Global & Nigeria Markets: Review & Outlook

Global Market Review and Outlook
A major event that took place in the global space this week was the decision of the US to pull out of the Paris Global Climate agreement. In reaction to this oil prices trended lower on the back of the threat of increased production from shale producers in the US. The decision came closer to the end of the week so we expect to see investors’ reaction in the weeks ahead.

Nonetheless, across the Global indices under our coverage, performance was largely positive. In the developed markets the UK FTSE advanced 0.3% W-o-W despite uncertainties trailing the general elections set to hold on the 8th of June. Likewise, the US S&P and NASDAQ appreciated 0.6% apiece W-o-W on the back of positive reactions to the recently released private sector employment numbers.

Across the BRICS classification, performance was bearish as all indices depreciated save for the India BSE SENS which rose 0.8% W-o-W. The Brazil IBOVESPA and Russia RTS dipped 2.8% and 1.0% respectively W-o-W mainly due to the decline in global oil prices. Likewise, the South African FTSE fell 1.7% W-o-W while the Chinese Shanghai Composite slid 0.1% W-o-W as the release of weaker manufacturing data weighed on sentiment.

All the indices within our Europe and Asia classification trended northwards W-o-W. The Japanese NIKKEI appreciated the most (+2.5% W-o-W), extending gains to the second consecutive week. Similarly, the German DAX and France CAC 40 advanced 1.2% and 0.3% W-o-W on renewed investor appetite for European equities. In the same vein, the bullish run of the Hong Kong Hang Seng (1.0% W-o-W) was stretched into the fourth consecutive week.

Across the African Markets, the Nigerian All Share Index appreciated the most, up 7.9% W-o-W on the back of improvements in the FX market as well as macroeconomic fundamentals while the Egypt EGX 30 rose 2.8% W-o-W. Contrarily, the Ghana GSE slid 0.1% W-o-W while the Kenya NSE closed flattish.

Equities Market Review and Outlook
Since the launch of the Investors’ and Exporters’ (I&E) FX window, the Nigerian equities market has appreciated on 24 of the 28 trading days. The generally positive sentiment in the bourse was evident in trading activities this week as the benchmark index advanced on all trading days of the week. Notably, on Friday, the largest daily gain since May 2016, was recorded as the ASI grew 3.5%. Consequently, the Nigerian equities market appreciated 7.9% W-o-W to close at 31, 371.63 points while YTD return strengthened to +16.7%. Performance was buoyed by price appreciation in NIGERIAN BREWERIES (+10.4%), DANGCEM (+15.7%) and ACCESS (+17.7%). Investors gained N797.6bn as market capitalization rose to N10.8tn. Similarly, activity level improved as average volume and value traded expanded 54.9% and 49.4% to 708.4m units and N8.3bn respectively.

Performance across sectors was broadly positive as 4 of 5 indices trended northwards W-o-W. The Industrial Goods index appreciated the most, up 9.2% W-o-W on account of gains in DANGCEM (+15.7%) and CCNN (+15.6%) while the Consumer Goods index trailed, advancing 7.7% W-o-W as a result of upticks in NIGERIAN BREWERIES (+10.4%) and NESTLE (+5.6%). Likewise, the Insurance and Banking indices rose 6.1% and 4.0% respectively due to price appreciation in UBA (+12.0%), ACCESS (+17.7%) and CUSTODYINS (+4.0%). On the contrary, the Oil & Gas index declined 4.5% on the back of depreciations in SEPLAT and OANDO which slid 10.3% apiece.

In line with the bullish sentiment in the bourse, market breadth (advancers/decliners’ ratio) strengthened to 5.9x (from 1.7x in the previous week) as 59 stocks advanced against 10 that declined.  The top performing stocks for the week were FBNH (+31.3%), UAC-PROP (+25.2%) and MANSARD (+24.7%) while 7UP (-14.2%), LINKASSURE (-12.7%) and OANDO (-10.3%) were the worst. Whilst we uphold our assertion that the upbeat market performance has been buoyed by improvements in FX management and macroeconomic fundamentals, we expect to see some profit taking in trading sessions next week as the benchmark index’s 14-Day RSI at 89.0 points indicates that the market currently stands in the overbought region.

Money Market Review and Outlook
In line with expectation, money market rates trended in tandem with financial system liquidity dynamics while the CBN conducted OMO auctions on all trading days and continued with its weekly FX sales on Tuesday. Open Buy Back (OBB) and Overnight (OVN) rate opened the week at 11.9% and 12.4% respectively (similar the close of the previous week 11.7% and 12.4%). By midweek, money market rates dropped 19bps and 10bps to 11.7% (OBB) and 12.3% (OVN) respectively as no major inflow hit the system. On Thursday, OBB and OVN rates declined 3.0% apiece to close at 8.7% and 9.3% respectively on improved system as an OMO maturity worth N64.8bn offset the impact of the debit for the T-bill auction on Wednesday. Eventually, OBB and OVN rates closed the week at 8.3% and 9.1%, down 0.4% and 0.3% respectively W-o-W.

In the Treasury Bills market, the CBN conducted a Primary Market Auction on Wednesday in which N26.1bn, N11.0bn and N80.0bn of the 91-day, 182-day and 364-day instruments were offered at respective stop rates of 13.4%, 17.1% and 18.7%. All instruments were oversubscribed, however the CBN allotted the exact amount that was offered at the auction. Secondary market performance was mixed but largely bearish during the week. Rates increased 57bps on average across tenors to close at 19.0% on the first trading day. Similarly, rates appreciated 3bps on Wednesday before declining 5bps to settle at 18.9% on Thursday. Average rates across benchmark instruments closed the week at 18.9%, up 0.5% W-o-W.

In the week ahead, we expect money market rates to respond to movement in liquidity which will be shaped by the different Primary Market Auctions expected to be held in the week- Foreign exchange interventions, OMO auctions and the FGN savings bonds.

Foreign Exchange Market Review and Outlook
The situation in the FX market has continued to improve since the Apex Bank increased its rate of intervention in an attempt to boost FX liquidity and shrink the massive spread between the official and parallel market rates. This has been largely successful as the spread between parallel and CBN’s spot rate has been reduced from over N200.00/US$1.00 to about N75.00/US$1.00. Relatedly, the impact of the increased FX sales by the CBN is reflected in the external reserves which have consistently declined from approximately US$31.0bn (5/05/2017) to US$30.3bn (31/05/2017). However, we note that the external reserves still remain above threatening levels and perceived to be somewhat sufficient for the CBN to sustain the interventions.

During the week, the official exchange rate remained relatively stable, marginally depreciating from N305.35/US$1.00 last week to end this week at N305.50/US$1.00. In line with the trend, the Apex Bank conducted SMIS sales worth US$100.0m on Tuesday for spot and short tenured forwards not exceeding 60 days. The naira appreciated at the parallel market to settle at N374.00/US$1.00 at the close of the week from N382.00/US$1.00 in the prior week. However, the FMDQ NAFEX rate which tracks activities at the I&E FX Window, depreciated from N380.33/US$1.00 in the previous week to close at N378.56/US$1.00 on Friday, closing the week higher than the parallel market rate. The value of transactions traded at the I&E window for the week also closed at US$416.0m, underscoring the gradual development of that window.

Trading in the FMDQ OTC Futures segment remained soft as total value of open contracts marginally improved to US$3,276.42m (from US$3,274.42 last week). In addition, the new instrument NGUS MAY 30 2018 which was issued last week was unsubscribed. We reiterate that the lacklustre activity in the FMDQ OTC Futures market remains tied to the fact that settlement of the contracts will be at the prevailing NAFEX rate and this in turn has deterred speculators from participating in the market.

Activities in the FX market during the week give further credence to our stance that there is a need for the CBN to collapse all the various fragmentations which currently exist in the market and establish a single market in which rates are determined by market dynamics. We are of the view that the CBN will toe this part of reasoning sooner than expected; hence, we expect FX prices to swing around current levels next week.
Bond Market Review and Outlook
Similar to the previous week, activities in the bond market remained soft this week as there was minimal interest across board given the more attractive yields on short term instruments as well as renewed appetite for equities. Average yield across tenors stayed flat at 16.2% on all trading days of the week. Marginal buying activity was recorded on Tuesday as investors’ interest was centered on the March 2024 instrument. However interest cooled off as minimal activity was recorded all week, hence, average yield closed the week flat at 16.2%. In the coming week, the Federal Government will be floating the monthly Savings bond instrument from 5th June to 9th June 2017.

Sentiment across the Sub-Saharan sovereign Eurobonds was mixed during the week. Yield on all the Senegalese (2024 and 2021, up 5bps and 8bps respectively) and Zambian (2024 and 2022, up 5bps and 2bps respectively) instruments increased as investors sold off while the Ivory Coast (2028 and 2032, down 2bps and 17bps respectively), Ghanaian (2023, 2026 and 2017 down 8bps, 5bps and 26bps respectively) and Kenyan (2024 and 2019 down 3bps apiece) enjoyed buy interest. The Kenyan 2024 instrument remains the best performing Eurobond in the SSA region, up 8.7% YTD followed by the Nigerian 2023 (+7.7%) and Gabon 2024 (+6.1%).

In the Nigerian corporate Eurobond space, performance remained largely bullish during the week as yields declined across the three ACCESS Eurobonds as well as the FIDELITY 2018, GUARANTY 2018 and ZENITH 2019 instruments. On the flip side, yield declined on the DIAMOND 2019 and FBN 2020 Eurobonds down 7bps and 4bps respectively. This may be linked to profit taking as yields on these instruments declined in prior weeks.