Market Review and Outlook – Week Ended May 26, 2017

Photo L-R: Pai Gamde, Ag. Head, Corporate Services Division, The Nigerian Stock Exchange (NSE); Master Yusuf Bello, Gloryville High School, Ebute metta, Yaba, Lagos; Master Ajoh Vincent Osita, Genesis High School, Ajah-Lekki, Lagos; Miss Priscilla  Ogundoku, Gloryville High School, Ebute metta, Yaba; Joshua Oginni, Riverside Montessori School, Isheri, Lagos and Olumide Orojimi, Head, Corporate Communication Department, NSE at the Closing Gong Ceremony in commemoration of the 2017 Children’s Day Celebration at the Exchange today.

Global Market Review and Outlook
On the global front this week, the decision by OPEC at its meeting on Thursday to extend production limits for additional nine months without deepening the cuts, precipitated a recoil in oil prices which had trended northward during the week. The agreement was extended to non-OPEC countries such as Russia while Nigeria and Libya were excluded as their output remains curbed by socio-political unrest in the countries.

Performance across the global equities indices under our coverage was largely positive across regions. In the developed markets, the UK FTSE appreciated 0.7% W-o-W as investors have continued to demonstrate calmness ahead of the general elections in June. Likewise, the US S&P 500 and NASDAQ indices appreciated 1.3% W-o-W and 1.9% W-o-W respectively on the back of lingering expectations of tax cuts and increased infrastructure spending by the U.S government as well as impressive earnings releases of retail giants.

In the BRICS, performance was bullish as all indices appreciated save for the South African FTSE which dipped 0.5% W-o-W amidst rising political tensions. The Brazil IBOVESPA and Russian RTS appreciated 1.9% and 2.1% respectively W-o-W on account of the upticks in Oil prices recorded during the week, while the Chinese SHANGHAI COMPOSITE advanced 0.6% W-o-W amidst speculations of interventions of state directed funds to bolster demand for equities.

Across indices within our Europe and Asian classification, performance was broadly positive as all indices closed in the green save for the GERMAN DAX which closed flat. The France CAC 40 and Hong Kong HANG SENG appreciated 0.5% W-o-W and 1.8% W-o-W respectively. Likewise, the Japan NIKKEI rebounded from the previous week’s negative close, to advance 1.1% W-o-W this week.

In the African bourses, the Kenyan NSE 20 was the best performing index, gaining 4.8% W-o-W followed by the Nigerian All Share Index which rebounded from the decline recorded last week, up 3.4% W-o-W while the Egypt EGX and Ghana GSE COMPOSITE also advanced 1.1% and 0.5% W-o-W in that order.

Equities Market Review and Outlook
The Euphoria that accompanied the launch of the Investors’ & Exporters’ FX window remained evident this week as the benchmark index sustained its bullish trend, up on 4 of 5 trading sessions. On Tuesday, the National Bureau of Statistics (NBS) released its Q1:2017 GDP report, which recorded a contraction of 0.5% Y-o-Y. Also, much in line with our expectation, the Monetary Policy Committee of the CBN maintained status quo on all rates at its meeting. Nevertheless, the Nigerian equities market closed 3.4% higher W-o-W to settle at 29,064.52 points while YTD gain improved to +8.1%. Investors added N328.8bn owing to an increase in market capitalization which closed at N10.0tn. Sustained buy sentiment in NIGERIAN BREWERIES (+0.7%), GUARANTY (+12.0%) and NESTLE (+4.2%) buoyed market performance. However, activity level waned as average volume and value decreased 17.6% and 39.0% W-o-W to settle at 374.3m units and N4.0bn from previous 454.1m units and N6.5bn respectively.

Sector performance mirrored the broader index as 4 of 5 indices appreciated W-o-W. The Banking and  Insurance indices appreciated the most, up 7.6% and 3.7% W-o-W on account of gains in GUARANTY (+12.0%), ZENITH (+6.9%), MANSARD (+20.3%) and LINKASSURE (+8.6%) while the Consumer Goods index followed, adding 1.7% W-o-W owing to  increase in NESTLE (+4.2%) and NIGERIAN BREWERIES (+0.7%). The Industrial Goods index also inched 0.1% higher W-o-W as a result of price appreciation in DANGCEM (+2.3%) and CCNN (+13.0%). On the contrary, the Oil & Gas index depreciated 0.9% W-o-W as losses in MOBIL (-9.7%) and FORTE (-3.9%) dragged the index.

Investor sentiment stayed strong as indicated by the market breadth which improved to 1.7x (from 1.0x in the previous week) - 40 stocks advanced while 24 declined. UAC-PROP (+25.9%), FBNH (+22.0%) and MANSARD (+20.3%) topped the gainers’ list while CADBURY (-11.6%), MOBIL (-9.8%) and LEARNAFRICA (-9.4%) led the losers’ chart. Owing to the recent positive developments witnessed in the economy, we expect the bullish sentiment to be sustained in the week ahead. We however do not rule out the possibility of investors taking profit in the early trading days of next week as market’s 14-day RSI (79.5) is currently around the overbought region.

Money Market Review and Outlook
For a couple of weeks now, system liquidity levels have been weak with aggregate system liquidity mostly negative. Nevertheless, the CBN remains committed to stifling system liquidity in order to prevent possible pressures on the domestic currency. This thus continues to dictate the hawkish direction of monetary policy which the outcome of MPC’ Meeting on Tuesday further underscored.  Financial system liquidity opened the week in deficit N34.0bn, an improvement from last week Friday’s deficit of N71.9bn. As a result, OBB and OVN rates declined marginally to 22.5% and 22.8% on Monday from 23.3% and 26.1. The CBN also continued FX interventions as well as OMO mop-ups on Monday and the impact of the debit for successful bids at these auctions on system liquidity was evident on Tuesday’s rates as OBB and OVN rates surged to 111.5% and 121.7% with system liquidity at a deficit of N86.8bn. OBB and OVN rates remained in triple digits bymidweek as the debit for the Tuesday’s FX sales (second for the week) weighed on liquidity. However, OBB and OVN rates fell to 16.5% and 17.9% on Thursday as system liquidity improved to a deficit of N14.7bn (from deficit N133.1bn) on the back of the N119.1bn OMO maturity which hit the system. OBB and OVN rates eventually settled at 11.7% and 12.4% on Friday, down 11.6% and 13.7% points W-o-W.

Activities in the Treasury Bills market were largely bullish during the week as average T-bills rate declined on all trading days. On Monday, average T-bills rate declined 6bps to settle at 19.2% with investors showing interest in 3-6 month DTM (Date to Maturity) T-bills. Average T-bills rate trended southwards till the end of the week as investors continued to show interest at the shorter end of the curve. Consequently, average T-bills rate settled at 18.9% on Friday, down 0.4% W-o-W.

In the week ahead, we expect money market rates to trend lower at the start of the week as a scheduled N23.6bn OMO maturity hits the system. We also expect rates to rise by midweek as CBN continues FX interventions as well as OMO mop-ups. The Apex bank is scheduled to auction N26.1bn, N11.0bn and N80.0bn of the 91-day, 182-day and 364-day instruments in next Thursday Primary Market Auction. The impact of the debits for successful bids at the auction is however expected to be offset by a scheduled maturity of the same amount next week.

Foreign Exchange Market Review and Outlook
The Monetary Policy committee concluded its 3rd meeting for the year on Tuesday noting the improvements recorded in the foreign exchange market and its positive impact on the economy. The Committee also attributed the improvements in FX liquidity to the Apex bank’s interventions as well as the downward price review on import duties. As a result, emphasis was placed on sustaining the current FX momentum as well as deepening the FX management framework in order to reap more benefits.

Against this backdrop, the naira exchange rate at the official market remained stable closing at N304.35/US$1.00 from the previous week’s close of N304.45/US$1.00. The Apex Bank conducted SMIS sales for spot and short tenured forwards not exceeding 60 days with an offer amount of US$100.00m as well as sales for the clearance of the backlog of matured FX. Meanwhile, at the FMDQ NAFEX segment, the currency appreciated 0.2% W-o-W to N380.33/US$1.00 against N380.91/US$1.00 recorded in the prior week. However, rates at the parallel market depreciated to N382.00/US$1.00 from the previous Friday’s close of N380.00/US$1.00.

At the FMDQ OTC Futures segment, the value of opened contracts closed the week lower at US$3,274.42m from the previous week’s close of US$3,494.18m. During the week, the NGUS MAY 2017 contract matured with a notional amount of US$253.61m. This will be the 11th contract to mature since the introduction of OTC FX Futures market in June 2016. As with trend, the CBN continued to maintain operations in the OTC FX Futures market by way of replacing maturing contracts with new contracts as well as the frequent revision of contract prices. Hence, the maturing instrument was replaced with the NGUS MAY 2018 with total value of US$1.0bn at a price of ₦396.06/US$1.00. However, we noticed that contracts have remained under-subscribed with only 27.3% of the instruments subscribed. This is obviously not unconnected with the relative unattractiveness of the futures pricing as against the trend when first launched. Benchmarking the settlement of naira settled OTC Futures to NAFEX has eliminated speculators who may have taken advantage of the prior cheaper pricing.

We expect the calmness in the FX market to remain sustained in the short to medium term as we presume the outcome of the Thursday OPEC meeting will further strengthen stable global oil prices and also solidify Nigeria’s external reserves position. This in turn will make the CBN more comfortable with its continuous intervention programme.

Bond Market Review and Outlook
Activity in the local bonds market was quiet - albeit with a tint of bullishness this week as benchmark bond yields trended southwards on 4 of 5 sessions.  Sentiment at the start of the week was positive, with average yield falling 14bps and 13bps on the first two sessions. However, by mid-week, average yields across tenors rose 12bps as investors sold off on the JULY 2021 and JAN 2022 (yields rose 6bps apiece) instruments. Eventually, average yield closed the week at 16.2% indicating a flattish W-o-W close. We believe the tight liquidity level (system liquidity remained negative on all sessions) contributed to the low level of activity in the bonds market this week. Next week, we foresee a similar trend barring any major inflow which may boost system liquidity.

Performance across the Sub-Saharan Africa sovereign Eurobonds remained bullish this week. Average yield fell 21bps, 30bps, 13bps, 10bps, 26bps and 12bps on the Nigerian, Ghanaian, Gabonese, Kenyan, Zambian and Senegalese instruments. However, investors sold off on the South African 2017 (yield rose 1.7% W-o-W). YTD, the South African 2017 (-2.6%) continues to record the least performance amongst SSA Eurobonds. Going forward, we suspect sentiment towards SSA Sovereigns may change due to the expectations of a rate hike by the US Fed. The FOMC is set to have its third meeting for the year in June 13-14, 2017.

Similarly, performance in the Nigerian corporate Eurobonds market was largely positive as yields fell on all instruments save for the Guaranty 2018 (up 9bps W-o-W), Zenith 2019 (up 18bps W-o-W) and First Bank 2021 (up 7bps W-o-W) instruments. With a YTD return of +21.9%, the Diamond 2019 Eurobond tops as the best performing corporate Eurobond while Access 2017 is the least performing with a YTD loss of 83bps.