NSE signs point to recovery during second half of year

With annual results in for most of the companies in the NSDE 20 Share Index, the sideways market seems to be saying; that was not a poor show but not an impressive one either.

The flattish market that includes many post-earnings sell-offs has bounced within a tight range and provided little trading advantage. Some may see the flattish behaviour as a mismatch – and therefore, bearish. For that reason, the bourse has not been an interesting area.

But as analysts dig into details, such as size and source of revenue growth, cash flow sustainability, growth margins, new markets and economic climate, these evaluations may bring a different hue to the market.

Well, time will tell, but for now it seems the market’s lacklustre performance appears unmoved. Year-to-date, shares have lost some 20 percent of value.

However, looking deeper into the stock market, the performance actually shows a sound market at work. The fact that shares have held their own for several months – an important accomplishment that shows near-correction level—is a sure sign that change is nigh. This performance raises the spectre that “something good is cooking” seeing that selling pressure has also weakened.

From a technical standpoint, a consolidation wave always points to a growing bullish strength. This is reinforced by the fact that the current trading levels (2,600 -2,700 area) have in the past served as an important support level – 1998, 2004, 2009 and 2017. A confirmation of these expectations will likely play a key role in investor sentiment in the coming weeks.

That probability could receive a boost from a favourable environment.

First, the recent Stanbic Bank PMI shows the private markets are re-gaining strength. The reading rose to 54.3 (June) from 51.3 in the previous month, the fastest since last August.

Secondly, the economy has also remained unfazed by slowdown in agricultural activities (due to delay in the onset of long rains) to post 5.6 percent in the first quarter of 2019.

Thirdly, although dollar strength is a headwind for stocks, foreign investors seem to have given it a pass.

They have increased their shareholding to 20.91 percent, up from 19.97 percent year-to-date, according to the latest Capital Markets Authority quarterly report.

Average foreign investors participation in second quarter 2019 has accounted for 71.13 percent of equity investor participation, up from 61.7 percent recorded in a similar period in the previous year.

That said, investors need to approach the rest of the year cautiously. Economic weakness, jump in inflation, weak earnings and policy uncertainty could put a damper on investor enthusiasm.

Growing weakness in the global space (read trade tensions) could also set up the market for a nosedive.

Moreover, improving fundamentals do not necessarily translate into the Index performing particularly well—the share market can be very independent minded.

Nonetheless, second-half performances can be independent of the first-half performances.

In our case, the odds of a rising market in the second half point towards a recovery. Small caps in particular are poised to lead this charge. They have a plenty of room to run. Will you be part of this great march?