Meristem Investment Guide: Market rebounds… as positive sentiments meet MPC decisions

In reaction to the bold decisions by the MPC that surpassed consensus’ expectations, a 1.82 percent return week-to-date (WtD) in the NSE ASI may be interpreted as a signal of renewed confidence in the equities market as substantial position taking ensued post MPC meeting.

Market capitalisation settled at N11.404 trillion, pushing index level to 34,543.05pts as against 33,926.18pts in the previous week. Volume pared by 15.10 percent, turnover surged by 152.51 percent, and market breadth favoured advancers as 52 stocks appreciated against 21 stocks that depreciated in their respective prices.

However, market capitalisation for the month of November dipped by 8.30 percent, indicating the sell pressure the market encountered on the backdrop of free fall in global oil prices, and tacit devaluation of the domestic currency before the official pronouncement by the CBN.

We envisage that the renewed investors’ confidence in the Nigerian equities market might be sustained, at least in the short term. Albeit, some uncertainties, notably political tensions and depressing oil prices, still loom on the horizon.

We are of the opinion that these risk factors may result in gyrations in market returns until after the elections in 2015. However, we expect there may be a resurgence post-elections, and position taking during this period of depressed prices may present a good opportunity for alpha-seeking investors.

Economic round up: Apex bank move to stabilise the economy

In a bid to salvage the disturbing macroeconomic indicators in the system (dwindling reserves, FX volatility and impairing government revenue) the MPC concluded its last meeting for the year. The meeting concluded with the Committee taking a bold and decisive decision to devalue the naira by 8 percent, pegging official rate at N168/USD vs. N155/USD, while expanding the band to ±5 percent from ±3 percent. The benchmark interest rate (MPR) was increased to 13 percent from 12 percent percent, even as liquidity was further drained from the banks as CRR on Private Sector Deposit was hiked to 20 percent from 15 percent with immediate effect.

In a related development, OPEC members concluded their meeting on Thursday, November 27, with a decision not to cut supply from its current levels of 30 million barrels per day, despite oversupply concerns causing sliding oil prices.

In the US, third quarter (Q3) GDP numbers outperformed analysts’ expectations as it expanded by 3.3 percent, as growth estimate was raised to 3.9 percent by the commerce department. In China, the People’s Bank of China dropped the benchmark deposit rate to 2.75 percent from 3 percent for the first time since 2012.

Fixed income: MPC officially devalue the naira

According to our liquidity gauge, market liquidity fluctuated during the week, starting from 42.97 when FAAC released allocations before falling to 29.10 (as of Thursday) post MPC announcement of increase in private sector CRR, thus further tightening liquidity in the banking system. In response to the liquidity squeeze, NIBOR rates trended higher, however, moderated as it declined by 1.27 percent on the last trading day to peg the average rate at 14.34 percent for the week. The OBB and OVN rates also declined by 4.46 percent and 4.41 percent, respectively, to put their respective rates at 11.54 percent and 11.92 percent.

The T-Bills market witnessed active position taking towards the end of the week, notably at the long end of the curve. Yields on benchmark and off-the-run bonds declined consistently after an early risein their first trading for the week to peg their respective average yields for the week at 13.42 percent and 13.41 percent, respectively.

The local currency depreciated by 0.90 percent against the greenback to close at N178.65/USD. We expect the measures put in place by the CBN to abate the pressure on the naira in the medium term. Nonetheless, OPEC’s decision to maintain output in the face of declining global oil price remains a threat to the naira.

We envisage more capital flows into the bonds market, especially on longer term instruments as they currently present attractive yields for astute investors.

Banking Sector: Attractive prices drive resurgence

The banking sector was resurgent week-on-week despite the MPC’s decision to further increase CRR on private sector deposits to 20 percent from 15 percent. This will act to reduce liquidity and limit growth potentials, which might result in tempered FY2014 performances.

There were 11 price gainers as against three stocks that declined, while UNITYBNK stayed flat. The major gainers for the week included UBA (17.39%), DIAMONDBNK (12.73%), and FBNH (6.76%), while the losers chart included FIDELITYBK (5.88%), ACCESS (2.81%), and ZENITHBANK (2.05%).

We are of the opinion that many of the stocks in the banking sector are undervalued at their current prices, and so we expect investors to continue to channel funds toward the sector’s fundamentally justified stocks. Although we note that there are headwinds for the market, and banking sector especially which might cause drag to returns.

Industrial Goods Sector: DANGCEM drags sector performance

The industrial sector continued its losing momentum, shedding 4.18 percent week-on-week (WoW) as three stocks appreciated against four stocks that depreciated in prices.

Following a loss of 2.09 percent recorded in the previous week, CCNN witnessed position taking that expanded its price by 4.54 percent WoW just as it led the gainers’ chart for the week. Other gainers for the week were WAPCO and CAP as their respective prices increased by 2.56 percent and 0.50 percent.

On the converse, the most capitalised stock on the exchange (DANGCEM) dragged the sector’s performance, dipping significantly in price as it compounded its loss further by 4.54 percent. Other decliners for the week in descending order were PAINTCOM, CUTIX and ASHAKACEM with price depreciation of 4.38 percent, 1.96 percent and 0.83 percent in that order. Other counters in the sector closed flat.

We opine that some counters in the sector are trading below their fundamentally justified prices just as some trade at their year low. Hence, we expect discerning investors to take positions ahead of general market rally to enjoy first mover advantage.

Consumer Good Sector: A bullish outing

The sector enjoyed significant positive market sentiments for the week, closing at 4.46 percent up WoW. PZ appreciated by 28.38 percent WoW, followed by FLOURMILL with 21.20 percent return. They were joined on the chart by 7UP (4.03 %,), CADBURY (3.35%), DANGSUGAR (19.76%), HONYFLOUR (0.30%), NASCON (9.31%), NESTLE (0.58%), VITAFOAM (1.85%), UNILEVER (8.45%) and NB (9.28%).

On the decliners’ chart, INTBREW lost 10.34 percent WoW, joined by DANGFLOUR, GUINNESS, INTBREW and CHAMPION with losses of 4.89 percent, 1.25 percent, 10.34 percent and 0.51 percent, accordingly.

PREMBREW and NNFM along with the conglomerates sector counters (UACN and AGLEVENT), traded flat for the week.

Honeywell Flour released its H1:2014 result, showing a 3.54 percent and 3.48 percent reduction in revenue and cost of sales, respectively, even as operating expenses climbed by 12.47 percent. However, profit after tax rose by 8.96 percent majorly due to 11.74 percent decline in finance charges.

We advise cautious trading in the coming week given the recent speculative trend in the market.

Oil and Gas: OPEC leaves output unchanged

The Organisation of Petroleum Exporting Countries (OPEC) concluded its 166^th conference on Thursday, November 27, during which there were deliberations regarding world oil and gas concerns, especially the sliding global oil price caused by supply glut. OPEC, with 40 percent supply of world oil output, however decided to maintain output at the current level of 30mbpd due to concerns about that its members ceding market share.

With this decision, the global oil price may continue its downward trend in the near-term, nonetheless the committee reaffirmed its readiness to respond to developments that could have adverse impacts on the maintenance of an orderly and balanced oil market.

In the domestic scene, the sector’s index was resurgent, with an appreciation of 8.29 percent as major counters gained for the week, save for SEPLAT. FO led the gainers’ chart with a price appreciation of 11.56 percent, followed by MOBIL, ETERNA, TOTAL and OANDO, which gained 10.93 percent, 10.03 percent, 6.83 percent and 1.81 percent in that order.

SEPLAT on the other hand continues its losing streak, compounding its loss by 1.41 percent. This is not surprising given the current happening in the global oil market which affects players in the upstream sector of the oil and gas value chain where the company operates.

OANDO’s right issues opened for trading during the week, November 24, valued at N22/share on the basis of one new share for every four ordinary shares held as of July 25, 2014. Closure date is December 19.

Insurance Sector: CUSTODYINS and MANSARD enjoy rally

The Meri-Insurance index closed the week up, returning 5.07 percent WoW to peg YtD return at 18.40 percent. The sector’s breadth pegs at 4x as four stocks advanced against one stock that declined. MANSARD and CUSTODYINS sustained their gaining streak as investors’ sentiments continue to favour the tickers.

MANSARD, CUSTODYINS, NEM and CONTINSURE appreciated in prices for the week with returns of 10.14 percent, 5.26 percent, 4.92 percent and 4.49 percent, respectively. AIICO is the only stock that closed south, shedding 5.88 percen to close at N0.80. All other counters traded flat.

We envisage positive trading in the coming week as bargain hunting activities persist, however we continue to preach cautious trading ahead of anticipated headwinds.

Healthcare Sector: New distribution channel to curb drug counterfeiting

The Meri-health index followed the NSE ASI gaining path for the week by advancing 0.02 percent to peg the YtD return at -23.25 percent. MAYBAKER and NEIMETH posted gains of 18.9 percent and 2.17 percent, respectively. EVANSMED emerged as the only stock that dipped, losing 9.6 percent WoW. All other counters closed flat. The sector’s breadth stood at 2x as two stocks advanced against one that shed points.

We expect the activities of speculators and bargain hunters to drive prices in the coming week.

In a bid to curb drug counterfeiting, the government approved the National distribution channels which is designated with distribution of drugs to stores both at the Federal and State levels. The mega distribution channel serves the Federal arm while the State distribution channel will serve states. There are ongoing efforts by the government to get the channels running by 2015, through partnership with private sector. This reform is expected to help drive pharmaceutical company’s revenue subsequently.

Services sector: Services sector rebounds

The services sector closed in the green zone, as MERISERV INDEX appreciated by 0.61 percent WoW.

RT BRISCOE and CAVERTON led the gainers’ chart, gaining 4.94 percent apiece, while NAHCO, ABCTRANS, LEARNAFRICA, IKEJAHOTEL, and TRANSCORP followed the positive momentum with gains of 4.48 percent, 3.45 percent, and 2.94 percent, 0.55 percent and 0.52 percent in that order. On the flip side, ACADEMY led the decliners with a loss of 5 percent, trailed by AIRSERVE and REDSTAREX with declines of 4.82 percent and 3.81percent, respectively. Other counters traded flat.

We envisage a flurry of activities in the hospitality and logistics segments as we approach the festive season which is expected to drive topline growth of the segment in the last quarter of the year.

Agricultural Sector: Sector Index Advanced 11.10 percent.

Sentiments on sector’s tickers stayed largely positive for week as LIVESTOCK, OKOMUOIL and PRESCO appreciated during the week. LIVESTOCK gained the most with a 22.50 percent WoW return, OKOMUOIL followed with 11.94 percent WoW and PRESCO returned 10.34 percent for the week.

We expect recent mood to persist in the coming week on the back of renewed investor’s interest in the market post MPC decision.

Also, we expect the devaluation announcement by the CBN to augur well for companies that export their produce, hence we expect to see the impact on their scorecards in FY2014 and beyond.