Market Review and Outlook –Week Ended Nov. 09, 2018

Global Equities Market: US Midterm Elections Buoy Performance
This week, the uncertainties surrounding the US mid-term elections, which had affected markets for some weeks, finally cooled. The outcome of the elections triggered a global equities rally as the Democratic Party won control of the House of Representatives for the first time in eight years, although markets later pared gains towards the end of the week. The implication of the election outcome is that the House will exercise more oversight over President Trump’s decisions, which could potentially result in some measure of calm, especially as it relates to global relations. However, this could also mean further divisiveness and conflict that would eventually result in slow paced reforms and decision making, which are a bad signal for investors.

The performance of developed markets was largely bullish, even as sell offs increased at the end of the week, due to fears of a further interest rate hike by the US FED. In the United States, the S&P 500 closed higher by 3.1% and the Nasdaq Composite was up by 2.4%. However, Hang Seng was the only index that recorded a decline (-3.7%) because of the expected FED interest rate hike and a slowing economy.

Across markets in BRICS, only 2 of 5 indices were up. Brazil’s Ibovespa had the worst return at -3.2%, followed by China with a decline of 2.9%. In view of the ongoing trade war with the US, China is offering tax breaks and more financing to support private sector companies affected by the trade tensions, as well as a slowing economy. Similarly, South Africa’s FTSE/JSE All-Share was down by 1.9%. On the other hand, Russia RTS and India’s BSE Sens Indices recorded positive performances, increasing 0.5% W-o-W respectively.

In Africa, there was a bullish performance as 4 of 6 markets under our coverage recorded gains W-o-W. Egypt’s EGX30 had the best return with a gain of 4.0% W-o-W, followed by Morocco’s Casablanca MASI which increased 1.4% W-o-W while Mauritius SEMDEX increased by 0.4% W-o-W. Ghana’s GSE Composite and Kenya NSE-20 declined by 1.1% W-o-W and 0.4% W-o-W respectively. On the flip side, Nigeria’s All-Share closed the week up by 0.2% W-o-W.

In Asia and Middle East, there was a bearish performance as 4 of 5 markets under our coverage recorded negative returns due to expectations of an interest rate hike by the FED. UAE ADX General Index was worst hit as it recorded a loss of 2.1% W-o-W, trailed by Turkey’s BIST 100 Index which declined 1.2% W-o-W while Thailand SET and Qatar DSM 20 Indices declined 0.8% apiece W-o-W. However, Saudi Arabia recorded an increase of 1.8% W-o-W.

Domestic Equities Market: Buy Interest in Bellwethers Upturns Market Performance
The domestic equities market printed a bullish performance this week as investors took positions in market bellwethers – NESTLE, SEPLAT and NIGERIAN BREWERIES - hence pulling the All-Share Index (ASI) up by 0.2% W-o-W to 32,200.21 points. Consequently, the YTD loss moderated to -15.8%, while market capitalisation added N27.5bn to reach N11.7tn.

Furthermore, activity level declined as the average volume and value traded fell 14.8% and 10.6% respectively to 215.8m units and N3.6bn. The top traded stocks by volume this week were ZENITH (307.5m units), ACCESS (110.8m units) and FBNH (96.2m units), while the top traded by value were ZENITH (N7.3bn), GUARANTY (N2.4bn) and NESTLE (N2.1bn).

In terms of the direction of trading during the week, the market trend was undulating, opening on a negative note on Monday, after declining by 24bps in the trading day following sell-offs in NIGERIAN BREWERIES, UNILEVER, and DANGCEM. However, buy interest on Tuesday buoyed these stocks and the overall market by 33bps. Thereafter, the benchmark index shed 14bps on Wednesday as a result of profit-taking on WAPCO and GUARANTY, while bargain hunting on NESTLE and GUARANTY lifted the ASI on Thursday by 37bps. On Friday, however, the market recorded a marginal rise in the overall index by 0.2% despite pressure from sell-offs on UBN, GUARANTY and OANDO.

Performances across sectors under our coverage were bearish, as 3 of 5 indices closed negative W-o-W. The Industrial Goods sector led decliners after losing 3.8% W-o-W, following profit taking on WAPCO (-14.3%) and CCNN (-11.6%). Similarly, the Insurance and Banking indices shed 1.9% and 0.5% respectively W-o-W on the back of sell-offs in CONTINSURE (-4.7%), MBENEFIT (-23.3%), GUARANTY (-0.9%) and ETI (-2.8%). On the flipside, the Consumer Goods and Oil & Gas indices rose by 1.6% and 1.3% respectively W-o-W, following investors’ interest in NESTLE (+7.84), GUINNESS (+1.4%), DANGFLOUR (+0.9%) and SEPLAT (+7.0%).

Investor sentiment as measured by market breadth (advancers/decliners ratio) strengthened to 0.7x from 0.3x in the previous week, as 25 stocks advanced against 38 stocks that declined. Best performing stocks this week are UACN (+11.1%), NPFMCRFBK (+11.1%) and PRESCO (+10.7%) while MBENEFIT (-23.3%), FLOURMILL (-16.8%) and WAPCO (-14.3%) led decliners. Despite the mild uptick in performance this week, evidenced by improvement in market breadth, we believe overall market sentiment remains weak due to a general lack of drivers to sustain the market in the positive region.

Foreign Exchange Market: CBN’s Support Persists as FX Reserves Pare
The decline in the foreign exchange reserves continued in the week, as the Central Bank of Nigeria (CBN) sustained interventions. Hence, the external reserves declined to US$41.8bn (7/11/2018) from US$47.6bn at start of H2:2018, indicating a decline of US$5.8bn (-12.2%). Interestingly, the continuous decline in the foreign reserves coincides with the rise in prices of crude oil, which has maintained an average price of US$80.00/b over the last one month.

In the week concluded, the Naira remained relatively stable across all segments of the market, as the CBN spot rate opened the week at N305.35/US$ on Monday but appreciated by 5kobo to close the week at N305.30/US$. At the parallel market, the naira opened the week at N362.00/US$ and closed lower at N363.00/US$, while at the I & E window, the naira gained 41 kobo after opening the week at N361.18/US$ to settle at N360.77/US$. Also, activity level in the NAFEX I&E Window waned by 37.9% W-o-W to US$0.8bn from US$1.2bn in the prior week. In the FMDQ OTC open futures contract market, total subscriptions rose 2.6% W-o-W to US$4.9bn from US$4.8bn in the previous week, with significant buying interest noticed on the OCT-2019 instrument.

In the coming week, we expect the naira to remain stable, as we expect continued interventions in the foreign exchange market by the CBN to keep the naira at its current levels. However, given the pace of depletion of the reserves, we view the sustained interventions as precarious over the medium-term, which could result in action from the monetary authority.

Money Market: OMO Auctions Increase as Liquidity Increases
The CBN conducted two OMO auctions in the week in response to the heightened system liquidity, offering instruments worth N681.2bn. On the 6th of November, the CBN auctioned the 121-day, 184-day and 338-day instruments at marginal rates of 11.5%, 13.0% and 14.5% respectively, while on the 8th of November 91-day, 182-day, and 357-day instruments were offered at 11.5%, 13.0% and 14.5% accordingly. Consequently, financial system liquidity pared to N396.9bn by the close of the week.

The secondary market reacted to the OMO auctions as the average yield on benchmark instruments increased by 0.3%, while the OBB and OVN rates declined to 3.7% and 4.3%, representing declines of 41bps and 58bps respectively, as the still buoyant liquidity levels impacted rates towards the end of the week. We envisage multiple OMOs in the coming week to further manage liquidity levels downwards as OMO maturities worth N552.0bn are expected on the 15th of November 2018. Also, a primary market auction will be held on the 12th of November, when the CBN will auction instruments worth N133.3bn, while an equal amount will mature.

The appetite for T-Bills remained strong in the week, as investors continued to trade at a high pace, despite multiple OMOs in the week. While rates have increased in successive weeks, we envisage a further hike in rates as we move towards the general election given the expectation of increased capital flow reversals.

Bond Market: Yields Rise as Election Nears
The average yield on FGN bonds increased moderately by 6bps W-o-W to 15.4% as activities levels have remained relatively weak, with the average value of bonds traded declining to N84.9bn in the week from N147.4.0bn between 29th of October and 2nd of November. There were yield increases recorded right across the curve, as demand has tapered in line with expectations given weaker external demand (given heightened risk factors and policy normalisation of systemically important central banks) and tapered domestic demand (given attractive short-term rates). We expect this trend to persist through the rest of Q4:2018.

In the sovereign Eurobond market, average ask-yield declined by 0.1% to bring the average yield to 7.2% with the Zambia Sovereign Eurobonds recording the largest declines, after yields on the bonds pared by an average of 2.3%. The demand for Nigeria Sovereign Eurobonds was weak all through the week, with an average increase of 0.1% recorded across bonds to settle the average yield at 7.3%. Also, Nigeria is expected to shortly commence on roadshow prior to the issuance of a US$2.8bn Eurobond, which was recently approved by the Senate and expected to be issued later in 2018. The issuance of this additional debt would bring the country’s total outstanding Eurobond issuances to US$11.1bn.

In the corporate Eurobonds space, the average yield declined by 0.3% to bring the average yield to 8.9%. In the week, the Diamond Bank Plc 2019 bond recorded a significant decline in value after news relating to the bank filtered into the market. However, the bank has received an offer from a foreign investor to recapitalize the bank and sustain the bank’s capital adequacy ratio above the threshold of 15.0%. The bank recorded a CAR of 16.3% as at 9M:2018. Also, the Guaranty Trust Bank Plc 2018 bond matured on the 9th of November. We expect the impact of increased liquidity to result in a decline in yields for some bonds over the coming week, as re-investment ramps up.