Weekly Market Review and Outlook –Week Ended Feb. 19, 2016

The Nigerian equities market was broadly bearish this week as the benchmark index dipped 1.0% W-o-W to settle at 24,432.51 points on Friday, while YTD loss worsened to 14.7%. Similarly, market capitalization expanded N58.74bn to close the week as N8.40tn.  Performance was broadly driven by profit taking in DANGCEM which declined 4.6% W-o-W. However, activity level worsened, as average volume and value depreciated 44.7% and 89.7% W-o-W to 172.4m units and N925.39bn respectively.

Performance across sectors was mixed. The Oil & Gas index advanced the most, up 3.3% W-o-W, consequent on bargain hunting in SEPLAT (+20.0%), trailed by the Consumer Goods  index which improved 0.2% W-o-W, buoyed by the W-o-W gain in NIGERIAN BREWERIES  (+2.7%) and NESTLE (+0.7%). The Banking Index dipped 4bps amid price depreciation in ZENITH (-5.7%). Contrarily, sell offs in DANGCEM (-4.6%) drove the Industrial Goods Index south to led sector laggards. Likewise, the Insurance Index fell 2.2% W-o-W on account of losses in CONTISURE (-8.0%) and AIICO (-3.6%).

Market sentiment deteriorated this week, as market breadth -measured by advancers/decliners ratio- settled at 0.58x (against previous of 0.86x) as 21 stocks gained while 36 stocks depreciated. The best performing stocks for the week were SEPLAT (+20.0%), MAYBAKER (+17.5%) and GLAXOSMITH (+15.7%) while UNITYBNK (-11.8%), PORTPAINT (-10.2%) and LEARNAFRCA (-10.0%) declined the most. Given weak earnings expectation and current market valuation, we believe market performance will continue to be driven by speculation as active traders take advantage of irregular price movements. Nevertheless, we believe current valuation is attractive to dividend investors ahead of corporate declarations in the interim.

Money Market
On the back of the CBN FX intervention auction refund for unfulfilled bids last Friday to DMBs (Deposit Money Banks), liquidity in the financial system remained surfeit on Monday, rising to over N1.1tn. However, money market rates were barely changed from their low levels as the OBB (Open Buy Back) rate closed flat from the previous trading session at 0.5% and O/N (Overnight) rate rose marginally by 2bps to 0.9%. Rates trended higher on Tuesday and Wednesday as DMBs provisioned for the weekly CBN FX intervention auction (on Thursday) which largely accounted for the N711.9bn contraction in aggregate banks Naira liquidity. Consequently, OBB rate closed at 3.5% and 4.0% whilst ON rate closed at 3.8% and 4.4% on Tuesday and Wednesday respectively.

Following a T-bills maturity of N142.4bn on Thursday and a rollover of the same amount, system liquidity levels were maintained on Thursday but money market rates dropped on Friday after the CBN FX intervention auction refund of unfulfilled bids to DMBs raised liquidity levels. OBB and ON rates settled at 0.6% and 1.0% respectively, rising 10bps a piece W-O-W respectively.

Performance in the T-bills market was mixed this week as rates reacted to liquidity dynamics. On Monday, rates dropped 10bps from Friday to close at an average of 5.9% driven by bullish sentiment at the short end of the curve. However, the trend was reversed on Tuesday as liquidity declined and investors traded cautiously ahead of the T-bills auction, pushing average rates up 20bps to 6.1%.  There was a T-bills maturity of N142.4bn and a rollover of the same amount, the T-bills auctioned were the 91days, 182days and 364days at stop rates of 4.9%, 7.3% and 9.0% respectively. As the Bills were issued at relatively lower stop rates (to February 3rd auction), sentiment swung bullish in the T-bills market with average yields settling at 6.0% on Thursday. Higher liquidity in the interbank market drove further bullish sentiment on Friday as average yields closed at 5.8% rising 1bp W-o-W. Bar any OMO auction, we expect the interbank market to stay liquid at market open next week but contract by mid-week as banks make provisions for currency auction. However, we expect rates to trend lower from Thursday due to expected inflow of N257.9bn from maturing OMO bills on Thursday and FX intervention refunds.

Foreign Exchange Market
The volatility in the foreign exchange market at the BDC and Parallel market segments were at unparalleled levels this week as the US$/Naira exchange rate depreciated to unprecedented record lows, triggered by both fundamental supply gap of FX in the economy and speculations of further tightening of exchange rate rules. The official (CBN) and interbank rates were stable all week at N197.00/US$1.00 and N199.10/US$1.00 respectively.

However, FX rose astronomically all week at the BDC and parallel segments of the market, with rates trading at N337/1US$ at the start of the week, rising to N365/1US$ by Thursday at the BDC and record high N400/1$US at the parallel market. Owing to the stance of the CBN and Fiscal authorities on foreign exchange adjustments, the increase in speculative activities at the less-regulated segments of the market and widening spread between the official and parallel market rates may not likely generate any reaction from regulators in the short term. However, the mounting demand for FX – as shown in the huge decline in money market liquidity when DMBs made provisions for Thursday FX auction – suggests an adjustment may be unavoidable in the medium term. Speculative activities may not likely reduce until more certainty and transparency are brought to bear in FX management.

Bond Market
The performance of the bond market was mixed this week but broadly bullish as average yields on benchmark bonds dropped 11bps to 11.3 W-O-W. The market opened soft on Monday with few deals while activities centered on the JAN 2026 instrument (58.6% of turnover on the FMDQ platform) which the DMO announced as a new 10year FGN benchmark bond on the same day.

Sentiment was largely bullish on shorter term bonds and the JAN-2026 benchmark, pushing average yields downwards by 13bps to 11.3%. However, profit taking in short to mid-term bonds was observed by midweek as average rates closed at 11.4%across the on Tuesday and Wednesday.  Average yields declined 10bps to 11.3%on Thursday on the back of renewed buying interest at the short end of the curve, eventually weakening by 6bps on Friday.  With the current easy monetary policy, we expect yields to stay at current levels with the inflection point likely to come in the medium term when monetary policy is readjusted to current realities.