Global & Nigeria Markets: Review & Outlook Week Ended June 17, 2016

BREXIT referendum took the centre stage in the global economy as the June 23rd date draws closer. Thus, bearish sentiments persisted in the European markets. Also, at the conclusion of the FOMC meeting during the week, the US Fed kept rates unchanged, against expectations of a hike as the committee weighed the potential impact of the referendum on the global economy.  All overhanging questions are anticipated to be answered in the coming week as voters cast their votes for or against BREXIT.

Investors’ sentiment across global equities markets under our coverage further waned as most of the indices posted negative performances for the week. In the developed markets, the UK FTSE declined for the third consecutive week, losing 2.0% W-o-W as BREXIT uncertainties weighed on sentiments. The US Markets also closed in the red as the S & P 500 and NASDAQ dipped 1.0% and 0.9% W-o-W respectively following the outcome of the FOMC meeting during the week. European Markets also closed lower as the France CAC and German DAX slumped 2.6% and 2.2% on BREXIT concerns. In the same vein, the Asian markets closed in the red for the week as the Japan Nikkei tumbled 6.0% W-o-W after BOJ held back from additional stimulus while the Hong Kong Hang Seng fell 4.1% W-o-W.

Similarly, indices within the markets under the BRICS classification all trended southwards, save for the Russia RTS which improved 1.2% W-o-W. The South African FTSE depreciated the most, down 2.1% W-o-W while the Chinese Shanghai composite trailed, declining 1.4% W-o-W as investors sentiments were dampened by the MSCI’s decision to keep the Mainland Chinese stocks out of its globally tracked index. The India BSE and the Brazil Ibovespa also slid 3bps and 2bps W-o-W respectively.

In the African Markets, performance was mixed as the 2 indices appreciated while 2 declined. The Nigerian All Share Index appreciated the most, up 7.4% W-o-W owing to renewed buying interest from investors while the Ghana GSE improved 1.1% W-o-W. On the flipside, the Egypt EGX dipped 4.3% W-o-W while the Kenya NSE fell 1.1% W-o-W.

Weekly Equities Market Review and Outlook
The Nigerian Equities market rebounded from a negative close last week as investors’ sentiment strengthened on new FX policy framework announced during the week. Following this decision, there was increased buying interest in the market especially from domestic investors that sort to take position amidst expectation of foreign investors return to the market. The bourse opened the week in the red, down 0.5% on Monday and 0.3% on Tuesday extending losses from the previous week. The bearish trend was reversed on Wednesday, as the NSE ASI surged 3.2% on a late rally in bellwethers. The renewed buying interest persisted on Thursday as early bird positioning by investors drove the All Share Index 2.1% northwards. On Friday, the bullish run was sustained as the All Share Index gained 2.7%. Following the impressive gains in the week, the All Share Index advanced 7.4% W-o-W to settle at 29,247.27 points while YTD performance returned to the positive region, up 2.1%. Market capitalisation also grew N691.9bn to N10.0tn. Activity level during the week strengthened as average volume and value traded grew 125.0% and 159.1% to 431.7m units and N4.1bn respectively.

All sector indices closed in the green for the week. The Banking index chaired sector gainers, up 8.8% as gains in GUARANTY (+14.5%) and ZENITH (+11.0%) buoyed the index. The Industrial Goods index followed as price appreciation in DANGCEM (+11.4%) and WAPCO (+3.1%) drove the index 7.6% northwards. In the same vein, the Consumer Goods and Insurance indices improved 6.1% and 3.0% respectively on account of gains in NIGERIAN BREWERIES (+13.6%) and NEM (+13.5%) while the Oil & Gas index improved 0.5%.

As earlier stated, investor sentiments improved this week as market breadth rose to 2.1x from 0.4x in the previous week on the back of 45 advancers against 21 decliners. The Best performers for the week were CHAMPION (+27.3%), FBNH (+15.8%) and GUARANTY (+14.5%) while GLAXOSMITH (-21.9%), NAHCO (-9.6%) and BERGER (-8.4%) were the worst performing stocks for the week. In the coming week, interest in Nigerian equities is expected to stay upbeat as domestic investors maintain early bird positioning in fundamentally sound stocks.

Money Market Review and Outlook
Money market rates movement was broadly dictated by liquidity dynamics. System liquidity levels stood at N219.7bn at the start of week. OBB and O/N rates rose 0.3% a piece from Friday’s closing rates to close at 4.5% and 5.0% respectively on Monday. OBB and O/N rates moderated by 0.1% and 4bps to 4.4% and 5.0% by midweek on the back of the inflow of refunds to the deposit money banks for unfulfilled bids at last week’s FX intervention auction. There was a N152.0bn T-bills maturity on Wednesday, coupled with the impact of the FX refund on liquidity, system liquidity levels opened at N907.2bn on Thursday, OBB and ON rates dropped significantly to 1.3% and 1.8% respectively by the end of Thursday, eventually closing the week at 1.6% and 2.2%, down 2.6% and 2.5% W-o-W.

Activities in the Treasury bills market were mixed this week. Average T-bills rate declined 0.2% to 8.2% at the end of Monday’s trading session. Average T-bills rate further declined 5bps to 8.2% by midweek. There was a T-bills maturity of N152.0bn on Wednesday and a rollover of another N229.0bn, N77.0bn more than the maturing amount, consequently average T-bills rate rose 0.2% to 8.4% on Thursday. On Friday, the CBN mopped up N205.9bn at stop rate of 13.5%, as a result, average T-bills rates surged to 9.2%, rising 0.8% W-o-W.

In the week ahead, bearing in mind current liquidity levels (N972.3bn as at market opening on Friday) and the termination of FX intervention auctions by the Apex Bank, we expect money market rates to adjust to liquidity dynamics as well as OMO auctions during the week.

Foreign Exchange Review and Outlook
The Apex Bank finally released the much awaited flexible FX policy guidelines, surpassing consensus expectation. The new policy includes the adoption of a single FX market structure via the interbank market whilst CBN participates through interventions. Foreign Exchange Primary Dealers (FXPDs) will be engaged by the CBN for large sized trades while other operators such as Non-FXPDs, Oil Companies, Oil Services Companies, Exporters and End-Users will operate as market participants. In addition to having a strong FX trading capacity, FXPDs will be appointed on meeting at least two of three criteria which include; 1) shareholders fund unimpaired by losses of N200.0bn, 2) minimum of N400.0bn in total foreign currency assets and  3) minimum liquidity ratio of 40.0%. Our estimates suggest that all the Systemically Important Banks with the exception of Skye Bank should meet at least two of these criteria.

The new FX policy also includes the introduction of derivatives products, done in partnership with FMDQ as risk management tools. According to FMDQ, the proposed Naira-settled Over the Counter (OTC) FX futures are “Non-deliverable forwards”. This is expected to help foreign investors hedge their FX exposures in the Nigerian currency market. Therefore, this should signal the reversal of foreign capital outflows at the peak of the FX crisis. Our major concern relates to the 41 items which according to the CBN would remain inadmissible for FX transactions at the interbank market, thereby creating a reason for the parallel market to thrive, especially as the Bureau De Change operators are not allowed to operate in the interbank market.

Earlier this week, Naira traded as low as N370.00/US$1.00 at the parallel market but appreciated to N355.00/US$1.00 on Friday following the announcement. Market rate for the local unit is expected to be determined in the week ahead as the new FX policy framework becomes operational on Monday. In the interim, interbank market rate is expected to spike whilst parallel market rate is likely to converge towards the interbank rate on increased supply.  On a whole, we reiterate the concluding remark of the CBN governor that market participants should “Be calm, no need to Worry, everything is fine”.

Bond Market Review and Outlook
Activities in the bonds market were largely bearish at the start of the week as investors repositioned their portfolios ahead of the monthly Debt Management Office’s (DMO) bonds auction scheduled for midweek. Yields rose at the longer end of the curve throughout the week. Average yield across benchmark bonds rose 0.1% at the end of the first trading session of the week to close at 14.1% (from 14.0% last Friday). However average yields across moderated 4bps by midweek.

At Wednesday’s Primary Market Auction (PMA) the DMO auctioned N15.0bn of the FEB 2020, N40.0bn of JAN 2026 and N50.0bn of MAR 2036 bonds. The auction was oversubscribed by 63.0%, similar to recent PMAs. N22.0bn of FEB 2020, N40.0bn of JAN 2026 and N50.0bn of MAR 2036 bonds were allotted at marginal rates of 14.2%, 14.4% and 15.0% respectively. Average marginal rates cleared at 14.5%, 90bps higher than the average rate at the May auction (13.6%). This highlights that investors are pricing macroeconomic realities particularly the new inflation figures into their valuation of bonds. The bias towards the FEB 2020 bond, which was over-allotted (N22.0bn as against the offered N15.0bn) by 46.7% is not surprising given that it is the only instrument trading at a premium amongst the offered bonds.

Average yields across benchmark bonds closed the week at 14.4%, up 0.4% W-o-W. In the week ahead, we expect yields to moderate as appetite in the Nigerian bonds market strengthens ahead of improved interest from foreign players following the new FX policy.