Review and Outlook of Global, Nigeria Markets –Week Ended May 4, 2018

Global Equities Markets Review and Outlook: Trade War Uncertainties to Dictate Global Market Direction in the Near Term 
Global equity markets performance this week was mixed as 8 of the 16 indices under our coverage closed in the red. We believe the inconclusive discussions by US and China on trade disputes weighed heavily on global performance especially in Asian markets this week. Nevertheless, reports out of China suggest that the two parties are still committed to resolving trade disputes through dialogue. In light of this, we believe this could continue to dictate performance of global markets in the near term. Also, in the commodities market, oil price slid 0.2% W-o-W to US$73.44/b (as of writing). Nevertheless, oil remains at its highest level since 2015 majorly due to OPEC and allies’ agreement to extend production cuts as well as geopolitical tensions.

In the developed markets, the NASDAQ was the biggest gainer, up 0.9% while the UK FTSE All Share appreciated 0.8% W-o-W largely driven by positive earnings as well as an increase in M & A activities. On the other hand, the U.S. S&P 500 shed 0.6% W-o-W respectively following the release of some unimpressive quarterly results as well as guidance by the US Fed that inflation could rise faster than expected.

In markets in the Europe and Asia classification, Hong Kong’s Hang Seng was the lone loser, down 1.2% as investors traded cautiously following uncertainties of the US-China trade talks. Nonetheless, all other indices in the segment trended northwards.  Germany’s XETRA DAX and France’s CAC 40 rose 1.9% and 0.6% respectively W-o-W while Japan’s Nikkei 225 closed the week flattish.

Performance across the BRICS markets was mixed as 3 of 5 indices declined. Brazil’s Ibovespa shed 3.4% on the back of losses in the financial, real estate and consumer goods sectors. Also, Russia’s RTS and India’s BSE Sens fell 1.8% and 0.2% respectively W-o-W. On the other hand, South Africa’s FTSE/JSE All Share and China’s Shanghai Comp appreciated 0.3% apiece from the previous week.  South Africa’s equity market gained this week following the sustained weakening of the Rand against the Dollar while the Shanghai composite surprisingly recorded gains despite investor fears tied to trade war uncertainties apprehensions.

Similarly, African markets were bearish as only one index under our coverage- Ghana’s GSE Composite (+0.4%) - appreciated W-o-W. Egypt’s EGX 30 and Kenya’s NSE 20 fell 1.6% apiece, largely due to profit taking. Likewise, Nigeria’s All Share Index slid 0.1% as investors booked profit in previous advancers.

Domestic Equities Market Review and Outlook: Buy Interest in Mid and Large Cap Stocks to Buoy Performance in Coming Week
Performance of the Nigerian equities market was largely bullish this week as the All Share Index (ASI) appreciated on 3 of 4 trading sessions in the week. However, W-o-W the benchmark index shed 0.1% to settle at 41,218.72 points while YTD return stood at 7.8%. Similarly, market capitalization decreased by N9.5bn to N14.9tn. The week’s negative performance was largely driven by sell offs in large cap stocks – NESTLE (-1.2%), NIGERIAN BREWERIES (-0.8%) and SEPLAT (-2.0%). On the contrary, activity level improved as average volume and value traded rose 3.7% and 6.7% to 332.7m units and N5.3bn respectively. The week’s top traded stock by volume are UBA (217.0m), MBENEFIT (132.5m) and ACCESS (108.4m) while DANGCEM (N3.6bn), GUARANTY (N2.8bn), and UBA (N2.5bn) were the top traded by value.

The local bourse started the week on a positive note, extending gains from the previous Friday as the ASI rose 6bps on the back of price appreciation in - GUARANTY, DANGCEM and FBNH. Following the resumption of trading activities on Wednesday, the bullish run was sustained as the ASI increased 9bps due to gains in UBN, 11PLC and UBA. However, on Thursday, the bullish run was halted as profit taking in large cap stocks dragged the benchmark index 48bps lower. To close the week, the market rebounded, up 27bps.

Performance across sectors was largely bearish this week as 3 of 5 indices under our coverage declined W-o-W. The Consumer Goods index declined the most, down 1.9% W-o-W due to profit taking in NESTLE (-1.2%) and NIGERIAN BREWERIES (-0.8%). Similarly, the Oil & Gas and Insurance indices shed 1.4% and 1.1% driven by losses in SEPLAT (-2.0%), NEM (-1.8%) and AIICO (-1.4%). On the flip side, gains in GUARANTY (+2.0%), UBA (+0.9%), and DANGCEM (+0.2%) buoyed the performance of the Banking and Industrial Goods indices 1.6% and 1.1% higher.

Investor sentiment, measured by market breadth, strengthened to 1.1x (35 advancers/31 decliners) from 0.8x recorded the prior week. The best performing stocks this week were CILEASING (+29.5%), UNITY (+20.0%) and CCNN (+19.5%) while DANGFLOUR (-18.6%), ETERNA (-13.0%) and PRESTIGE (-11.8%) were the worst performers. In the coming week, we anticipate a positive performance anchored on buy interest in large and mid-cap stocks following largely positive Q1:2018 earnings. However, we do not rule out the possibility of profit taking during the week.

Money Market Review and Outlook: Drop in System Liquidity Leads to Bearish Performance in the Money and T-Bills Market
In the money market this week, the Open Buy Back (OBB) and Overnight (OVN) rates remained relatively flat W-o-W. At the start of the week, OBB and OVN rates fell by 0.9ppts and 1.0ppt to 1.9% and 2.4% respectively relative to 2.8% and 3.4% recorded the previous Friday. By midweek, the OBB rate remained unchanged at 1.9% while the OVN rate declined 21bps to 2.2% despite a drop in system liquidity to N461.7bn from N503.9bn on Monday.

In addition, the effect of an OMO inflow worth N314.0bn was offset by an N600.0bn OMO mop up on Thursday, thus OBB and OVN rates inched 2.5ppts and 2.8ppts to 4.4% and 5.0% respectively. At the Auction, the CBN issued 105-day (offered: N150.0bn, subscription: N175.5bn sale: N175.5bn stop rate: 11.0%) and 245-day (offered: N350.0bn, subscription: N826.8bn, sale: N424.5bn, stop rate: 12.1%) which were largely oversubscribed. At the close of the week, OBB and OVN rates closed lower, down 0.36% and 0.33% respectively. With the reduction in OMO auctions in the past month coupled with the moderating yield environment, we anticipate sustained interest in longer dated instruments in the near term. On Friday OBB and OVN rates settled at 2.8% and 3.3%. Next week, N265.5bn of OMO instruments will mature on the 10th of May 2018 and we anticipate this to impact on money market rates accordingly.

In the Treasury Bills market, performance was largely bearish as average rate across tenors closed higher on 3 of 4 trading days. The week kicked off negative as average rate across benchmark instruments rose 5bps to 11.7%. This was quickly reversed by midweek when the CBN conducted a Primary Market Auction offering lower rates across the 91-day (offered: N9.5bn, subscription: N47.8bn sale: N9.5bn stop rate: 10.3%), 182-day (offered: N47.7bn, subscription: N112.1bn sale: N47.7bn stop rate: 11.0%) and 364-day (offered: N38.2bn subscription: N242.9bn, sale: N38.2bn stop rate: 11.1%) instruments relative to prevailing market prices, hence rates fell 77bps to 11.7%. On Thursday, the bearish trend re-surfaced leading to rise in average benchmark rate to 11.6%.

The result of the auction displays a deliberate moderation in shorter dated yields as well as increased investors’ appetite for long dated treasury bills instruments. Thus, in the short term, we expect the Treasury Bills market to remain bullish even as yields continue to moderate.

Foreign Exchange Market Review and Outlook: System Liquidity to Sustain Trades within Tight Bands
In line with trend, the Central Bank of Nigeria (CBN) sustained its weekly intervention in a bid to improve system liquidity and ensure stability across the different segments of the foreign exchange market by injecting US$210.0m (on Wednesday, 2nd of May 2018) via the Wholesale SIMS (Secondary Market Intervention Auction). As a result, the naira traded within tight bands across the market.

The CBN official spot rate opened the week at N305.70/US$1.00, a 5 kobo depreciation from the previous week, and stayed flat all through the week. Similarly, in the parallel market, rates were unchanged all week opening and closing the week at N362.00/US$1.00. At the Investors & Exporters’ (I&E) window, the NAFEX rate opened the week at N360.08/US$1.00, but declined on Wednesday to N360.17/US$1.00 and remained unchanged till the close of the week. Activity level in the I&E Window further weakened this week, falling 9.2% W-o-W to US$782.1m from US$860.9m recorded last week.

In the FMDQ OTC futures market, total value of open contracts increased 8.9% to US$3.4bn from US$3.2bn recorded last week. The NOV 2018 instrument was the most subscribed instrument during the week with a total value of US$585.3m while the April 2019 was the least subscribed with a total value of US$20.0m.

Next week, we expect rates to continue to trade within a tight band across different segments of the market as we remain confident of the CBN’s ability to ensure system liquidity by sustaining the weekly FX interventions.
Bond Market Review and Outlook: Sell Offs Drag Market Performance
Performance of the domestic bond market was largely bearish this week as average yield trended higher on every trading day save for Wednesday. At the start of the week, as investors sold off on longer tenored instruments, average yield rose 6bps to settle at 12.5% from 12.4% on the preceding Friday. By Midweek, average yield marginally declined 1bp on the back of renewed buy interest in mid to long tenored instruments. However by Thursday, sentiment weakened as average yield rose to 12.5%. We opine that the weakened sentiment on Thursday is largely tied to the fact that the CBN conducted OMO and T-bills PMAs on the same day. Average yield closed the week at 12.6%, indicating a 2.0% W-o-W increase. Against the backdrop of moderating yield environment, we maintain our bullish outlook as investor’s continue to take position at the longer end of the curve.

The bearish sentiment towards Sub-Saharan Africa Sovereign Eurobonds was sustained this week as yield on all instruments save for the Ghana 2023 (-0.1% W-o-W), rose. The largest sell offs were recorded in the GABON, ZAMBIA, NIGERIA, KENYA and IVORY COAST instruments which increased 0.3%, 0.6% , 0.6%, 0.3% and 0.3% W-o-W respectively. Following a largely bullish performance in 2017, all the SSA sovereign Eurobonds currently have a negative YTD return.

Nigerian Corporate Eurobonds performance was also bearish as yield on 9 of 12 instruments trended northwards W-o-W. The UBA 2022 instrument recorded the most sell-offs (up 3bps to -1.3%) while the FIDELITY 2018 instrument recorded the most buy interest (down 61.2% to -0.7%). The best performing instruments YTD are DIAMOND 2019 and FBN 2021 instruments, up 4.8% and 2.8% YTD respectively.

We expect sentiment on SSA sovereign Eurobonds to remain dampened by expectation of higher interest rates from developed systemic central banks.