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Breakfast Report - 02 November 2020

The CBN recently released the Purchasing Managers Index (PMI) report for Oct’20. Manufacturing (+2.9) and services PMI (+4.9) printed 49.4pts (Sep’20: 46.9) and 46.8pts (Sep’20: 41.9) respectively, indicating a contraction in both sectors. While the manufacturing sector contracted for the fifth consecutive month, the services sector shrank for the seventh consecutive time as both recorded readings below 50. This slump is attributed to the impact of existing FX challenges, higher cost outlays, weak consumer demand, and nationwide protests on economic activity during the month. As a leading indicator, the consistent sub-optimal PMI readings suggest the country is in a recession. We recall that the industry and services sectors were most affected by the pandemic. The double-step devaluation of the naira and the exclusion of two items from the official list added to pressures in the black market, where most firms access foreign exchange. This coupled with energy reforms, raised production costs of businesses. The high-cost environment has restrained the transmission of the CBN’s expansionary policies, which were put in place to drive economic recovery.

Equity: Following the latest results of the PMA in the FI market, where yields for short term dated instruments printed below 1.00%, fund/portfolio managers continued to channel funds into the equities market, leading to a number of fundamentally sound stocks closing the week deep in the green, while also improving the trading turnover in the market. We expect no deviation from this bullish pattern this week as most bellwethers remain below their expected intrinsic value, though the possibility of profit taking cannot be overruled.

Stock Watch: The Nigerian equities market again benefited from the unattractive yields in the FI market, as investors' again took position in INTBREW (+10.00%), NESTLE (+10.00%), MOBIL (+998bps), BUACEMENT (+990bps), TOTAL (+925bps), UACN (+685bps), UNILEVER (+570bps), UBA (+405bps), GUARANTY (+400bps), WAPCO (+389bps), DANGCEM (+303bps), MTNN (+286bps), ZENITHBANK (+279bps), ACCESS (+260bps) and FBNH (+236bps) among others.

Fixed Income: We expect market participants in the bonds space to remain buy–side inclined owing to the level of system liquidity, despite lower crude prices and rising investor uncertainty. Meanwhile, we expect investors to maintain a cautious stance in the T-Bills space, given the yield environment. However, given the robust level of liquidity, we cannot rule out the possibility of the CBN coming into the market to mop–up excess funds