Rising tensions in the Middle East boost Brent prices
What shaped the past week?
Global markets opened the week on a bearish note, as major markets in Europe and the u.s closed in negative territory, even with news of a possible phase one trade deal between China and the u.s. However, asian markets traded positive in reaction to the news. On Tuesday, European markets turned red, while asian and u.s markets traded mixed to positive; although, global markets on a whole closed the year in positive territory. Just after the new year holiday, an apparent boost to sentiment saw major markets trade bullish to start the year. This was supported by the combination of news that a timeframe has been set for the u.s-china trade deal, encouraging data on employment and manufacturing in the u.s, and news of an expanding manufacturing sector in China. However, at week close, news of the u.s.sanctioned attack on the head of Iran’s Irgc-quds Force, General Qassem Soleimani, caused tensions between the regions and overturned the gains in the previous session, as investors turned cautious.
Last week Monday, Dangote Cement Plc revealed plans to buy back 10% (1.7 billion shares) of its shares in issue from shareholders. In a notice filed at the Nigerian Stock Exchange, the firm stated that the aim of the share buyback would be to improve the company’s return on equity (ROE). The terms and conditions of the repurchase program, which is to be determined by the company’s board of directions, is expected to be completed within 12 months from the date of approval by shareholders, which will be sought at the extraordinary general meeting to be held on January 22, 2020. Share repurchase programs serve as a means for firms to return cash to their shareholders. However, the programmes also impact the per-share profitability of the firm, most notably the Earnings Per-share (EPS) positively due to the reduction in issued shares. Thus, we expect this to be value-accretive for the firm, especially given the current attractive valuation of DANGCEM.
The Equities space traded in a positive manner last week, as bargain hunting activities drove market activity at the start of the year. The market gained 38bps w/w, as investors sought stocks predominantly in Oil & Gas (541bps w/w) and Banking (295bps w/w) sectors. The Oil and Gas sector closed the week as the top performer, driven by interest in SEPLAT (800bps w/w), with Industrial Goods sector gaining 29bps w/w due to gains in DANGCEM (1bp w/w). Market activity improved w/w, with share volume and turnover rising 106% and 198% respectively.
- The Fixed Income Market traded in a mixed fashion in the last week, as interest in the space remained geared towards the short-end of the curve. The average yield on ntbs moderated 97bps w/w, as buy-side activity was observed at the shortto-mid end of the space. notably the yield on the 69DTM bill moderated 175bps to settle at 4.14%, with the yield on the 195DTM bill easing 122bps to settle at 4.55%. In the OMO market, the average yield on OMO notes dipped 23bps w/w as participants in the space sold notes at the longer-end of the OMO space. Meanwhile, in the bond space, trading activity remained tepid throughout the week, with the average yield on benchmark bonds easing 23bps. However, we observed pockets of demand at the short end of the bond market where the yield on the 14.50% Fgn-jan-2022 bond dipped 131bps w/w to settle at 9.06%.
The naira depreciated n2.34 w/w at the I&E FX Window to settle at n364.98 and remained unchanged w/w to at n359.00 against the dollar in the parallel market.
What will shape markets in the coming week? Equity market: While last week was positive for the index overall due to some portfolio re-balancing activities, profit taking was observed in the Industrial Goods and Consumer Goods sectors towards the latter part of the week. Thus, we expect the next session to trade mixed, as investors continue to seek attractive markers, while profittaking activity is likely to persist.
Fixed Income market:
at the start of next week, we foresee further yield moderations in ntbs space, driven by the level of system liquidity and in spite of the low yield environment. Meanwhile, in the bond market, we expect sentiment to remain positive as investors seek higher yields.
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 - Expect still slightly stunted growth in the manufacturing sector
Whilst the economy has continued to expand this year, real economic growth has remained fragile, with GDP growth still coming in sub 3%. While the oil sector has continued to expand post-niger Delta militancy, the non-oil sector has remained weak as real sector investments stagnate. The manufacturing sector has been particularly weak this year, averaging a 0.6% growth in the past three quarters (Q1-Q3’18 average: 2.0%), and even retracing by 0.1% y/y in Q2. We believe that this has been driven by a combination of still-weak consumer purchasing power and a jump in demand for cheaper imported alternative products. notably, while nigeria exited recession in 2017, we believe that consumer purchasing power has remained fragile, as subsequent economic expansion has continued to lag estimated population growth. Furthermore, consumer spending power has remained limited by sustained (but declining) double-digit inflation figures, weak retail credit access and insufficient fiscal stimulus. Expectedly, the Food and Beverage sector has also weakened, with growth falling to an average of 2.0% in the first three quarters of 2019 from an average growth of 3.2% in 2018. apart from weak consumer spending, the subsector has been dragged by the prominence of cheaper imported food alternatives such as bouillon cubes, sugar, and crude palm oil. With this, we believe that many local food producers lost market share to cheaper imported substitutes in 2019, especially packaged food items. all in, Food & Beverages and Manufacturing are expected to grow at 12.3% and 1.2% y/y respectively in 2020, much lower than 13.6% and 0.8% in 2019.
Increased prices to drive revenue growth next year
With consumer purchasing power still weak despite the exit from recession and demand still largely price elastic, FMCG producers have been hesitant in recent years to pass on rising costs to consumers. notably, prices in the beverage industry have remained largely stable and have been cut in some cases despite higher costs. Coca cola, the last price holdout in the 60cl soft drinks industry recently reduced its 60cl rrp by 33.3% to n100/bottle. Even the excise duties imposed on beer, spirits and tobacco producers have driven minimal changes in retail prices amidst intense competition. notably, with consumer wallets depressed and competition rife among industry players and cheap imported products, consumers have had a stronger grip on bargaining power. In recent months, following the closure of the border, we have seen a jump in headline inflation, driven by food inflation amidst a shortage of food supply. However, we believe that this increase was mostly driven by basic food items as prices of packaged foods and HPC products have been largely stable. That said, we see scope for some price increases in 2020.
Stunted margin growth amidst increasing input prices Whilst price increases should drive revenue gains across board, we foresee increased pressure on margins amidst higher expected raw material costs. For example, while we expect price of wheat to remain stable in 2020, driven by stable supply levels and healthy demand, we foresee a jump in Barley prices in 2020 as demand from Saudi arabia and north africa weigh on pricing. Palm oil and Sugar prices are also set to increase in 2020 as strong asian demand drives CPO price and reduced sugar supply supports sugar prices. While many local FMCGS are looking to localize sourcing of raw materials, inputs are still largely sourced outside the country, in an estimated domestic to foreign split of 60:40. With this, we expect increased margins for producers in the flour space but renewed pressure on beer, sugar and HPC manufacturers.
causing the valve to tap.
My space bus engine gets unbearably hot. As a result, it slows the speed. The gear will not select smoothly. The model is 2004 Mazda MPV. Anonymously
You will need to confirm that the engine actually gets hot, e.g. overheating. If it does, it could affect the transmission because the oil cooler is attached to the radiator. But you will need a mechanic to do a proper diagnosis on the van to ascertain the fault.