Meristem Investment Guide: Market sentiments remain bullish

Investors sentiments remained strong during the week ended as the Equities market All Share Index (NSEASI) closed the week 2.55% up, having gained on four (4) out of five (5) trading days, to drive the Year-to-Date (YtD) return up to -5.33%.

The positive momentum observed during the week in review may be related to renewed bargain hunting activities by investors following the signing of the 2016 appropriation bill, and anticipation of a subsequent increase in government spending.

Consequent on these increased activities, the volume of transactions for the week increased by 33.95%, while value traded declined slightly by 9.14% from the previous week. Market breadth for the week however indicated relatively stronger sell sentiments, as it pegged at 0.81x, representing forty-three (43) losers against thirty-five (35) gainers.

Top gainers for the week were UBA, CONOIL, OANDO, TRANSEXPRand ACCESS, with respective gains of 22.59%, 20.67%, 13.42%, 12.71% and 10.77%. Conversely, VITAFOAM topped the underperformers chart with a 20.85% loss in value. Other top losers for the week were TIGERBRANDS, NCR, UNILEVER,and IKEJAHOTEL which recorded losses of 19.87%, 14.14%, 13.89% and 13.88% accordingly.

Given the spate of positive investor activities in the market lately, a number of stocks are now trading close to their intrinsic values. Nonetheless, we expect the recent rally of stock prices to persist into the coming week, as more investors return to the market to join the rising wave.

We also opine that the outcome of the MPC meeting will impact the direction of trading activities in the coming week.

This report reviews events last week, with emphasis on different segments of the financial market, while presenting our expectations for this week.

Economic Update: Headwinds persists

The MPC meeting came up ahead of releases of downbeat economic data and news flows, such as the spiraling inflation rate at 13.7% in April (vs. 9.6% in January 2016), as well as a 67.63% jump in fuel prices to a NGN135 – NGN145 band, as pronounced by the Minister of State for Petroleum, Ibe Kachikwu, and published by the Petroleum Products Pricing Regulatory Agency (PPPRA) respectively.

In addition, the Committee is convening at a time when macroeconomic pressures are mounting, amidst persistent badgering from the international community regarding the country’s exchange rate policy.  It is quite apparent that there are several risks on the horizon – pressured naira (9% decline in 1 week after months of stability at c.NGN320/USD) unanchored inflation expectations, slowing growth, rising unemployment, slow credit growth – which pose monetary policy dilemmas.

Fixed Income: Bearish Sentiments Pervades Bond Market

Following the contraction of system liquidity in the week (-19.81% to c.NGN146bn), money market rates hiked across instruments by 1.00% Week-on-Week (WoW) to peg at 8.71%.

Also, the Apex bank auctioned NGN110.94bn worth of Treasury bill instruments during the week. As expected, the auction was oversubscribed, with bid to cover ratio pegged at 1.95x, just as the stop rates on all instruments auctioned closed higher than at the previous PMA (on the 4th of May, 2016) . The stop rates for the 91-day, 182-day, and 364-day instruments pegged at 8.10%, 9.20%, and 12.48% accordingly.

The bearish sentiments towards Treasury bond instruments were sustained in the week, as yields trended northwards across all instruments by 0.25% to peg the average bond yield at 13.45%, as at week ended. In the coming week, we expect the decision of the MPC as regards the MPR to determine the direction of trading activities.

The value of the Naira against the US Dollar at the interbank market was sustained in the week, exchanging at NGN197.38/USD. However, the local currency weakened against the USD in the parallel market, paring in value by 8.36% to close at NGN350/USD.

Agric. Sector: PRESCO Drives Marginal Gains

The Agric sector recorded a marginal week-on-week gain of 1.10%, as measured by the performance of our MERI-AGRIC Index. This development is primarily attributed to the 1.97% WoW rise in the share price of PRESCO, which resulted in the year-to-date return for the sector pegging at0.50%. Sector breadth stood at 1.00x, reflecting equal number (one) of gainers and decliners.

LIVESTOCK was the only decliner in the sector this week, after the share price pared by 4.00% WoW to settle at NGN0.96. ELLAHLAKES (NGN4.26), FTNCOCOA (NGN0.50) and OKOMUOIL (NGN29.01) stayed flat week-on-week.

Considering the dearth of sector specific news capable of spurring investors’ sentiments, we opine that the Agric sector might record sideways performance in the coming week. However, over the medium to long term, we anticipate that the sector will drive value for investors, as it is positioned to benefit from incentives geared towards increasing participation in the sector.

Banking Sector: Advances 7.30% to Record 2nd Consecutive Week of Gains

The banking sector advanced for the second consecutive week, appreciating by 7.30% WoW to peg the YtD return at4.83%, on the back of good gains by sector heavyweights amongst others.

There were eleven (11) gainers and three (3) decliners to peg the sector’s breadth at 3.67x. UBA led the gainers after recording a price appreciation of 22.59%.

The ticker was followed by ACCESS, ZENITHBANK, GUARANTY, and FCMB which recorded respective gains of 22.59%, 10.77%, 8.50% and 7.75%. On the flip side, STERLNBNK (-10.29%), DIAMONDBNK (-5.45%), FIDELITYBK (-3.88%), and SKYEBANK (-2.50%) populated the decliners list.

Sentiments seem to have switched, as investors’ attentions have turned to most of the sector’s stocks. However, we do not expect gains to be as marked in the next week, as investors’ attention turns towards the MPC meeting at the start of the week, after which the direction for the rest of the week will be directed by the expected impact of policy decisions.

Consumer Goods: Sector Gains 1.76% WoW

Accumulating on gains recorded in the previous week, the Consumer Goods sector, as measured by the NSEFBT10 index, advanced by 1.76% WoW to push the YtD return to -10.38%. The sector breadth for the week pegged at 0.50x, reflecting five (5) advancers and ten (10) decliners.

NB, DANGSUGAR, NASCON, NESTLE and GUINNESS populated the advancers’ list, after recording gains of 6.82%, 4.13%, 2.47%, 1.45% and 0.11% accordingly. On the other side, the decliners’ list featured VITAFOAM, TIGERBRANDS, UNILEVER, CHAMPION and AGLEVENT, which recorded respective WoW returns of -20.85%, -19.87%, -13.89%, -5.08% and -4.76%.

Despite the largely negative performance of some sector stocks during the week, gains recorded on sector heavyweights were adequate to sway the overall sector performance to the positive region. We anticipate that the current trend in trading will be maintained in the coming week.

Health Sector: Sector Performance Downbeat

The sector breadth settled at 0.50x in the week, as a lone stock appreciated against two (2) decliners. Performance for the sector settled at -0.05% WoW, as measured by the MERI-HLTH index.

MAYBAKER (+0.99% WoW) was the only advancer, with the share price pegged at NGN1.02 at the end of the week, while FIDSON (-11.11%) and NEIMETH (-5.00%) were the laggards, settling at NGN2.00 and NGN0.95 respectively.

We envisage sustenance of the current cautious mood of investors to the sector counters, barring any news inflow capable of spurring buy sentiments amongst Investors.

Industrial Goods: Improved Investor Perception Drive Gains

The Industrial goods sector made a strong showing during the week ended, as the Meri-Ind index closed the week 1.73% up to peg the YtD return at -3.76%. There were five (5) advancers and two (2) decliners to peg the sector’s breadth at 2.50x.

WAPCO was the top gainer for the week, having gained 8.71% WoW to drive its share price to NGN77.40. CCNN, DNMEYER, CAP and DANGCEM were the other advancers for the week, with respective gains of 6.36%, 4.29%, 3.90% and 1.27%. BERGER (3.82%) and ASHAKACEM (1.70%) were the only price losers.

We believe the renewed interest in the industrial goods segment may be related to the recent signing of the 2016 appropriation bill. We expect investors’ perception of the building materials segment to continue to improve as we proceed further into the year, as the federal government increases funds disbursements towards infrastructure development.

Insurance Sector:Sector Returns Lone Gainer

The bullish run of the insurance sector was halted in the week, as the index pared by 1.73% WoW to peg the YtD return at -8.08%,as measured by the NSEINS10 index. The sector breadth (0.25x) signalled the direction of activities, as four (4) counters declined in value, as against a lone advancer.

NEM emerged the sole gainer in the week, having advanced by 1.27% WoW to close at NGN0.80. Conversely, AIICO (-10.59% WoW), MANSARD (-3.65% WoW), CONTINSURE (-2.83% WoW) and CUSTODYINS (-2.43% WoW) emerged as the worst performing sector stocks.

Corner Stone Insurance Plc (CORNERST) released its FY2015 and Q1:2016 financial scorecards during the week. Gross Premium Earned (GPE) and Profit after Tax (PAT) grew by 37.26% and 72.30% YoY respectivelyat FY2015, while the company recorded a loss after tax of NGN177mn (-251% YoY) in Q1:2016, despite a 60.24% YoY (NGN2.21bn) growth in GPE.

Also, AIICO Insurance Plc announced the resignation of some of its board of directors; Oladele Fajemirokun (Chairman) and Senator Tokunbo Ogunjobi, while three (3) new Directors were elected by the shareholders. We expect the general market to determine the performance of the sector in the coming week.

Oil & Gas Sector: Sector Breadth Pegs At 0.75x

Bargain hunting activities continued amidst pockets of profit taking on sector counters during the week, as the NSEOILG5 index pared by 0.08% WoW. There were three (3) gainers and four (4) decliners accordingly, pegging the sector breadth at 0.75x.

CONOIL(+20.67% WoW) steered the gainers in the week to close at NGN23.00, trailed by OANDO(+13.42% WoW), and ETERNA (+3.63% WoW). On the flip side, MRS (-9.74% WoW), FO (-5.33% WoW), SEPLAT (-0.83% WoW), and TOTAL (-0.59% WoW) populated the decliners’ list.

The continued militant attacks on oil installations in the Niger-Delta region remains a concern for the Nigerian economy, as current crude oil production is estimated to have dropped significantly from 1.64MMbpd in April. Crude oil price as measured by Brent settled at USD48.76pb (+1.94% WoW) at the end of the week.

Considering recent sector performance, we anticipate reduced levels of activities on sector stocks in the coming week; while not ruling out the possible persistence of current investing sentiments.

Services: Investors Anticipate Rise in Consumer Spending

The mood in the services sector remained positive during the week as our MERISERV index appreciated by 1.44% WoW. This drove YtD return to 1.93%, with four (4) stocks recording price gains, against three (3) decliners.

TRANSEXPR witnessed strong bullish sentiments which drove share price up by 12.71%to NGN1.33. TRANSCOHOT, NAHCO and REDSTAREX, with respective WoW gains of 10.19%, 5.57%, and 2.76%, completed the gainers list. On the other hand, IKEJAHOTEL was the top decliner, after paring in value by 13.88% to NGN2.11. The ticker was followed by TRANSCORP and CAVERTON, following price declines of 9.30% and 0.66%.

Against the backdrop of the recently signed 2016 budget, we expect improved investor perception of the services sector in the coming weeks. We anticipate that expected government spending will help to drive consumer spending and economic activity.