June review: Vetiva Research conviction stocks

What shaped the past week?

Global: With the world working its way through the COVID pandemic, investors are starting to show concerns that the peak of the recovery is behind us. In the U.S., major markets in the region were mixed w/w. At time of writing, the Dow Jones, S&P 500, and NASDAQ were all above their all-time closing highs. At week start, an ISM report revealed that services PMI fell on a m/m basis, while an IHS Markit report revealed a slowdown in private sector activity; furthermore U.S. Fed official Mary Daly cautioned that the latest Delta variant of the coronavirus poses a significant threat to the global economic recovery, stating that unless global vaccine rates increased, the economic recovery remains at risk, and this will dampen U.S. growth. Moving to Europe, investors kept a keen eye on economic data that were released over the week. Private sector activity in the EU recorded a modest m/m improvement, with Germany reporting an improvement in business activity for June and the U.K posting a 0.8% growth for its economy and industrial production in June. However, the positive sentiment was short-lived, with the German Centre for European Economic research (ZEW) forecasting a drop in economic sentiment for Germany and the EU in July. Much like the U.S., EU investors have become increasingly concerned about the Delta variant, with the U.K. reporting 30,000> new cases of the virus on backto-back days, while the strain accounted for half of the new cases recorded in France. Finally, in Asia trading activity over the week was a mixed bag with modest gains observed across the space, the Nikkei-255 sank 293bps w/w, as the country remains in a state of emergency due to the virus, while the Shanghai Composite recorded a minimal 5bps w/w advance.

Domestic Economy:

Recently, the National Assembly approved the supplementary budget proposal for the 2021 fiscal year. The supplementary budget was created to tackle insecurity, procure and deploy COVID-19 vaccines, and adjust wages in the health and education sectors. Raising the proposed budget by N87.9 billion, both houses approved a supplementary budget of N982.7 billion. In addition, the National Assembly approved the borrowing plans of the Federal Government. Earmarked in the budget was a $6.18 billion external loan, which would be funded from both multilateral and bilateral sources. While a fiscal deficit of N5.6 trillion is envisaged, we expect this target to be overshot given the conservative benchmark price of $40, cap on production, health situation in India, and the unbudgeted high fuel subsidy bill. Ultimately, the winding down of OPEC+ restrictions and pent-up investment in the oil sector post-PIB passage could be essential in supporting our fiscal balance.

Equities: Local equities closed lower w/w, easing 57bps to close at 37994.19pts. Losses were concentrated in the Consumer Goods space, which fell 32bps w/w as losses in DANGSUGAR (-299bps w/w) weighed on the sector. Meanwhile, all other sectors closed higher with the Oil and Gas Sector (+653bps w/w) leading the way. Gains in SEPLAT (+1000bps w/w), and TOTAL (+924bps w/w) helped propel the sector higher. The Banking sector (+329bps w/w) was the next best performer driven by gains in FBNH (+405bps w/w) and ZENITHBANK (+396BPS). Finally, the Industrial Goods space saw moderate gains across leading to a 19bps rise w/w for the sector. For the week, volume traded increase 0.16% w/w while value traded also rose 0.34% w/w.

Fixed Income: Sentiment across the fixed income space was largely mixed this week, with investors pursing OMO papers, while selling bonds and NTB papers w/w. Starting in the bonds space, yields across benchmark bonds rose 6bps on average due to sell-side pressure at the short-mid end of the market. Notably, the yield on the 12.50% FGN-JAN-2026 rose 24bps w/w to settle at 12.05%. Meanwhile, in the OMO space, buy-side activity at the short-mid end of the curve saw yields dip 3bps on average. Finally, in the NTB space, sell-side interest at the long-end of the market saw yields rise 4bps on average.

Currency: The Naira depreciated N0.62 w/w at the I&E FX Window to close at N411.75 and while also depreciating by N0.20 w/w to close at N502.5 against the dollar in the parallel market.

What will shape markets in the coming week? Equity Market : We expect

next week’s activity to follow the same pattern observed in the last few sessions, with sell offs followed by price appreciation. We anticipate mixed activity level in the market with the banking sector likely to dominate trading once more. Finally, with a few Q2 results expected in the coming week, this will also shape market outcome in the new week. Fixed Income: Next week, we expect the bonds market to trade on a bullish note, as investors anticipate the incoming maturities. Meanwhile we expect the NTB segment to trade cautiously, as the upcoming PMA takes centre stage. Also, we expect the OMO market to trade in a similar fashion, as investors continue to monitor market developments.

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

June review: Vetiva Research conviction stocks

The ASI suffered another negative month in June, closing 1.38% lower m/m amid persistent profit-taking and lukewarm sentiment over Nigeria’s mild economic recovery. However, our stock picks continued to accrue value during this period. While the ASI’s YTD losses worsened to -5.87%, our conviction stocks have returned 15.0% YTD, outperforming the broad-market index by 20.9ppts thus far.

The Banking sector contributed a weighted return of 1.9% m/m, thanks to renewed interest in the sector on the back of the introduction of the new holding company (GTCO) and expectations of further profitability improvements in the coming quarters.

The Consumer Goods sector was also positive, contributing a combined return of 2.3%, thanks to DANGSUGAR’s 10% and FLOURMILL’s 7% m/m increases.

Our Industrial Goods pick, WAPCO contributed a marginal gain of 0.04% m/m amid lukewarm investor sentiment towards the sector.

Our Oil and Gas picks also returned a marginal 0.1% m/m, with Upstream counter SEPLAT inching up only 0.3% m/m, while TOTAL and ARDOVA contributed 0.1% m/m gains amid enduring weak sentiment in the downstream sector.

The lingering doubts over the downstream sector, coupled with our expectations of continued improvements in both the telecoms and construction sectors have given us reason to revise our conviction stock selections for the second half of the year; thereby removing TOTAL and ARDOVA and replacing them with MTNN and JBERGER for the forthcoming 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.