Imperial Asset Weekly Review: Investors Watch Devts In Fiscal Space For Direction

we expect developments in the fiscal space to weigh in on sentiments, as investors assess the direction of recent policy pronouncements.

Global Economy:
In the out-gone week, concerns around trade tensions between the U.S. and Chinaslightlycooled off as both parties resumed trade talks amid G7 summit. However, this only gave way for fresh concerns around BREXIT, as the UK’s newly sworn-in Prime Minister, Boris Johnson, effectively ‘suspended parliament’, after securing the Queen’s approval to extend the September 9th break to five weeks from the previous three weeks. This means the MPs would have only two weeks to the October 31st deadline, limiting the amount of time to stop a no-deal BREXIT. Note that under former Prime Minister Theresa May’s deal – which was voted down three times by the Parliament – the UK would have entered a 21-month transition period, thus providing her with some breathing space-maintaining much of the status quo – while it two continue to negotiate a workable trade deal with the European Union (EU). In a no-deal scenario, the UK would immediately (after October 31st) leave the EU with no agreement about the “divorce” process.
The 45th session of the G7 Summit was held between 24th – 26thof August 2019, in Biarritz, France. Prominent issues discussed were – global trade dispute, rising global warming, tax evasion by multinational tech companies and protecting biodiversity. French President Emmanuel Macron also used the Summit to promote Europe as a global leader on several issues. Most notable was a solution to the Amazon forest fires. The G-7 promised $22 million to fight the fires. The response and action of the U.S. president, DonaldTrump on most of the issues were cold. Although, Macron got him softening on his protectionism and a possible agreement to meet with Iranian President Hassan Rouhani in respect of recent hostilities between the two countries. The absence of a definite compromise at the Summit on trade tensions suggests that rising uncertainties will continue to persist in weeks ahead.
The 7th Tokyo International Conference on African Development (TICAD 7) was held in Japan in the period under review. Science, technology and human resource development were the critical issues at the summit. In his address, Prime Minister Shinzō Abe kicked off the summit by announcing that his government would increase trade and investment insurance to cover 100% of transactions, in order to boost Japanese private sector investment in Africa – a major aim of Japan’s engagement with the continent. In our view, the G7 African Partnership and TICAD are both in a sense the Western counterparts to China’s more dramatic involvement in Africa.
With the trade tensions’ breather, financial markets across the globe witnessedbullish investors’ disposition as shown in the figure below.

Markets across the globe as at Friday, 30th August 2019

Domestic Macro-Economy:
The Central Bank of Nigeria (CBN) released an exposure draft on prudential guidelines for Microfinance banks, mortgage refinance companies, finance companies, deposit money banks, and development finance companies, as part of efforts to enhance the quality of banks’assets. The CBN cited significant changes in the banking landscape arising from FX crisis, liquidity issues, deteriorating corporate governance, rising incidence of non-performing loans, increasing competition from financial technology companies,review of major global prudential standards such as Basel Committee forBanking Supervision (BCBS), among others, as reasons compelling the review of the existing prudential guidelines issued in 2010.

The CBN in the proposed prudential guidelines set new limits on non-performing loans (NPLs) for banks and other financial institutions. According to the apex bank, the maximum ratio of NPL to total gross loans for Deposit Money Banks (DMBs) shall not, at any point in time, exceed 5%, while Mortgage Refinance Corporations (MRCs) are expected to maintain a maximum ratio of NPL to total gross loans of 10%. Also, the CBN pegged the total outstanding exposure by a bank to any single person or a group of related borrowers at a maximum of 20% of the bank’s shareholders’ fund unimpaired by losses.
The new guideline is expected to take effect from 1st January 2020 and will replace the extant Prudential Guidelines issued on 30th June 2010. However, the draft is subject to comments and observations from stakeholders. Expectedly, the new guideline will ensure improvement in the quality of banks’ assets, as well as support the stability of the Nigerian financial services sector.
The CBN also published the Purchasing Managers’ Index (PMI) and business Expectations Survey Reports for August 2019. According to both data, respondents expressed optimism on the performance of the economy in the period covered. For the PMI, both the manufacturing and non-manufacturing PMI for August rose to 57.9 and 58.8 from 57.6 and 58.7 index points posted in July, suggesting an expansion in economic activities.

In the case Business Expectation Survey, although respondents identified insufficient power supply, high-interest rate, unfavourable economic climate, unclear economic laws and unfavourable political climate as major headwinds that constrained business activity in August but were optimistic of the economy going forward. They expect the Naira to appreciate in the current month and rest of the year, level of inflation to increase slightly in the rest of the year and borrowing rate to rise also in the current month and rest of the year.

Domestic Equity Market:
The performance of the Nigerian Equity Market in the week under review reverted to negative territory, as participants engaged in profit-taking from the prior week’s upward price movement. As such, theAll-Share Index and Market Capitalization depreciated by 0.99% to close the week at 27,525.81 points and N13.39 trillion respectively. Activity levels were also lacklustre, as average value and volume traded fell by 32.0% and 50.0% respectively. Safe for NSE Insurance Index (+1.55%) and NSE Industrial Goods (+1.21%) that closed above prior week’s positions, other major indicators witnessed selling sentiments-, NSE Banking Index (-3.46%), Oil and Gas Index (-10.76%), and NSE Consumer Goods Index (-0.63%).
The year-to-date loss increased to -12.42% as investor sentiment as measured by market breadth (advance/decline ratio) weakened to 0.71x compared to strong1.6x recorded in the previous week.
The -10.76% decline by NSEOil and Gas Index was owing to price depreciation in SEPLAT (-18.8%) and TOTAL (-5.5%). The Banking and Consumer Goods Indexes decline was fuelled largely by selloffs in ZENITHBANK (-7.5%)ETI (-9.4%), INTERBREW (-15.2%) and DANGSUGAR (-5.3%).

Equity Market Outlook for the Week Ending 6th September 2019
This week, we expect bargain hunting on stocks that have witnessed significant price depreciation in recent past to still be at fore. We equally expect a market reaction on the UBA’s 6M-19 earnings which was released late on Friday, last week. Overall, we expect developments in the fiscal space to weigh in on sentiments, as investors assess the direction of recent policy pronouncements.

Stocks Recommendation
Kindly see opening table for stocks’ recommendation this week. Our positions on the companies are based on their recent earnings results and management’s mid to long-term outlook as revealed from their recent 6M-2019financials.

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