Nigeria inflation rises to 31 – month high, at 13.71% in September

What shaped the past week? Global:

With Q3’20 earnings season coming into focus, global equities traded in a mixed manner on the backdrop of rising COVID-19 cases in Europe slow developments around a coronavirus vaccine. In the U.S. markets, gains in the tech space, notably in large cap stocks Apple and Amazon filtered across U.S. markets at the start of the week. However, rising pessimism over another round of fiscal stimulus for the U.S. government, dimmed sentiment over the course of the week. Despite months of negotiations, U.S. lawmakers appear to have reached an impasse on a new agreement, that would provide much needed aid to U.S. households. Meanwhile, on the vaccine front, Johnson & Johnson and Eli Lilly announced earlier in the week that they halted the trials vaccine candidates as a safety precaution. Investor sentiment continued to sour over the course of the week, after U.S. Treasury Secretary Steven Mnuchin stated that it was unlikely another coronavirus relief bill will be passed before the Nov. 3 presidential elections. The U.S. Dow Jones is up 0.50% w/w, with the S&P 500 and Nasdaq up 0.75% and 1.71% w/w. Meanwhile, in Europe, major markets closed in the red last week, fueled by rising concerns over the second wave of the coronavirus. French prime minister Jean Castex, announced on Monday, that the government would implement local shutdowns in places with high infection numbers. This spooked investors, resulting in selloffs across the region’s markets. In addition, the recent setback in finding a COVID vaccine filtered into European markets as well, as the pandemic remains at the forefront of investors concerns. Rhetoric from leaders the region, suggest that governments will bring back restriction of movement policies in order to curb the spread of the virus. The FTSE 100 shed 1.37% w/w, with the German DAX and French CAC slumping 1.09% and 022% respectively. Finally, in Asia, markets in the region continue to react positively to the recovery in China, while waning optimism over a coronavirus vaccine weighed on the region. On Tuesday, China reported that its trade surplus amounted to $37 billion in September. However, with Japan reporting a 13.8% y/y drop in industrial production for August, sentiment in region turned sour, as the globe suffers from an uneven recovery from the pandemic. For the week, the Chinese Shanghai Composite gained 1.96% w/w, while the Tokyo based Nikkei-225 sank 0.89% w/w.

Domestic Economy:

The statistics bureau, NBS, confirmed that inflation rose by 49bps to 13.71% y/y in September. This we attribute to the reforms in the energy sector and the fall in the value of the naira. Both food and core inflation maintained the uptrend rising to 16.66% y/y and 10.58% y/y respectively. Notably, we associate the rise in the pump price of Premium Motor Spirit (PMS) from 148 (in August) to N151.56 (in September), as well as the hike in electricity tariffs as key price pressure points for the month. However, the price cap of PMS was removed shortly after a higher pump price was announced, leading to higher retail prices. Despite the suspension of tariffs, the price increases were already reflected in the prices of commodities as all segments of the Consumer Price Index experienced higher inflation readings for the second consecutive month. Food inflation rose despite the harvest season due to flooding in the north that affected rice supply, amid continuous closure of land borders. Health recorded the highest pricing pressures among the nonedible segments for the fifth consecutive month, followed closely by transport and clothing. This reflects increased demand for medical items since the lockdown began at the end of February as well as increased energy costs. Going forward, we anticipate further inflationary pressure as we see the intention to restrict food imports from FX supplies as future triggers for food inflation. The expansionary move of the CBN, of reducing the benchmark interest rate by another 100 basis points in September, could also trigger demand-pull inflation.

Equities:

The local index closed higher last week, advancing 0.86% w/w, fueled by gains made on Friday. Throughout the week, the bulls and bears tussled for control of the market, with the market closing flat on Wednesday and Thursday. A review of the sectors showed that gains were broad based, with the insurance sector being the only one to close in the red. The banks continue to experience investor patronage, with the sector gaining 2.89% w/w, ending the week as the best performer. Interest in major lenders drove gains, with ZENITHBANK and UBA advancing 7.75% and 5.88% w/w respectively. Meanwhile, the Oil and Gas sector gained 2.40%, thanks to gains in ETERNA, TOTAL, and SEPLAT. SEPLAT climbed 2.44% w/w, while ETERNA saw its stock surge 34.99% w/w and TOTAL gained 10.00% w/w. Furthermore, the Consumer Goods sector advanced 1.87%, while the Industrial Goods sector gained 0.24%, to close out the week. For the week, volume traded decreased 43.05% w/w, with value traded decreasing 34.92%.

Fixed Income:

In the fixed income market last week, the CBN conducted an NTB Primary Market Auction, where it offered and sold 124.84 billion across the 91-Day, 182-Day and 364-Day at stop rates of 1.00%, 1.00% and 2.00% (Effective Yield: 1.002%, 1.005% and 2.04%) respectively. Meanwhile, government bond yields sustained their downtrend, supported by an influx of liquidity and the relatively high yield environment in the bonds space. Yields on benchmark bonds sank 108bps w/w, with the yield on the 2-Year, 5-Year, 10-Year all falling 56bps, 13bps, and 199bps w/w to settle at 2.44%, 3.81% and 5.24% respectively. Moving to the NTB space, yields on NTB tenors fell 34bps on average, as market fills the unmet demand across the segment, following the auction. with the 1 – year paper settling at 1.36%; Finally, OMO tenors closed moderately lower, easing 18bps w/w as investors maintained interest in papers at the mid-long end of the market.

Currency:

The Naira depreciated 17bps at I&E FX Window at 385.83 and while appreciating 3.50 to settle at 458.50 against the dollar in the parallel market.

What will shape markets in the coming week? Equity market:

The domestic bourse was characterized by mixed trading activities during the week, with profit taking action recorded at the beginning of the week, while barging hunting dominated the tail end of the week. With the fear of the second wave of the Coronavirus pandemic dampening investors’ sentiment across the world, we advise a cautious trading strategy for short term players in the short term, while mid/long term investors can still take advantage of the current attractive price levels. Also, as Q3 earnings begin to come into the market from next week, we believe this should shape market direction in the coming week.

Fixed Income market:

With investors anticipate a fresh supply of bonds in the market, we expect the market participants to remain buy-side inclined in the bonds space. In addition, with liquidity at a decent level we foresee this supporting the buy-side sentiment, as fund managers deploy excess liquidity.

Currency: We expect the naira to remain largely stable across the various windows of the currency space as the CBN maintains interventions in the FX market.

Focus for the week CONSUMER GOODS SECTOR:

Q3’20 Earnings

Preview

The first half of the year was a difficult one for many consumer goods companies. While some players were able to ride the wave of the storm and post decent performances this period, others succumbed to the demand deficit and consumers’ price sensitivity that rolled with the wave of economic disruption. We saw many companies embark on different survival strategies, ranging from cost cutting measures, online sales promotions and expansion into the value segment of the consumer space.

Despite these strategic shields, a lot of companies had to deal with the foreign exchange problem first through raw material sourcing and also in terms of exchange losses on foreign held liabilities limiting the passthrough gains from Revenue to operating profit.

Looking across the subsectors, the food, sugar and beverage companies were the most insulated as the gains in market share resulting from the stricter border controls told positively on Revenue. Furthermore, the inelasticity of most food products supported demand through the turbulent cycle. Lower down the gainers scale, the Home and Personal Care makers were set for a profitable season following increasing awareness for total and more frequent hygiene practices. However, on the flip side, Brewers had a sad story as demand and sales volume dropped significantly due to reduced social interaction. Players in the durable consumer goods space also faced challenges as most consumers’ income fell and likely deferred purchases in the segment.

Q3 however may prove to be a significantly better quarter than the first two, owing to the gradual easing of restrictions on economic and social activities. Thus, we maintain our Revenue expectations across board for our coverage companies.

While we expect cost pressures from the increased costs of raw materials, owing to the ban on forex for importing food items and constraints like flooding to the local agriculture sector, we foresee a compounding of this pressure on Opex as administrative and selling expenses increase under higher energy costs. However, we foresee only a slight dampening in absolute operating profits due to the expected impressive Revenue performance.

After a depressed first half, Q3 saw a leap in stock price performances. We believe that this reflects investors’ positive expectation for Q3 earnings rounds as well as bargain hunting positioning as stocks sank to multi-year lows in the H1 period.

Whilst reasonable care has been taken in preparing this document to ensure the accuracy of facts stated herein and that the ratings, forecasts, estimates and opinions also contained herein are objective, reasonable and fair, no responsibility or liability is accepted either by Vetiva Capital Management Limited or any of its employees for any error of fact or opinion expressed herein.