• Tuesday, December 05, 2023
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BusinessDay

Meristem Investment Guide: Fixed Income: Liquidity level temper rates

Market gains N31bn as stocks rally further

Liquidity in the system was fair in the course of the week, consequently NIBOR and other money market rates pared WoW. NIBOR shed an average 0.46 percent, while OBB and OVN rates pared by 0.51 percent and 0.46 percent, respectively, to close at 8.42percent and 9.17 percent, accordingly. We believe that NIBOR and other money market rates may decline further in the coming week, as TB’s maturities worth a total sum of N227.89 billion are expected on January 22, 2015.

Investors’ sentiments favoured the short end of the curve, as average yield on T-bills pared by 0.34 percent WtD. This, we believe is due to investors’ expectations of a higher yield environment in near-future periods. Our Meri Bond Index which reflects that performance of the bond market declined by 0.54 percent, largely due to the sell rally on Friday, which brought the average yield to 14.37 percent for the week.

In the face of continuing pressures, the Naira depreciated 1.09 percent, as the CBN’s RDAS auctions ($249.35m), and IOC sales were not enough to support it. We expect this trend may persist in the short term, as existing pressures are not estimated to vanish momentarily.

Agric. Sector: PRESCO leads with 13.79%

The agriculture sector remained resilient, ending the week on a mildly positive note, with the Meri-Agric index rising by 0.02 percent despite the negative mood in the market.

PRESCO led the pack with a 13.79 percent gain to close at N29.70. On the other hand, LIVESTOCK lost 3.11 percent to close at N2.18, while OKOMU traded flat.

We anticipate a reduction in the market interplay within the sector in the coming week, dictated by the gloom in the equities market with indications of further oil decline and the heightening insecurity.

Banking Sector: Still under pressure

The Banking Sector stocks remained under pressure this week, as only two stocks advanced, while 12 stocks declined and UNITYBNK stayed flat. This brought the MERI-BANK index’s return to -18.67 percent YtD, which ranked it as the second worst performing sector on the Nigerian bourse.

UBN (6.48%) and ZENITHBANK (0.30%) were the only gainers for the week, while DIAMONDBNK (13.54%), GUARANTY (12.85%), and FIDELITYBK (10.67%) led the losers’ chart.

Although we believe that expected headwinds have been priced into sector stocks, tickers continue to be pressured by the general negative market and sector sentiments, especially with the MPC meeting on the horizon.

Read also: Meristem Investment Guide: NSE ASI advances as MSCI withholds the hammer on Nigerian equities

In our opinion, there will be no further restrictive measures (i.e. increase in CRR on private or public deposits) placed on the banking system which would prove operationally stifling. We therefore see a level of moderation in the coming week, especially as bargain hunters seek to take advantage of low prices.

Consumer Good Sector: Heavyweights trade at attractive prices

The sector’s performance was influenced by the negative market mood, as most of the heavyweights pushed southwards during the week’s trading session. This was reflected by the NSEFB10 index that closed the week at -3.70 percent, despite two out of five positive trading days.

UACN led the gainers’ chart with+10.33 percent, joined by 7UP (0.64%) and FLOURMILL (0.73%). On the flipside, DANGFLOUR topped the decliners’ chart with a loss of13.88 percent, while DANGSUGAR, UNILEVER, AGLEVENT, GUINNESS, NB trailed with -8.06 percent, -5.33 percent, -1.53 percent, -0.16 percent and -5.44 percent WoW in that order.

CADBURY, NNFM, VONO and PREMBREW remained unchanged despite market dynamics.

During the week, Honeywell Flour Mills appointed five new board of directors, who had years of work experience and professional qualifications, as part of the company’s efforts to strengthen operations in Africa.

We advise position taking in companies with sound fundamentals such as FLOURMILL and UACN which are currently trading at their fiveyear lows.

Healthcare Sector: GLAXOSMITH dips further to N40

The Healthcare Sector continued its losing streak, as the index plunged further by -6.36 percent for the week to peg the YtD return at -19.62 percent. Two stocks declined during the week’s trading, one stock advanced, while all other stocks traded flat.

The sector giant (GLAXOSMITH) led the week’s loss, down by 6.52 percent to settle price at N40, trailed closely by NEIMETH, which dipped by 5.48 percent (N0.63). In contrast, PHARMADEKO was the only counter that advanced, up by 4.67 percent to thrust price to N2.24.

Although concerns about economic headwinds persist, we believe that the currently low prices present opportunities for investors who have medium to long-term investment horizons, based on our fundamental valuations. However, we expect a minimal moderation in the ongoing market upheaval post elections, and therefore preach cautious and strategic position-taking by investors.

Industrial goods: Bearish trend persists

The industrial goods sector continued in the negative zone as the sector’s index declined by 3.69 percent WoW as against 18.88 percent in the previous week.

CUTIX was the only stock with positive return for the week, gaining 8.09 percent to drive share price up to N1.47. ASHAKACEM fell to N20.4 during the week, implying price depreciation of 7.15 percent WoW. Other laggards for the week were WAPCO, DANGCEM and CCNN with price declines of5.13 percent, 3.56 percent and 1.06 percent, accordingly.

We are of the opinion that the current negative trend in the sector may persist in the weeks to come, as we do not anticipate any positive news that will significantly subside investors’ negative sentiments.

Insurance Sector: Wallows amid weak economic fundamentals

The negative sentiment in the insurance space continued in the second trading week of the year, as the sector returned -2.54 percent WtD. Market breadth (0.25x) favoured decliners as a lone stock appreciated in price against 4 decliners.

CUSTODYINS closed 6.44 percent up to put current price at N3.80 (vs. N3.57 in previous week). Contrarily, CONTINSURE rocked the bottom with a 12.75 percent loss to close at N0.89 (vs. N1.02 in previous week). NEM, MANSARD and AIICO joined the losers’ chart with respective losses of 11.67 percent, 6.56 percent and 2.56 percent, while all other counters closed flat.

Regency Alliance Insurance plc notified NSE of the resignation of its chairman and Director Hon. Justice Adolphus Godwin, as a result of enormous state responsibilities saddling him, couple with his advanced age. Sovereign Trust Insurance plc also announced its intention to raise additional capital c.N1.1 billion through rights issue. A total of about 2.29 billion ordinary shares of N0.50 is expected to be issued at N0.50 per share for every three ordinary shares to one new ordinary share.

In the light of currently weak fundamentals surrounding the investment environ, we envisage this negative trend might persist in the coming week.

Oil and Gas: Rebounds to positive zone

The sector bounced back to the positive territory, recording a 1.59 percent WoW gain following the significant 6.22 percent loss it posted in the previous week. However, sector’s breadth stayed in favour of the decliners as two stocks appreciated in prices against three stocks that declined.

OANDO led the gainers’ chart, returning 6.18 percent WoW, followed by SEPLAT which grew its price by 3.71 percent. The marginal increase in SEPLAT may not be unconnected to the fast approaching January 19 deadline of the possible business combination with Afren plc, a Nigerian focused oil and gas company listed on the main market of the London Stock Exchange. This strategic combination, if finalised, is set to bode well for both companies as synergy of operations is expected to improve initial individual standings.

On the laggards’ list, ETERNA continued its losing streak, compounding its loss for the year by 4.56 percent as investors’ negative sentiments persisted. Other losers were FO and TOTAL with respective price depreciation of 1.31 percent and 0.52percent.

We foresee a possible reversal in FO’s performance in the coming week against the backdrop of its usual positive investor sentiments. Also, if SEPLAT’s business combination deal materializes by the deadline, we foresee a possible position-taking by investors in the coming week. However, we preach cautious trading in the sector given its high volatility.

Services Sector: NAHCO closed higher with 2.46% as sole gainer

The services sector ended the week on a depressed note, with the MERISER index declining by -1.42 percent. Sector breadth was 0.13x as one stock appreciated against eight stocks that declined.

NAHCO surpassed other gainers in the sector with 2.46 percent to close at N5. Contrariwise, CAVERTON outdid other losers, down by 9.64 percent to close at N3. Other losers were TRANSEXPR, REDSTAREX,RTBRISCOE, TRANSCORP, ABCTRANS, AIRSERVICE, and IKEJAHOTEL with respective losses of 8.93 percent, 5 percent, 4.55 percent, 3.87 percent, 3.77 percent, 2.94 percent, and 2.82 percent, while others traded flat.

In another development, TRANSCORP HOTEL plc, the hospitality arm of the TRANSCORP Group listed its shares on the Nigerian bourse at a market price of N10.

We anticipate that declining demand (especially from foreign investors) may continue, taking into cognisance the sliding global oil prices, the impending February 14 general elections, as well as the market’s expectations of outcome of the MPC meeting expected during the coming week.

Economy & Markets

Operators seek reduction in transaction cost to attract more investors, issuers

Leaders of coalition of capital market operators met this week at the Nigerian Stock Exchange (NSE) to examined the economy and the financial markets. As a way forward, they made suggestions on salient issues affecting the capital market. Iheanyi Nwachukwu looks at the positions of the coalition that comprises Chartered Institute of Stockbrokers (CIS), Association of Stockbroking Houses of Nigeria (ASHON), and Association of Issuing Houses of Nigerian (AIHN).

More opportunities to invest in the Nigerian capital market

At present, virtually all stocks on the NSE are undervalued despite strong fundamentals. The primary reason for the depressed state of the market is believed to be due to sell down by foreign investors who accounted for about 57 percent of market transactions in 2014.

While the large presence of foreign investors in our market signifies strong attraction to the country and our market, since these are hot monies, their sudden reversal also portends great danger for the market as seen in the second half of 2014, up till now when the market began the bearish mode.

They urged large local institutions with strong capacity to invest in the capital market to reduce the dependence on foreign investors and prevent the market and the economy from unnecessary shocks. “We particularly implore the Pension Fund Administrators (PFAs) to lead the vanguard of this investment opportunity by increasing their stakes in the equity market. Strong institutions like the Asset Management Company of Nigeria (AMCON), Nigerian Deposit Insurance Commission (NDIC), the Sovereign Wealth Fund (SWF) and other local investors should equally see the trend as potential opportunity to take position in the Nigerian capital market,” the operators said.

They also reiterated the need for a reduction in market transaction costs to attract more investors and issuers to the market. “While we commend the Federal Government on the handling of Value Added Tax (VAT) which had hitherto served as a major disincentive to investment in the capital market, we believe that a lot still need to be done in the area of transaction costs to make our market more competitive.”

Interest rate regime

The interest rate is a veritable tool in national development. In addition to aiding economic development as a whole, it also sends signals about the expected dynamics of the capital market. A high interest rate discourages long-term investment and lowers demand generally, whereas a low interest rate regime stimulates demand and helps with capital formation for long-term investment. An example of the importance of the interest rate as a tool can be seen in its deployment by United States Federal Reserve Bank (FED) and United Kingdom’s Bank of England (BoE) to stimulate demand for commodities and the capital market, and the economy as a whole. The two countries brought interest rate to close to zero so as to encourage borrowing for consumption and investment purposes. The result of the exercise is a strong growth in the US and the UK.

From the foregoing, it is clear that the current nominal anchor for interest rate in Nigerian, the Momentary Policy Rate (MPR), currently at 13 percent, is not only discouraging demand but is also a disincentive to investment in this environment, especially when inflation rate, currently 8 percent, has been successfully kept at below 10 percent in the last two years. While it is arguable that the reduction in interest rate may lead to an uptick in inflation, it is noteworthy that inflation in Nigeria has been found to be more structural than monetary; hence, the high interest rate, which discourages long-term investment in infrastructure, may actually lead to more inflation than curb it over time. Therefore, having successfully kept inflation in check, now may be a good time to start considering a reduction in interest rate.

Another worrisome effect of the high interest rate is the lack of flow of credit in the financial system. Perhaps, since the banks can invest in Treasury Bills and FGN Bonds with yields ranging from 10 percent to 15 percent, they can easily make profits without risking their money. This is more so as the Standing Deposit Rate (SDR) at which banks places funds with the Central Bank of Nigeria (CBN) stands at an all-time high of 10 percent despite the fact that banks pay only 3.9 percent as interest rate on savings deposit. An opportunity to make a risk-less return of more than 6 percent would not encourage lending by banks to the detriment of real sector companies and the capital market.

“We therefore implore the Federal Government through the CBN to commence the reduction of interest rate by a downward review of the MPR, especially now that we have achieved a moderation in inflation to single digit in the last two years. We appreciate the implications of a sudden change in interest rate; hence, we urge the government to embark on gradual adjustment of the rate to boost investment in the bond sector of the capital market which at present is badly affected by the high interest rate regime,” the coalition stated.

Devaluation of the naira

They also recognised that the management of a nation’s currency exchange rate is a critical monetary policy function of the Central Bank of Nigeria (CBN) and has dire consequences on economic activities in the medium and long term.

“However, it is always a very difficult exercise to keep a tab on the nation’s currency; hence, the reason why many industrialised countries opted for the ‘float’ exchange rate mechanism where the currency value is market determined. Although the ‘semi-fixed’ or ‘managed float’ exchange rate mechanism adopted by Nigeria has a lot of advantages, it has been at the detriment of the nation’s foreign reserves. In the present day, it appears that no country has been able to successfully defend its currency. A clear example is that of Switzerland which recently let go of the peg on its currency,” the operators said.

The apex bank devalued the Naira in November last year in order to ensure appropriate value for the currency.

“We believe that devaluation of the naira has potential to prevent round-tripping and protect local industries among others. However, it appears that the CBN is currently over-protecting the naira value and thus making it artificial while also depleting the nation’s foreign reserve in defending the naira exchange rate,” they further stated, adding that since the value of the foreign reserve essentially determines the country’s capacity to borrow internationally and to support our international trade, the continuous hemorrhaging of the reserves is not in the best interest of the country.

“While keeping the managed float, we believe that the currency should be allowed a wider band, say up to N200/US$. The CBN may need to intervene if the new band is breached. We believe that at N200, it would become unattractive for speculators to engage in any profitable business that requires hard currency. While imports could become more expensive, we believe that it portends significant opportunity for consumers to consider local substitutes. A wider exchange rate band may also help exports as local producers earn more from their exports,” capital market operators said.

While the key policies introduced by the CBN to check exchange rate volatility might be effective, the coalition noted that they are also affecting the liquidity of the currency. “The recent threat by JPMorgan to remove Nigeria from the Emerging Market Government Bond Index is a clear indication of the current pressure on the naira.”

The need for national savings

They noted that savings and investment go together; hence, the called on the Federal Government to promote the culture of national savings through appropriate incentives.

“For instance, we suggest a policy where the interest on the first N1 million of savings is tax free. Through that, investors are incentivised to put their funds in savings account.

Another approach to national savings is the review of the privatisation programme of the Federal Government and the divestment of its holdings in the privatised companies in order to mobilise funds and encourage the private sector operators to develop the economy while the government provides an enabling environment.”

According to the operators, “the Federal Government should consider the divestment of at least 20 percent holdings in the power companies to the Nigerian investing public as preparatory for listing the shares on a stock exchange. In addition, in order to solve the perennial housing problem, more Real Estate Investment Trusts (REITs) should be created as a matter of urgency to boost investment in the real estate sector.”

Collaboration

In order for the capital market to continue to thrive, it has become necessary to create collaborative efforts between the capital market operators and the government and the regulators. Capital market operators should also collaborate among themselves for the good of the market.

In addition, it is also important for the capital market to have a consideration in the federal budget as part of development. The Nigerian annual budget should consider how the government can deploy the capital market to finance infrastructural deficit.

Hence, there is a compelling need for regular constructive engagement between the market operators and the regulators on one hand and the government on the other. “Our collective aspiration to create a world class capital market must be anchored on the platform of mutual understanding.

The coalition recognizes that all over the world, the capital market drives the entire economy as it provides a platform for government at all tiers to access medium and long term fund to execute developmental projects. In a similar vein, companies also utilize the market to beef up capital base and expand generally while individuals take advantage of the market to do capital formation.”

In Nigeria, capital market is grossly underutilised relative to its absorptive capacity. The government, companies and individuals are not using the capital market to meet long-term funding requirements while the back-seat approach of the capital market operators has not helped matters.

However, the time has come for total review of some of the government’s policies that are at variance with the development of the capital market in order to promote an enhanced use of the market to finance the huge infrastructural deficit that has become the bane of Nigeria’s economic development. We believe that the effective and efficient utilisation of the capital market facilities would enable the Federal Government finance the 2015 budget, despite its frightening infrastructural deficit.