish across the sectors, as the Industrial index outperformed indexes, gaining 46.88 per cent week-on-week, driven by price increases and buy interest in the cement firms; Dangote Cement, BUA Cement and LaFarge Africa.
Also, the Insurance, Oil & Gas, and Consumer Goods Indexes closed the week on a positive note, rising by 14.94 per cent, 8.82 per cent, and 8.18 per cent, respectively, propelled by positive price movements in NEM Insurance, Honeywell Flour Mills, May&Baker, Eterna Plc and Seplat.
However, the banking index retreated by 0.12 per cent week-on-week due to price declines in FBN Holdings, Guaranty Trust Holding Company Plc, and Stanbic IBTC.
Despite the market’s positive performance, participation levels weakened compared to the previous week.
Total traded volume declined by 9.44 per cent to 5.18 billion units, while the number of trades dipped by 1.31 per cent to 79,012 deals.