Nigeria & Global Markets: Review & Outlook

Global Equity Market Review and Outlook: Global Markets to Remain Fragile due to Trade War Uncertainties
The resignation of Gary Cohn (the Chief Economic Adviser to the US President) and uncertainty surrounding plans by President Trump to impose a 25% tariff on steel and a 10% tariff on aluminum imports put global markets in a jittery mode at the start of week. However, market stabilized towards the end of the week following the announcement by the US President to exempt Canada and Mexico – two of the top five exporters of aluminum and steel to the US – and the decision to consider other countries on a case by case basis.

As a result, all indices in the developed markets were up W-o-W as of writing. The US S &P 500 rose 1.8% while the US Nasdaq and UK FTSE inched 2.3% apiece W-o-W.  The positive sentiment was evident in Eurasian markets as all indices we track in the region closed in the green. France’s CAC 40 jumped 2.9% higher W-o-W while Germany’s XETRA DAX climbed 3.9% W-o-W. Similarly, Japan’s Nikkei appreciated 1.4% while Hong Kong’s Hang Seng gained 1.3% following President Trump’s announcement on Thursday as well as price appreciations in financial services stocks.

Emerging markets also strengthened, with the South African FTSE/JSE All Share Index the highest gainer, up 1.9 W-o-W due to developments in the socio-political space which have buoyed investor confidence. Despite fears of a possible trade war between the US and China, investor sentiment remained upbeat in China with the Shanghai composite improving 1.6% W-o-W. Likewise, Russia’s RTS appreciated 0.9% W-o-W. On the flipside, India’s BSE Sens declined the most, falling 2.2 % W-o-W while Brazil’s Ibovespa closed flat W-o-W.

In African markets, profit taking in the Ghanaian market was sustained as the GSE Composite fell 2.4% W-o-W. Likewise, Kenya’s NSE 20 declined 1.0% W-o-W, stemming from the government’s declaration of a shortfall in revenue and subsequent plans to implement spending cuts. On the other hand, Egypt’s EGX 30 and Nigeria’s All Share Index appreciated 6.7% and 0.7% W-o-W respectively.

Domestic Equity Market Review and Outlook: Earnings Expectation to Drive Market Direction in the Near-Term
The local bourse sustained its positive performance for the second consecutive week as the All Share Index (ASI) rose 0.7% W-o-W to 43,167.87 points while YTD return improved to 12.9%. We attribute this largely positive performance to buying interest in medium cap stocks in anticipation of the release of earnings scorecards. Consequently, market capitalization increased by N104.8bn to settle at N15.5tn. In the same vein, activity level strengthened as average volume and value traded rose 27.6% and 1.9% to 553.7m units and N7.9bn respectively. CAP (309.0m), ZENITH (131.0m) and STERLING (123.7m) were the top traded stocks by volume while GUARANTY (N4.6bn), ZENITH (N4.0bn) and DANGCEM (N2.1bn) were the top traded by value.

The bourse kicked off the week with a bullish performance (ASI jumped 1.5%) due to gains in DANGCEM, SEPLAT and GUARANTY. This was sustained on Tuesday, as the benchmark index gained 66bps on the back of buying interest in SEPLAT and UNILEVER ; the rally in the former largely stems from the impressive earnings recorded for FY:2017 and positive outlook on performance for 2018. Midweek, investors booked profit in previous advancers - DANGCEM, NIGERIAN BREWERIES and GUARANTY – which dragged the ASI 1.5% lower. On Thursday, the market rebounded, up 0.3% primarily due to upticks in UNILEVER, STANBIC and GUARANTY and this was extended into Friday (+0.2%).

Across sectors, performance was largely mixed as 3 of 5 indices closed in the green. The Oil & Gas appreciated the most, up 5.6% largely driven by rally in SEPLAT (+12.1%). The Consumer and Industrial Goods indices followed suit, rising 1.7% apiece following gains in UNILEVER (+20.7%) FLOURMILL (+12.1%), WAPCO (+3.9%) and BETAGLAS (+5.0%). On the flipside, price depreciation in ZENITH (-2.1%), GUARANTY (-1.6%), WAPIC (-7.7%) and AIICO (-5.5%) dragged the Banking and Insurance indices 1.1% and 0.7% lower W-o-W.

Investor sentiment measured by market breadth (advance/decline ratio) improved to 1.1x from 0.8x recorded the prior week as 42 stocks advanced relative to 38 socks that declined. JAPAUL OIL (+54.0%), HMARKINS (+34.5%) and LASACO (+25.7%) were the best performing stocks for the week while REGALINS (-27.1%), AFRINSUR (-13.9%) and FTNCOCOA (-13.5%) led the losers chart. Earnings of companies that have published results have been largely positive and we expect market performance to remain upbeat as investors take position in fundamentally sound stocks in anticipation of more corporate scorecard releases.

Money Market Review and Outlook: Interbank Rates Trend Lower on Improved System Liquidity
In the Money Market this week, rates trended lower on 3 of 5 trading days despite sustained OMO mop-ups by the CBN (held on all days save for Wednesday) to maintain system liquidity. At the start of the week, Open Buy Back (OBB) and Overnight (OVN) rates inched 1.9 ppts and 2.7ppts higher to close at 11.7% and 12.7% respectively consequent on tighter system liquidity (settled at N298.1bn from N919.0bn on the previous Friday) as the CBN carried out an OMO auction in which the 94-day (offered: N50bn Sold: N0.69bn) and 277-day instruments (offered:N150bn, Sold:N89. 2bn) were offered.

By Tuesday, OBB and OVN rates trended higher, closing at 12.6% and 13.4% respectively as the CBN continued its OMO mop-up, offering N50.0bn for the 114-day instrument (No sale) and N100.0bn for the 219-day (sale of N67.7bn) bills. Midweek, OBB and OVN rates trended lower to 11.3% and 12.5% respectively as there was no OMO mop-up conducted by the CBN. On Thursday, OMO maturity of N113.6bn partially offset the impact of an OMO auction sale of N150.0bn of the 259-day instrument; hence, system liquidity remained robust at N412.4bn while the OBB and OVN rates declined to 9.5% and 10.2% respectively before closing the week at 8.5% and 9.2% on Friday - indicative of a 1.3ppt and 0.8ppt W-o-W decline.

In the treasury bills market, performance was mixed as rates across benchmark tenors trended lower on 2 of 5 trading days. The trading week started on a relatively quiet note with average rate across benchmark tenors staying flat at 13.9% as the CBN continued its OMO mop ups.  By Tuesday however, buying interest was recorded at the shorter end of the curve and this pulled average rate 5bps lower to 13.9%. The bullish sentiment was extended till Wednesday as rates further declined 9bps on average on account of the decision by the CBN to withhold OMO auctions on the day which spurred buying interest in short tenored instruments. This positive trend was reversed on Thursday as sell-offs were recorded across shorter tenored instruments which drove average rate 10bps higher. Average rate closed the week at 13.9%, indicating a 3bps W-o-W decline.

In the coming week, despite an OMO maturity of N261.9bn, we expect rates to remain at similar levels as the CBN continues its OMO auctions to mop up excess liquidity.

Foreign Exchange Market Review and Outlook: Naira Stable across Segments on Sustained Liquidity Injections
This week, the CBN continued with its weekly FX intervention sales, offering US$100.0m via the Wholesale Secondary Market Intervention Scheme (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 Invisibles segment. As a result, the naira was stable at all segments of the FX market.

The CBN Spot rate opened the week at N305.85/US$1.00, appreciated 5kobo to N305.80/US$1.00 on Tuesday and maintained this level till the end of the week. Similarly, the naira remained flat at the parallel market, trading at N362.00/US$1.00 throughout the week. At the Investors’ & Exporters’ (I&E) FX Window, the NAFEX rate opened the week flat at N360.14/US$1.00 and subsequently traded within a tight band of N360.10-N360.45/US$1.00. The NAFEX rate closed at N360.08/US$1.00 on Friday, indicating a 6kobo appreciation W-o-W. Activity level in the I&E Window waned as total turnover declined by 56.8% to US$539.9m (On Thursday) from US$1.2bn 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$105.0m to US$3.3bn relative to US$3.2bn recorded the previous Friday which implies a 3.3% increase in market size. The APR 2018 instrument (contract price: N360.59) is the most subscribed with a total value of US$659.9m while JAN 2019 instrument (contract price: N361.94) is the least subscribed with a total value of US$45.5m.

In line with trend, we expect the CBN to maintain its weekly interventions in the FX market, thus keeping rates at similar levels across segments.

Bond Market Review and Outlook: Flattish Performance in Local Market as Investor Interest in Corporate Eurobonds Remains Upbeat
Performance of the local bond market was largely flattish this week with marginal movements in yield. Average yield stood at 13.8% on Monday (the same level recorded the previous Friday) although we observed buying interest across longer tenored bonds with APR 2037 experiencing the most buying interest (down 5bps to 13.0%). However, on Tuesday sentiment was mildly bearish as yield on 10 of 16 instruments rose, driving average yield 3bps higher. We observed renewed investor interest at the shorter end of the curve midweek as yields on MAY 2018, JUNE 2019 and OCT 2019 bonds fell 32bps, 10bps and 4bps to 15.0%, 14.0% and 13.9% respectively.

Average yield remained at the same level till the end of the week, closing at 13.8%, implying a flat performance W-o-W. Near term outlook for bond yields remains broadly anchored on FX market stability and inflation development. In the coming week, the NBS is due to release February 2018 inflation report; we forecast Headline Inflation (Y-o-Y) to further moderate to 14.8% from 15.1% in January. In the absence of negative inflation surprises in coming months, our yield expectation remains bullish as external sector balance stabilizes further on the back of stable oil prices and robust foreign portfolio inflows.

Performance of SSA Sovereign Eurobonds this week was largely bearish as yield on 14 of 22 instruments under our coverage advanced W-o-W. Despite the negative performance of the market, average yield across Senegalese instruments fell 3bps W-o-W in line with the increased appetite shown at the Eurobond issuance in the week. On Tuesday, Senegal joined other African countries – Nigeria, Egypt and Kenya – which have already issued Eurobonds in 2018. The West African country issued US$2.2bn in two tranches - US$1.2bn at 4.75% for a 9-year tenor and US$1.0bn at 6.75% for a 29-year tenor. A total of US$10.3bn was received as bids signaling sustained investor interest in high yield emerging and frontier FCY debts as well as improving domestic macroeconomic fundamentals and remarkable stable political environment in the country.

Sentiment towards Nigerian Corporate Eurobonds remained upbeat, as yield on 9 of 12 instruments declined W-o-W. During the week, DIAMOND 2019 enjoyed the most buying interest (YTM down 45bps to 8.6%) while FIDELITY 2022 experienced the most sell off (YTM up 14bps to 9.3%). The best performing instruments YTD are DIAMOND 2019 and FBNH 2021 - up 3.6% and 3.6% respectively.