ASI sheds 42bps w/w to close at 41,001.99 points
What shaped the past week? Global:
Amid surging COVID cases across the world and a change in administration in the U.S., global markets showed mixed sentiment last week. In the U.S., investors sentiment was posted by comments from nominees for the Biden administration; Treasury Secretary Janet Yellen in her Senate hearing promised to work effortlessly in overcoming the impact of the coronavirus pandemic citing its important role in fiscal sustainability. Meanwhile, in Europe, the pandemic continues to weigh on sentiment across the region, with several nations extending lockdowns. Furthermore, consumer confidence fell in the region for January, while the European Central Bank (ECB) acknowledged that the decline in growth in Q4’20 was due to COVID restrictions. Finally, in the Asian region, new lockdown measures in China weighed on sentiment in the region; the nation put 29 million citizens under lockdown after the country recorded 100 new cases of the virus for the sixth day in a row. In the coming week, investors around the world will continue to monitor the stimulus negotiations on Capitol Hill.
Domestic Economy:
Between 2010 and 2020, Nigeria’s fiscal deficit has risen five times over. This is reflective of the government’s expansionary fiscal stance as the revenue targets were consistently missed and the government consistently exceeded its spending limits. However, 2020 was a peculiar year as falling oil prices - no thanks to COVID-19 - led to a prompt review of the 2020 budget, and the benchmark oil price was reduced by 50% to $28 per barrel during the heat of the oil price crash. This enabled the government to outperform its oil revenue target as oil prices averaged $40 per in 2020, despite OPEC limits on production. Going into the new fiscal year, the Federal Government is betting on improved oil prices and increased condensates production to boost revenue generation despite OPEC production limits. Thus, the 2021 budget has been signed into law alongside the Finance Act. Despite a planned a deficit of 5.6 trillion, we may see continuous surge in government spending in a bid to jumpstart the economy from a recession. Thus, the country’s fiscal deficit-to-GDP may rise beyond the 3% limit stipulated by the law for the third consecutive year.
Equities: Local equities closed lower last week, as broad-based losses across the market weighed on the market sentiment. The ASI lost 42bps w/w, with the Banking sector ending as the worst performer, down 133bps w/w. Profit-taking activity in ACCESS (-567bps w/w), UBA (-595bps w/w) and FBNH (-329bps w/w), were the primary drivers of losses in the space. Meanwhile, losses in BUACEMENT (-113bps w/w) and DANGCEM (-127bps w/w), were unable to offset the gains witnessed in WAPCO (+924bps w/w), as a result the Industrial Goods shed 51bps w/w. Likewise, in the Consumer Goods space, profit-taking in FLOURMILL (-244bps w/w), GUINNESS (-263bps w/w), and DANGSUGAR (-288bps w/w) amongst others, drove the sector 9bps lower w/w. Finally, in the Oil and Gas space, losses in OANDO (-343bps w/w), amongst others saw the space shed 13bps w/w. For the week, volume rose 24.41% and while value traded fell 20.59% respectively.
Fixed Income:
On Tuesday, the Central Bank of Nigeria (CBN) conducted a bond auction where it offered N150 billion and sold N122.36 billion across the 10-Year, 15-Year and 25-Year tenors at stop rates of 7.98%, 8.74%, and 8.95%. Meanwhile, sentiment was largely mixed for the week, with investors across the bonds space taking profit while participants in the T-bills segment remained buy-side driven. In the bonds space, yields on benchmark bonds rose 23bps w/w, as investors digest the auction latest results; notably, the yields on the 9.80% FGN-JUL-2045 and 14.80% FGN-APR-2049 tenors rose 138bps w/w and 189bps w/w respectively. Moving to the T-bills space, yields on OMO papers eased 1bp w/w, as a result, of mixed activity across the curve; likewise in the NTB space, interest at the long-end of the market saw yields dip 20bps on average.
Currency:
The Naira appreciated closed flat w/w at the I&E FX Window at
394.67 and while appreciating 6.50 to close at 474.00 against the dollar in the parallel market.
What will shape markets in the coming week?
Equity market: With a number of mid/large cap stocks closing the previous week deep in the green, the domestic bourse recorded a bearish performance during the week, owning to profit taking actions by investors. However, given that most fundamentally sound counters remain below their target prices, coupled with the unattractive yields in the Fixed Income market, we expect the market to return to the positive region in the coming week.
Fixed Income market:
We expect the market to trade in a mixed manner to start next week, as investors continue to react to the latest auction results and system liquidity levels.
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 NIGERIA EQUITY STRATEGY - 10 High Conviction Stocks for 2021.
Amid a resurgence of BUY sentiment and record trading activity, the Nigerian equity market, much like capital markets around the world felt largely disconnected from the realities of the deadly pandemic ravaging the global economic landscape in 2020. In truth however, market performance was simply responding to a global expansionary monetary wave coordinated by apex banks to manage the crisis.
In Nigeria, investors whose wealth had suddenly taken a beating due to a currency depreciation looked to recoup their losses by scavenging oversold but fundamentally sound stocks in the equity market. The buying momentum was further supported by declining yields in a Fixed Income market that was losing its attractiveness by the day. Accordingly, the equity market rewarded investors with a 50% trading return at the end of the year.
While we do not expect 2021 to play out in the same manner, we note that the support factors for equities remain strong, as still-low Fixed Income yields are supported by rising crude prices and an expected uptick in business activity.
In line with 2020, even as we foresee broad-based equity demand, we expect investors to favour fundamentally sound stocks with strong dividend payment potential. Accordingly, we have put together our ten preferred investment options for 2021, which we believe provide the highest upside potentials in 2021. Our selection criteria combines intrinsic valuation upsides to potential dividend yields, while limiting downside risks. Our picks cut across four key sectors: Banking, Consumer Goods, Industrials and Oil & Gas.