November review: Vetiva High Conviction Stocks

What shaped the past week?

Global: Persisting fears over the impact of the Omicron variant caused mixed trading activity during the week especially as many nations around the world tightened COVID-19 measures and movement restrictions. In Asia, sentiment was largely swayed by the latest reports on service sector growth in Japan and China, where Japan’s activity sector expanded at the quickest pace for 27 months, while China recorded softer growth in October. Thus, the Shanghai Stock exchange recorded a moderate rebound of +1.22% w/w, while the Hang Seng and Nikkei 225 extended last week’s losses, falling -1.30% and -2.51% w/w respectively. Sentiment in the region was largely mixed as investors reacted to the latest reports on service sector growth. Meanwhile, following last week’s selloff, stocks across Europe rebounded this week, with the London FTSE-100 rising +1.90% w/w; the German DAX gained 0.40%, while the French CAC climbed 1.15% w/w. Investor focus shifted to the latest economic reports out of the region; reports on Germany, the United Kingdom, and the Eurozone’s service and manufacturing sector were released on Friday. Finally, in the U.S., it was a week of sideways trading across markets, with the Dow Jones and Nasdaq posting marginal losses, while the S&P 500 posted marginal gains. There was some investor optimism in the region, following remarks from U.S. President Joe Biden who stated that the nation would not go into another shutdown due to COVID.

Domestic Economy: The discovery of the Omicron variant of the COVID-19 virus sparked a lot of buzz this week, especially after travel bans were placed on Southern African nations. Following the discovery of three incidents, Nigeria has been added to Canada’s list of banned countries. While a hard lockdown may not be feasible in Nigeria considering the daunting economic consequences, low vaccination rate could impede the country’s ability to contain the virus. However, we see the variant contributing to risk-off sentiments, as investors may require higher premiums from emerging economies. Thus, monetary authorities may have to allow for higher interest rates or weaker exchange rates to incentivise portfolio flows.

Equities:

The NGX ended the week in the red, falling 2.63% w/w as broadbased losses weighed on its performance. The Oil and Gas space recorded another week of significant losses, down 4.55% w/w; as the downturn in global crude prices has soured investor sentiment in the sector; the sector is down 10.91% m/m, weighed down by losses in SEPLAT which fell 6.47% w/w. In the Banking Space, losses in ZENITHBANK (-3.49% w/w), UBA (-2.47% w/w), FBNH (-1.67% w/w), and ACCESS (-1.11% w/w), saw the sector shed 2.29% w/w. Moving to the Consumer Goods space, the sector posted marginal losses this week falling 0.59%, driven by losses in DANGSUGAR (-2.74% w/w) and FLOURMILL (-1.86% w/w). Finally, in the Industrial Goods space, sell-side interest in WAPCO (-1.40%) saw the sector ease 0.09% w/w.

Fixed Income: It was a week of mixed trading across the fixed income space, as bond and OMO investors largely stayed on the sidelines, while a fresh supply of NTB tenors trigged a week of buy-side activity across the NTB space. Starting in the bonds space, yields on benchmark bonds closed flat on week, due to a mix of buy and sell-side action at the short-mid end of the market over the course of the week. Meanwhile, OMO activity was largely muted this week with a buyside tilt in Friday’s session, as we observed a 3bps w/w drop in average yield in the space this week. Finally, it was a largely bullish week in the NTB space as yields eased 49bps on average, as broad-based interest across the curve fueled activity this week; the yield on the 317DTM eased 114bps w/w to settle at 5.62%.

Currency: The Naira lost

N0.29 at the I&E FX Window to close at 414.73

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

This week, the market was lifted by block trades in names likes FBNH and SEPLAT, while being dragged by sell pressure seen in some Tier-I banking names. We expect the latter to persist into next week amid persistent negative market sentiment.

Fixed Income: We expect the market to open the week on a relatively tepid note, owing to the level of system liquidity. Additionally, given the limited changes to the macroeconomic environment, we expect bond participants to remain on the sidelines as they look to the next DMO auction.

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 November review:

Vetiva High Conviction Stocks

The NGX All-Share Index closed November in the green, advancing 2.9% m/m amid a cool off in investor sentiment in the equity market, driven by a slide in crude oil prices amid the advent of a new COVID-19 variant. This negative reaction spilled over into our top picks, which lost 4.57% against the ASI, worsening YTD gains to 20.98%, a 13.6ppts outperformance against the ASI’s YTD gain of 7.39%.

Our Oil and Gas picks, SEPLAT and TOTAL lost a combined 1.4% m/m, amid the aforementioned decline in crude prices, which drove some selloffs on stocks in the sector.

The Industrial Goods sector also saw sell downs, contributing a weighted loss of 1.23% m/m, dragged by a drop in WAPCO (-8.0% m/m) and a milder decline in JBERGER (-0.8% m/m), despite WAPCO posting a 43% y/y improvement in 9M profits.

The Consumer Goods sector continued its negative run, with losses in FLOURMILL and DANGSUGAR culminating in a -0.4% contribution to the portfolio. The sector has been plagued by negative sentiment amid high inflation and weak margins for majority of 2021.

Our Banking stocks also gave negative returns, as ZENITHBANK, GTCO and ACCESS contributed a weighted loss of -2.0% m/m, as investors capitalised on the gains from the previous month to take profit in the sector.

MTNN returned to positive territory, as investor interest in the stock returned ahead of their announced public offer, driving an 8.2% m/m gain for the telecoms giant.

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.