Markets in Red as Investors Adopt Risk Off Strategy

–Week Ended May 18, 2018

Global Equities Market
Weeks after the US pulled out from the Joint Comprehensive Plan of Action (JCOPA), the Trump administration provided conditions for a renegotiation with Iran which the country has refused. This coupled with Venezuela’s plunging oil production is anticipated to have a positive knock on effect on oil prices in the near term and most importantly on markets of oil dependent countries.

General Performance across global equity indices was largely bearish this week as only 3 of the 16 indices under our coverage trended northwards W-o-W. Sentiment in the US markets took a positive turn after senior officials from North Korea expressed willingness to sit and resolve any issues with the US following President Trump’s pullout from the US -North Korea summit slated earlier to hold in June. As such the NASDAQ and S &P 500 appreciated 1.3%and 0.4% W-o-W respectively. However, UK’s FTSE was the lone loser, down 0.7% W-o-W as the release of weaker than expected Q1:2018 GDP numbers weighed on sentiment.

Across markets in our Eurasia classification, all markets trended southwards W-o-W. Japan’s Nikkei shed the most, down 2.1% due to a strengthening Yen and the recent move by US to impose auto tariffs. Hong Kong’s Hang Seng trailed, down 1.5% on the back of weaker global sentiment. Similarly, France CAC 40 and Germany’s XEXTRA DAX closed in the red, down 0.6% and 0.7% respectively.

In the BRICS markets, India’s BSE Sens was the lone gainer, up 0.2% as Oil & Gas stocks boosted performance in the week. On the flipside, Brazil’s Ibovespa shed 3.6% W-o-W, weighed on by price depreciation in Petrobras (the state owned oil company). Russia’s RTS maintained a downward trend, shedding 0.6% W-o-W as investors reacted to comments by Russia’s energy minister with regards to OPEC and its partners phasing out supply curbs in its next meeting.  South Africa’s FTSE/JSE All Share maintained a downward trend W-o-W, declining 1.7% as foreign investors continued to exit positions while China’s Shanghai Composite fell 1.6% W-o-W due to losses recorded in Telecoms, Mobile and Software Companies.

In the African markets, sustained foreign investor sell offs persisted throughout the week. Kenya’s NSE 20 fell 3.7% largely due to foreign participants’ exit from the market. Similarly, Ghana’s GSE Composite and Nigeria’s All Share dipped 2.9% and 2.8% respectively W-o-W. To close the week, Egypt’s EGX declined 1.4% W-o-W on sustained sell offs in the market.

Domestic Equities Market: Sell Offs in Domestic Bourse Drag Market below 40,000 points
Performance of the domestic equity market was largely bearish this week as investors continued to sell off positions in bellwethers - DANGCEM (-0.4%), NIGERIAN BREWERIES (-6.3%), GUARANTY (-4.7%) and ZENITH (-4.8%) – which dragged the All Share Index (ASI) 2.8% lower W-o-W to a 4-month low of 39,323.62 points while YTD return contracted to 2.8%. Correspondingly, investors lost N416.1bn as market capitalization fell to N14.2tn at the close of the week. Activity level weakened as average volume and value traded declined by 5.9% and 32.3% to 274.1m units and N3.2bn respectively. For the week, AFRINSURE (291.1m), IKEJAHOTEL (84.1m) and SOVRENINS (79.9m) were the top traded stocks by volume while NESTLE (N2.7bn), ZENITH (N2.1bn) and GUARANTY (N2.1bn) were the top traded by value.

The market opened the week on a negative note, extending the bearish performance from the previous week, to decline on all trading days in the week. On Monday, selloffs in banking stocks GUARANTY (-4.7%) and ACCESS (-1.8%) pulled the index 12bps lower. By midweek, the ASI had cumulatively lost 2.1% on the back of continued profit taking in DANGCEM (-0.4%), ETI (-0.5%), and DANGSUGAR (-12.2%). By Friday, continuous dumping of bellwethers – UBA (-7.4%), ZENITH (-4.8%), GUINNESS (-3.8%) and UNILEVER (-2.0%) – further dragged the index 1.0% southwards.

Performance across sectors was largely bearish as 4 of 5 indices closed in the red W-o-W. The Banking index depreciated the most, down 2.0% as investors sold off positions in GUARANTY (-4.7%), ZENITH (-4.8%) and UBA (-7.4%). The Consumer Goods index followed closely, shedding 1.1% on the back of sell pressures in NIGERIAN BREWERIES (-6.3%) and UNILEVER (-2.0%). Similarly, the Insurance and Industrial Goods indices fell 0.8% and 2bps respectively due to profit taking in MANSARD (-2.0%), LINKASSURE (-7.8%), DANGCEM (-0.4%) and JBERGER (-5.0%). On the flip side, buy interest in MRSOIL (+5.0%) buoyed the Oil & Gas index, up by a marginal 2bps.

Market breadth (advance/decline ratio) which measures investor sentiment weakened to 0.3x from 0.4x in the previous week as 14 stocks advanced relative to 56 stocks that declined. The top performing stocks were IKEJAHOTEL (+44.9%), MRSOIL (+21.2%) and LAWUNION (+21.0%) while ETERNA (-22.3%), JAPAULOIL (-20.0%) and DANGFLOUR (-16.8%) led laggards. The current bearish run in the local bourse is largely due to foreign investors selling off positions in emerging and frontier markets; leaving local investors skeptical of potential near term upsides. However, we believe cheaper valuation presents investors with an attractive entry opportunity to take advantage of.

Money Market: Rate Moderation Expectations to Buoy Performance of Treasury Bills Market 
Money market rates – Open Buy Back (OBB) and Overnight Rates (OVN) trended higher on 3 of 5 days despite improvements in system liquidity during the week. OBB and OVN rates kicked off the week 8.7ppts and 8.4ppts higher at 16.5% and 17.4% respectively following a decline in system liquidity to N66.8bn on Monday from N143.6bn recorded the previous Friday. OBB rose to 17.0% on Tuesday and declined slightly to 16.7% on Wednesday, resulting from inflow of FAAC allocation to the States and LGAs estimated at c.N250.0bn, while OVN rose to 18.0% and inched 4bps higher to 18.4% on Wednesday.

By Thursday, rates crashed significantly as N267.0bn worth of maturing OMO instruments hit the system. Hence, OBB and OVN rates fell 8.9ppts and 10ppts to 7.8% and 8.4% respectively. The effect of the inflow on system liquidity and rates largely offset the impact of OMO mop-ups on that day. A total of N300.0bn was offered through the 112-day instrument (N50.0bn) and 231-day (N250.0bn); however, only N113.4bn was sold as both instruments were undersubscribed. At week close, the CBN conducted another N37.0bn OMO mop up in response to perceived excess liquidity in the system with the OBB and OVN climbing to close the week at 17.2% and 19.7%. In the coming week, we anticipate more OMO issuances as inflows from Wednesday maturing FGN May 2018 bond (N300.0bn) as well as N176.3bn OMO and N99.2bn T-Bills maturity on Thursday hit the system.

In the Treasury Bills market, performance was largely bullish as average rate across benchmark instruments moderated 30bps W-o-W to close at 12.5%. Average rate opened the week at 12.8%, fell 2bps to 12.6% on Tuesday and stayed flat till midweek. In the absence of a Primary Market Auction or repayment, the bullish sentiment filtered into Thursday, as average rate declined 40bps to 12.2% before closing the week at12.5%. Next week, the Apex bank is scheduled to repay N99.2bn maturing Treasury bills and only rollover N49.6bn in line with the FGN’s debt strategy to reduce domestic borrowings. We anticipate a further moderation in rates at the auction and hence expect the secondary market to remain more attractive.

Foreign Exchange Market: FX Market Stability Hinges on the CBN’s Continuous Intervention
This week, the CBN continued with its weekly FX intervention sales, offering US$210.0m (on Wednesday, 23rd May 2018) via the Wholesale Secondary Market Intervention Sales (SMIS) window in a bid to sustain liquidity levels and maintain stability in all segments of the market. This was in addition to weekly auctions at the SME and Retail Invisible segment of the market. Despite this intervention, continued pressures from the sell-offs of sovereign bonds holding by offshore investors further led to pressures on exchange rate as well as the external reserves, which marginally declined to US$47.8 by Thursday.

The CBN’s Spot rate opened the week at N305.35/US$1.00, unchanged from the close of the previous week, but declined on Tuesday to N305.40/US$1.00 - a depreciation of 5 kobo - and remained at that level till the close of the week. Similarly, the naira remained flat at the parallel market trading at N364.00/US$1.00 for the first three trading sessions in the week before losing 1 naira on Thursday and Friday respectively to close the week at N366/US$1.00. At the Investors’ & Exporters’ (I&E) FX Window, the NAFEX rate opened the week at N361.46/US$1.00, depreciating by 28 kobo from the previous close of N361.18/US$1.00. However, by midweek, it appreciated to N361.25/US$1.00 but reversed to close the week at a 2-week’s low of N361.64/US$1.00 by Friday. Also, activity level in the I&E Window waned this week as total turnover declined by 21.7% to US$883.9m (on Thursday) from US$1.0bn recorded in the same period of the previous week.

In the FMDQ OTC futures market, the total value of open contracts of the Naira settled OTC futures increased by US$258.4m to US$4.0bn relative to US$3.7bn recorded the previous Friday; implying a 7.0% increase in market size. The APRIL 2019 instrument (contract price: N362.44/US$1.00) was the most subscribed with a total value of US$60.0m while MAY 2018, JUNE 2018, JULY 2018 and AUGUST 2018 instruments were flat W-o-W. The MAY 2018 instrument, which has a subscription value of US$503.1m, will mature by next week Wednesday and in line with trend, we expect it to be replaced by the CBN. This coming week, we anticipate much more frequent interventions by the CBN as it sustains efforts to maintain stability in the FX market. Hence, we expect rates will trade at similar levels across segments.

Bond Market: Sub-Saharan Eurobonds Rebound amid Post-Emerging Market Asset Sell-offs
The Performance in the local bonds market was bearish this week as the average yield rose 7bps W-o-W in line with the retention of MPR by the CBN’s Monetary Policy Committee and the general market conditions. Consequently, average yield across tenors fell 3 of 5 trading days, shedding 10bps at the start of the week to settle at 13.2%, due to sell offs across tenors especially in short and medium dated tenors. On Tuesday, the average yield across tenors also fell marginally by 2bps to close at 13.2% while the downward trend was reversed by mid-week as average yield rose 7bps to 13.3%. Average yield across tenors further increased by 7bps and 28bps on Wednesday and Thursday to settle at 13.3% and 13.6% respectively before closing Friday 15bps lower to close the week at 13.4%.

However, the Debt Management Office (DMO) held a bond auction on Wednesday where the APRIL 2023 (Offered: N20.0bn, Subscription: N8.7bn, Allotted: N3.5bn), MARCH 2025 (Offered: N20bn, Subscription: N14.5bn Allotted:N8.5bn) and FEB 2028 (Offered: N30bn, Subscription: N66.7bn, Allotted:N38.5bn) instruments were issued with 4.9-year, 6.8-year and 9.8-year tenors respectively at marginal rates of 13.5% each and original coupon rates of 12.75%, 13.53% and 13.98% for the respective bonds.

Performance in the Sub-Saharan Sovereign Eurobonds was largely bullish, halting the prior week’s bearish performance as yields on 21 of 25 instruments trended southwards W-o-W while the KENYA 2019, ZAMBIA 2024 & 2021 and SOUTH AFRICA 2024 instruments rose W-o-W. This downward trend in yields is attributable to buying interest in emerging market assets as yields across the Nigerian, Ghanaian, Gabonese, Ivorian and Senegalese Eurobonds fell 10bps, 20bps, 40bps, 10bps and 10bps respectively. In addition, all instruments showed a negative YTD price change with the ZAMBIA 2024 instrument recording the highest decline of -15.1% while the NIGERIA 2018 instrument had the lowest YTD price change of -1.1% W-o-W.

Conversely, the Nigerian Corporate Eurobond Performance was bearish as yields on 6 of 11 instruments closed in the green W-o-W. The instrument with the most buying interest was FBN 2020 (down 18bps to 9.1%) while DIAMOND 2019 had the most sell-offs (up 45bps to 8.0%). Nonetheless, DIAMOND 2019 and FBN 2021 instruments were the best performers YTD, up 4.4% and 3.4% respectively. We expect the rebound in the Sub-Saharan Eurobonds market amid rising yield in systematically important developed central banks to be sustained in the near term.