Markets Review and Outlook –Week Ended Mar. 23, 2018

Global Markets Review and Outlook: Trade War Fears Spark Sell-off across Global Markets
On Thursday, concerns of a possible trade war between the US and China were further elevated  following an announcement by President Trump to the impose tariffs on up to US$60.0bn worth of Chinese imports especially in the aerospace, information & communication technology and machineries categories. This, alongside the US Fed’s optimistic outlook for the US economy and a hint that policy rate hike could be more aggressive further spooked markets.  Consequently, the US S&P 500 extended losses to the second week, down 3.9% W-o-W as of writing. In addition, recent revelation of a “trust breach” by social media giant- Facebook, the 5th most capitalized stock on the US NASDAQ dragged the index 4.1% lower W-o-W.

Similarly, across markets in Europe and Asia, performance was equally bearish as all indices closed in the red W-o-W. Japan’s Nikkei was the biggest loser, down 4.9%, while the Hong Kong Hang Seng trailed with a 3.8% W-o-W loss due to ongoing US trade policy review which is targeted at altering terms of trade dynamics between the US and Asian exporters. Another large exporter to the US, Germany, recorded a 3.5% W-o-W loss in its main benchmark index.

Performance was largely bearish across markets in the BRICS region as 4 of 5 indices closed southwards. Russia’s RTS was the lone gainer, up 0.4% W-o-W following President Putin’s landslide victory at the recently concluded election which impacted positively on investor sentiment. Unsurprisingly, China Shanghai Composite led with losses, shedding 3.6% as investors exited positions in the market following US tariff announcements on Thursday. South Africa’s FTSE followed, posting a 2.7% decline W-o-W.

In Africa, 3 of 4 indices we track closed positive, indicating a largely positive performance.  The Ghana GSE Composite rebounded this week to lead the gainers chart, up 1.9% W-o-W, as sentiment remains anchored by improving macroeconomic environment. Similarly, Kenya’s NSE 20 climbed 1.3% W-o-W following a 50bps cut in benchmark rate earlier in the week and expected review of interest rate cap policy. On the flipside, Nigeria’s All Share Index was the lone loser, down 1.1% W-o-W.

Domestic Market Review: Cheaper Valuation to Create Bargain Hunting Opportunities in Subsequent Trading Sessions
Performance of the domestic equity market was largely bearish this week following the combined impact of sell offs in bellwethers - DANGCEM (-3.4%), NIGERIAN BREWERIES (-4.9%), NESTLE (-4.6%) and SEPLAT (-5.0%) – and weak sentiment for risk assets globally. As a result, the All Share Index fell 1.1% W-o-W to 41,472.10 points while YTD gain contracted to 8.4% and Market Capitalization declined N20.3bn to N15.0tn on Friday. However, activity level was mixed as average volume of stocks traded increased by 13.4% to 463.2m units while value traded declined by 8.7% to N5.8bn. For the week, ZENITH (250.0m), ACCESS (145.0m) and AFRINSURE (130.1m) were the top traded stocks by volume while ZENITH (N6.9tn), GUARANTY (N4.4tn) and ACCESS (N1.6tn) were the top traded by value.

The local bourse opened the week on a negative note and this trend was sustained till Wednesday as the All Share Index lost 105bps on the first three trading days. The extended sell off created attractive entry opportunities; thus, we saw investors taking position in blue chip Banking and Consumer goods stocks – ZENITH, NIGERIAN BREWERIES and GUARANTY - on Thursday and Friday. However, losses in DANGCEM pulled the index 39bps lower at week close, offsetting the rally in other large- to mid-cap stocks.

Performance across sectors was largely bearish as 4 of 5 indices closed negative W-o-W. The Insurance index depreciated the most, down 3.1% as MANSARD (-6.6%) and NIGERINS (-16.7%) recorded losses. The Industrial Goods index followed closely shedding 2.8% as investors sold off positions in DANGCEM (-3.4%) and WAPCO (-5.7%). Similarly, the Consumer Goods and Oil & Gas indices fell 2.2% and 2.1% due to profit taking in NIGERIAN BREWERIES (-4.9%), NESTLE (-4.6%) and SEPLAT (-5.0%). On the flip side, bargain hunting in ZENITH (+9.4%) and GUARANTY (+4.5%) drove the Banking index 3.3% higher.

Market breath (advance/decline ratio) which measures investor sentiment strengthened to 0.7x from 0.4x recorded the prior week as 33 stocks advanced relative to 46 that declined. The top performing stocks were GLAXOSMITH (+21.4%), FIDELITY (+17.7%) and DIAMOND (+12.0%) while FTNCOCOA (-21.4%), NIGERINS (-16.7%) and UNITYKAP (-21.4%) led the laggards. The sell offs experienced in the local bourse so far can largely be attributed to profit taking in stocks that had rallied significantly before the beginning of the earnings season as well as contagion effect of the rout in equities across global markets. With investors skeptical of forward earnings vis-à-vis elevated valuations, sentiment has turned bearish in recent weeks. We believe declining level of valuation has presented investors with attractive entry opportunity; hence, we expect a reversal of the bearish trend in the near term
Money Market Review and Outlook: Interbank Rates Moderates on OMO & T-bills Maturities
In the money market this week, Open Buy Back (OBB) and Overnight (OVN) rates fell W-o-W as system liquidity improved towards the end of the week following OMO & T-bills maturities which hit the system. At the start of the week, OBB and OVN rates rose 10.7ppts and 12.1ppts to settle at 22.5% and 25.0% respectively (from 11.8% and 12.9% recorded the prior week) as the impact of CBN OMO auction and weekly FX intervention offset N87.0bn bond coupon payment. At the OMO auction, the CBN issued 101-day (Offered: N50.0bn, Sale: N5.3m) and 227-day (Offered: N100.0bn, Sale: N111.2bn) instruments at 12.6% and 14.4% respectively. On Tuesday, the OBB and OVN rates increased 7.5ppts and 7.3ppts to 30.0% and 32.3% respectively, attributable to a further squeeze in system liquidity which opened at N45.1bn.

The trend reversed mid-week as the OBB and OVN rates moderated 10.0ppts and 10.2ppts to close at 20.0% and 22.1%. This was sustained till Thursday as rates further eased to at 6.8% (OBB) and 8.1% (OVN), attributable to improvement in system liquidity which increased following OMO (N151.1bn) and T-bills (N107.9bn) maturities which hit the system. OBB and OVN rates closed the week at 6.8% and 8.1%, 5.0ppts and 4.8ppts lower W-o-W respectively.

Performance in the Treasury Bills market was largely bullish as average rate across tenors traded lower on 3 of 5 trading days. The week started on a relatively flat note although average rate across benchmark tenors declined 2bps to 13.9%. Rates remained flat midweek even as the CBN carried out a Primary Market Auction (PMA) in which the 91-day (offered: N5.4bn, subscription: N5.6bn, Allotted: N5.4bn), 182-day (offered:N26.9bn, subscription:N13.7bn, allotted:N8.4bn) and 364-day (offer: N21.6bn, subscription: N60.7bn, allotted: N40.2bn) tenors were allotted at stop rates of 11.95%, 13.00% and 13.15% respectively. The 182-day instrument was the only undersubscribed and under allotted instrument. Average T-bills rate closed the week at 13.6%, down 1bp W-o-W.

In the coming week, N140.01bn of OMO bills will be maturing. Our short term outlook for T-bills remains bullish against the backdrop of relatively lower FGN domestic borrowings and CBN policy easing bias.

Foreign Exchange Review and Outlook: Naira Maintains Resilience as Rates trade Within Tight Bands
In line with trend, the CBN continued its weekly interventions, injecting US$210.0m via the Wholesale Special Interventions Auctions with the aim of maintaining stability across the different segments of the market. Against this backdrop, rates traded flattish within tight bands all week. The CBN spot rate opened the week at N305.70/US$1.00 and remained unchanged throughout the week. At the parallel market, the Naira appreciated N1.00 at the start of the week to close at N362.00/US$1.00 and traded at similar level all week.

At the Investors’ and Exporters’ (I & E) window, the NAFEX rate opened at prior Friday’s close (N360.16/US$1.00) and traded flat till mid-week before appreciating 13 kobo on Thursday to close at N360.03/US$1.00. The rate depreciated 5 kobo on Friday and closed the week at N360.08/US$1.00, up 8 kobo W-o-W. Activity level in the I & E window weakened as cumulative weekly turnover measured on Thursday stood at US$839.3m, down 40.7% (US$576.7m) from US$1.4bn recorded the same period of the prior week.

In the FMDQ OTC futures market, the total value of open contracts of the Naira settled OTC futures strengthened by US$198.9m, indicative of a 2.8% W-o-W expansion to US$3.6bn. The most subscribed remains APR-2018 instrument with total market value of US$659.9m (contract price: N360.59) while the JAN-2019 instrument was the least subscribed with a total market value of US$47.5m (contract price: N361.94). MAR-2018 instrument will be maturing next week and in line with the trend, we expect the instrument to be replaced with a new contract.

In the near term, we expect rates to continue trading within tight bands as we remain confident of the Apex bank’s ability to sustain FX interventions, considering sustained increase in external reserves (US$45.4bn as at Wednesday this week) and strong autonomous capital inflows.
Bond Market Review and Outlook: Outlook for LCY Yields Bullish on Expectation of Monetary Policy Easing and FGN Debt Strategy
The performance of the domestic bond market was largely flattish this week as average yield across tenors closed at a similar level to prior week. Yields fell by a marginal 2bps W-o-W to close at 13.5%. On Wednesday, the DMO held its monthly Bond Primary Market Auction (PMA). At the auction, the 5-year 14.5% JUL 2021 and 10-year 13.98% FEB 2028 bonds were reopened while a near 10-year 13.53% MAR 2025 bond was offered.

In line with expectation, demand for the longer dated 10-year instrument was stronger in anticipation of further moderation in the interest rate environment. The 10-year 13.98% FEB 2028 instrument received the highest subscription, 3.3x the amount offered (amount offered: N30.0bn, subscription: N98.8bn, allotment: N10.0bn and marginal rate: 13.6%). Investor sentiment towards the 5-year 14.5% JUL 2021 instrument was also positive with a subscription of 1.9x (amount offered: N10.0bn, subscription: N18.9bn, allotment: N10.1bn and marginal rate: 13.4%). However, the 7-year new issue which was allotted at a marginal rate of 13.5% was undersubscribed as the total subscription of N25.2bn was below N30.0bn offered. Marginal rates of the 5-Year and 10-Year bonds were 30bps and 38bps lower than February auction. Our outlook for yields remain bullish on expectation of monetary policy easing and FGN debt strategy.

Performance of Sub Saharan Africa Sovereign Eurobonds was largely bearish as yield on 20 of 22 instruments under our watch advanced W-o-W. This was against the backdrop of global risk off trades which led to a rout in emerging market assets as well as US Fed guidance on possible acceleration of pace of monetary policy tightening. If the Fed moves faster than expected in normalizing monetary policy, we expect further repricing of SSA frontier FCY bonds.

Performance of Nigerian Corporate Eurobonds was equally bearish as yield across 11 of 12 instruments advanced W-o-W with FBNH 2022 recording the most sell offs (YTM rose 40bps to 9.2%). The best performing instruments YTD are DIAMOND 2019 and FBNH 2021, up 3.9% and 3.1% YTD respectively.