Thursday, June 02, 2016 8.30PM / ARM Research
Sell in May and Go Away. At least that’s how the saying goes. However, May 2016 has been one with a difference. The 10%+ rally in the month marks the third strongest gain for the month of May in nearly two decades and this is after a 4.2% cutback in the last two trading days of the month.
Figure 1: YTD Trend of NSE’s value traded and ASI
…AMID a MACRO-PICTURE to FORGET
Against such optimism, one might be tempted to think that the macro-picture was no longer relevant. This was the same month in which a negative 0.4% GDP for Q1 16 was announced—the first negative reading in 12 years. Also, a 68% hike in PMS price came into effect with the potential to severely curtail already constrained discretionary incomes, with implications for FMCG companies. Still in May, inflation reached its highest level yet even as the drivers for the uptick in the food segment—by far the largest—emerged to be somewhat more fundamentally rooted and of potentially more lasting effect than initially credited.
This is aside the enduring issues of non-budget implementation, pressured corporate earnings and very compressed fiscal receipts. Indeed, the 3.2% MoM rebound in oil prices in the month which should have been a major positive ended up not even close as a result of pipeline disruptions that cut output by more than 23% to less than 1.69mbpd after at least eight attacks in the month.
How will the market vs macro dichotomy be resolved?
So here’s the picture as we see it: one of the strongest market rallies in a given month is hinged on an MPC that has hinted at flexibility but a week after is yet to give any clues as to how exactly to achieve it; a rebound in oil price that neither impacts the domestic economy nor fiscal receipts; negative GDP that could extend as a result of oil and other issues; and a hike in PMS that government is still scrambling to ensure is not taken as the deregulation we believe the sector really needs. If this is the stuff that a 10%+ market rally is hinged on then investors might need to think again.
Indeed, our piece at the tail end of the month—Is the rally marching on or marking time?—already clearly highlighted our views on where the market is headed in the near term. From a fundamental perspective, the next table clearly shows what the rally in the month has done to our investment ratings. However, in line with the thrust of this particular report what we’re looking to focus on is how best to position from this point forward.
Table: Effect of market rally on investment ratings
Total (nig) Plc. and Flour Mills of Nigeria Plc. catch our eye
In terms of immediate actions, SELL decisions probably seem obvious at this point especially as other issues remain, especially forex market structure. However, our focus is on a subtler theme. From previous diary entries this year, a recurring point has been that despite the toughness of the macro conditions and broadly bearish equity sentiments, compelling opportunities will inevitably present. Thus, while it is understandable why some of the previous opportunities may have been foregone, the rapid turn in the month of May reemphasizes that, no matter how poor sentiment is and how pervasive disinterest seems, opportunities will not lay around in perpetuity. Hence, considering the swiftness with which the tide could change, our focus is on taking advantage of the ongoing declines for portfolio restructuring or creation of new positions.
Whilst we continue to favour the heavyweights in the Banking and Industrial (Cement & Construction) sectors, a couple of names also catch our eye. In the Oil & Gas sector, we feel that Total Nigeria Plc. Is best positioned to catch the benefits from the government’s increasing openness to deregulation while not at all affected by the pipeline disruptions that taint the upstream players. In addition, we continue to like Flour Mills of Nigeria on valuation grounds and expected resilience against the tough operating environment.
Figure 2: P/E ratios of Total Nigeria Plc and Flour Mills of Nigeria Plc
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