Weekly Investment Research Commentary
Weekly Investment Research, November 26 – 30, 2018
Macroeconomics: PMI points to continued expansion in economic activity
The CBN released November PMI report which showed that manufacturing and non-manufacturing indices climbed to 57.9 (October: 56.8) and 58.4 (October: 57) respectively. For the manufacturing PMI all 14 sectors reported an expansion with overall index increase being driven by new orders index. For non-manufacturing, 16 out of 17 sectors recorded increase except utilities which contracted over the month
Figure 1: Nigeria PMI – November 2018
Source: CBN, Sigma Research
Currency: Speculative demand drives widening parallel market spreads, FX reserves on the up
Following the steep declines in crude oil prices, pressures began to surface on the USDNGN at the parallel market likely speculative demand without any access to the official FX window. At the segment, the USDNGN weakened by NGN6/$ to NGN370/$1. Across other segments, the NGN remained stable with a 0.2% w/w gain to NGN364.10/$ at the IE window where average turnover climbed 14% w/w to USD315million (Total: USD1.5billion). Likely reflecting the mid-month Eurobond sale, FX reserves reversed the recent declining trend (+1.1% w/w to USD42.1billion).
Equities: Recent oil price slide drives fresh bearish sentiments
Nigerian equities remained in negative territory for the third consecutive week with the ASI down 2.5% w/w (YTD: -19.3%) driven worries over the lower oil price as well as FX pressures on the parallel market. Trading activity tumbled from the prior week with average turnover down 46% w/w to NGN2.9billion.
Across the sectors, while Personal Care (+2.9% w/w), Brewers (+1% w/w), Insurance (+0.3% w/w) and Construction (1.4% w/w) recorded gains, the declines in Banks (-3.3% w/w), Cement(-4.1% w/w), Food (-0.8% w/w), and Oil & Gas (-0.02% w/w) worked to drive the NSEASI lower. The negative performance was spurred by declines in bellwether stocks in the banking (FBN Holdings: -6.6% w/w, Guaranty Trust Bank Plc: -5.6% w/w, Stanbic IBTC Holdings Plc: -2.04%, UBA Plc: -3.85% w/w and Zenith Bank Plc: -3.3% w/w), cement (Dangote Cement Plc: -4.2% w/w, Lafarge Africa Plc: -7.14% w/w) and Oil & Gas (Seplat Plc: -9.7% w/w) sectors. Notably, Diamond Bank Plc dropped 32% w/w as concerns over outlook and Eurobond payments drove bearish sentiments on the stock.
Figure 2: Monthly NSEASI Performance
Source: NSE, Bloomberg, Sigma Research
Fixed Income: Yield curve inversion moves up gears on account of fresh CBN tightening
Following the recent slide in oil prices as well as the emergence of currency pressures at the parallel market, the CBN moved to adopt a hawkish stance on system liquidity with a step-up in the frequency of OMO auctions (from the usual once a week to three over the week) as well as a progressive increase in clearing rates. In terms of actual OMO sales, the CBN sold NGN652billion relative to OMO maturities of NGN452billion. Stop rates at the OMO auction rose to close at 11.75% (+10bps), 13.50% (+30bps) and 15% (+25bps) on the 97-, 181- and 342day bills respectively. Cumulative impact of the CBN aggression was the rise in front end rates over the week (up 23bps w/w on average) to 13.55(3M), 13.33% (6M) and 17.25% (1-yr). The CBN aggression fueled an uptick in FGN bond yields which climbed on average 10bps over the week. Despite lower subscription at the fortnightly NTB auction with bid-cover of 1.8x (Last: 3.2x), the CBN, on behalf of the FGN, rolled over NGN151billion at flat-to-lower yields. The DMO announced that it would not carry out any NTB auctions in December, electing to redeem NGN78billion worth of maturities over the period.
Figure 3: Naira Yield Curve
Source: FMDQ, NBS, Sigma Research