According to the Purchasing Managers Index (PMI) data released by the Central Bank of Nigeria (CBN) for the month of October, activity levels in the manufacturing and nonmanufacturing sectors strengthened even as readings remained below 50 index points. Specifically, the manufacturing PMI expanded to 49.4 in October from 46.9 in September, indicating slower contraction compared to the prior five months. Similarly, the nonmanufacturing PMI strengthened to 46.8 in October from 41.9 in September, halting two months of consecutive contraction in the index. That said, we note that Manufacturing PMI has remained below 50 index points for the past six consecutive months while NonManfacturing PMI has been below 50 index points for the past seven consecutive months.

Across the key indices in the manufacturing PMI, save for Supplier delivery time (-1.7) which recorded some deterioration, the remaining four indices in the manufacturing sector improved in October; Raw materials/WIP Inventory (+3.2), New orders (+4.8), Production level (+2.7) and Employment level (+1.9). We think the deterioration in Supplier delivery time reflects the impact of the nationwide unrest and peaceful protests on logistics and distribution channels of manufacturing firms. Furthermore, we note that while Employment
level and Raw material inventories improved in October, they remain below the 50-point mark which reflects weak labour employment and FX illiquidity challenges impacting ability to import critical raw materials. The data further revealed that, of the 14 surveyed subsectors in the manufacturing sector, six (compared to four in September) reported growth while 8 (compared to ten in September) contracted.

For non-manufacturing PMI, all four of the key metrics recorded improvement albeit they all remained below the 50-point mark. Across all the indices; Business Activity (+5.0), Level of new orders (+8.3), Employment level (+2.6) and Inventory level (+3.2) showed decent improvements. We think the decent recovery in Non-manufacturing PMI was driven by sustained recovery in activities of service-based organisations in the face of reduced covid19 restrictions.

CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

Excerpt from my dairy (21/10/2020)
“Hmm! How did we get here? What did I miss? How did we go from a historical peaceful protest to reports of
violence and looting? 2020, haven’t you done enough already? Oh lord, I know I don’t normally pray for
Nigeria, but please protect everyone stranded in Lekki. The night started on Twitter. Pictures of the cameras
being taken down was shared. Theories of conspiracy, the unsafe location and ‘get out of there’ tweets were being tweeted all at once, but no one saw this coming. I couldn’t believe it was daybreak when I looked outside the window as my eyes were still wide open and my heart still kept beating fast as if I had just come back from a morning jog. I took some time out, talked to some of my loved ones I couldn’t reach before and it gave me some level of comfort and ease. I decided I had to keep it cool and focus on work. Then it hit me like a ton of bricks. The first gunshot I heard this year. I heard it once, twice, thrice, and then I couldn’t keep count anymore.

Survival instincts set in; I shut all windows and doors and then the typical Nigerian in me came alive and I
started praying. I have never prayed so hard in years, even whilst executing clients’ trade orders. This will surely
be a day to remember.”

In spite of all the unrest and violence we all witnessed in most part of the country especially Lagos, the commercial hub of Nigeria, markets still witnessed a positive showing in the Bonds and Equities space WoW. This begets the question, “Is Nigeria’s financial market defying all rules of logic?”

Before I delve into this, we should let you all know that our heart is heavy and goes out to everyone who lost a
loved one or got injured during this traumatic period of unrest and also to all SMEs, corporate and government,
whose properties were vandalized and looted. I must say, it was extremely exhausting and heart-breaking to
watch people’s sweat go down the drain especially with how challenging this year has been already. Amidst the current unrest happening in our dear country, we would like to encourage everyone to keep staying safe and pray for our dear country.

Market defying logic…

The equities market managed to close in positive territory last week despite the insecurity and unrest seen in
the country. The Nigerian Stock Exchange All Share Index (NSEASI) advanced by 0.13% WoW to close at
28,697.06 points as it witnessed gains on three (3) out of five (5) trading days of the week. The NSEASI YtD
improved further, climbing up to 6.91% YTD from 6.77% YTD in the prior week. However, we saw weakness
in investors sentiment, as market breadth closed at 0.80x (vs. 1.52x recorded last week) as the market recorded
twenty-eight (28) advancers against thirty-five (35) decliners in the week. The hunt for yield (Particularly from
a dividend perspective) coupled with the unattractive fixed-income yields and fairly robust system liquidity
continues to provide support in the equities market as the dip witnessed in the middle of the trading week was
met with sizeable bargain hunting activities across most sectors of the market.

NSEASI

The Bond market also sustained its bullish momentum last week on the back of the liquidity improvement
coupled with the unmet bid at the monthly FGN bond auction. The Bond auction which held on October 21,
2020 (I know, right? I didn’t think it was going to hold too but I guess we still have a budget deficit to fund)
was relatively strong with a bid to cover of 5.24x as DMO sold NGN45 billion(as against NGN30 billion
offered) across the 15-Year and 25-Year papers, at stop rates of 4.97% and 6.00% respectively. Consequently,
yields declined by 69 basis points on average across the curve. By the way, speaking of defying the odds, did
you notice that even with everything happening the local sovereign bond yields remained lower than the
Nigerian Sovereign Eurobonds? (Not sure they teach this in school).

Three major hypothesis that have been confirmed this week are:

H1: Market liquidity has a significant impact on financial market performance in Nigeria

H2: Fundamentals may not necessarily impact financial markets as anticipated in Nigeria

H3: The market can stay irrational longer than you can stay liquid.

Nevertheless, we expect the impact of largely felt disruption and looting seen in the past week to put downward
pressure on the already depressed economy, with Lagos State alone estimating the cost of its damage to be
about a N1 trillion, although figures are yet to be confirmed (That is slightly above the entire state’s revised
budget at N920.469bn). As we continue to face economic challenges, with inflation on the rise, mounting
pressure on our reserves, weaker crude prices and declining FDIs and FPIs, the road to recovery seems more
distance than ever.

Where is the money?

NIGERIA EUROBOND

The recent volatility seen across all dollar underlying assets coupled with the security crises-driven sell-off has
created entry point in the Nigeria Eurobond market which currently yield higher than the local FGN bonds.

Equities Market

The equities market has been on a rally this October 2020 as local investors resumed bargain-hunting as yields
remain depressed in the fixed income market. The NSEASI finally crossed into positive territory YTD this month
after suffering a major blow from the Covid-19 induced sell-off. NSEASI is currently up 6.91% YTD. We expect
the bullish trend to persist in coming weeks as investors will be looking to position themselves ahead of Q3
earnings as yields remain depressed in the fixed income market. Dividend yield remains the major play.

The peaceful protests staged by youths across the country, mobilized through various social media platforms to protest against the activities of the Special Anti-Robbery Squad (SARS), took a sad turn last week following alleged shooting of unarmed protesters at the Lekki toll gate. In what could be referred to as a reaction to the shootings, hoodlums hijacked the protests and began the destruction of both private and public properties. For example, In
locations like Surulere, almost every shop, bank, shopping mall and ATM gallery along Bode Thomas and Adeniran Ogunsanya streets were damaged and goods carted away freely and there were reports of similar incidences in other parts of Lagos and in other states. There were also reports of BRT buses burnt at terminals and buildings razed down by fire. The Lagos State governor Babajide Sanwo-Olu was reported to have said the state alone would need c.N1 trillion for reconstruction after the destruction caused by the hoodlums.

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The massive destruction of both public and private property has sparked worries on the ability of the insurance sector to cope with the expected number of claims. According to news reports, many operators expect claims to run into billions of naira which may be overwhelming for the insurance players if the government fails to offer some sort of aid especially as the sector is right in the middle of a recapitalisation exercise. In what may be a
reaction to these fears, the Nigerian Stock Exchange (NSE) Insurance Index, a benchmark to measure the performance of the insurance sector closed lower by 0.59% for the week (ended 23-Oct-2020). It is however not too clear how much of the #EndSARS loss incident is covered under the different types of available policies.

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The Nigerian Insurance sector remains largely underdeveloped with Insurance penetration still at c.2% and with the sector contributing less than 0.5% to GDP. The sector which contracted by 29.5% in the Q2 GDP report released by the Nigerian Bureau of Statistics is set for a deep recession this year. Yet to recover from the effect of the Covid-19 pandemic which has resulted in an increase in health, travel and business disruption claims, players will now have to face the impact of the recent destruction of properties across the country on claims amidst trying to meet the new capital requirements set by regulators.

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CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.