Nigeria & Global Markets: Review & Outlook

Global Market Review and Outlook
It was a bearish week across global equities as selloffs persisted amid build-up to next week’s U.S. presidential election with investors weighing the implications of a Trump presidency. Also, crude oil prices retreated, hitting a one-month low of US$44.00/b. The Morgan Stanley’s MSCI All Country World Index dropped to the lowest in almost four months with the S&P 500 Index caught up in its longest losing streak since 2008. Global stocks seem to be wrapping up the worst week since the run-up to Britain’s vote to exit the European Union in June 2016, as opinion polls showed a waning lead for Democratic Presidential candidate Hillary Clinton before the Tuesday Presidential election in the US.

Much in line with the previous week, all indices in the developed markets closed in the red. The UK FTSE fell 3.8% W-o-W while the US S&P 500 and NASDAQ dipped 1.8% and 2.5% W-o-W respectively. The S&P 500 is on an 8-day losing streak, the longest since the 2008 financial crisis, driven by a slump in share price of Facebook and the concerns surrounding the U.S. November election. This negative sentiment also spilled into the Euro-Asian markets as the German DAX tumbled 4.4% W-o-W while the France CAC slid 3.9%. In contrast to the previous week, the Japan NIKKEI fell 3.1% W-o-W after major automobile stocks stumbled during the week. The Hong Kong HANG-SENG also closed the week negative, dipping 1.4% W-o-W.

Performance in the BRICS markets was also broadly bearish as all indices closed in red save for the China SHANGHAI COMP which added 0.7% W-o-W. The Brazilian IBOVESPA depreciated 4.0% W-o-W while the Indian BSE-SENS slipped 2.4% on the back of the decline in pharmaceutical stocks which are collectively the second-biggest suppliers of generic medicines to the U.S. The pharmaceutical stock plunged amid rising concerns about potential pressures on drug prices after revelations of a Justice Department probe into industry collusion. The Russian RTS also dipped 1.5% W-o-W while the South African FTSE/JSE was down 2.1% W-o-W.

Across the African region, performance was mixed as the Egyptian EGX extended gains, up 5.6% W-o-W driven by devaluation of the Egyptian pound and the excitement surrounding Central Bank of Egypt’s adoption of a flexible exchange rate regime in order to rebalance markets and ease foreign exchange shortages. The Kenyan NSE also closed the week 1.8% northwards. On the flip side, the Nigerian All Share Index depreciated 1.1% extending the bearish trend to the third consecutive week. The Ghanaian GSE closed flat.

Equities Market Review and Outlook
Sentiments in the Nigerian equities market remained bearish during the week amid influx of unimpressive Q3:2016 earnings releases as the All Share Index (ASI) slid 1.1% W-o-W while YTD loss worsened to -5.8%. Market capitalization contracted to N9.3tn as investors lost a total of N86.4bn. On Monday, the market halted its 3-day gaining streak, ending the month of October on a negative note, down 4.1% M-o-M. However, investors took to bargain hunting on Tuesday, beginning the month of November with strong interest in top Tier-1 banks - GUARANTY and ZENITH – as well as OKOMUOIL following its impressive Q3:2016 earnings result (Revenue: Up 40.8% to N10.9bn, PAT: up 89.4% to N4.2bn in 9M:2016).  Sentiments however weakened for the rest of the week as declines in NIGERIAN BREWERIES and DANGCEM ensured a negative W-o-W performance. Activity level improved as average volume and value rose 29.0% and 16.7% W-o-W to 151.8m units and settle at N1.2bn respectively.

Performance across sectors was however mixed as 2 sector indices closed in the red while 3 advanced. The Industrial Goods and Insurance indices gained 3.0% and 1.3% W-o-W respectively on the back of price appreciation in WAPCO (+9.8%), DANGCEM (+1.5%), AIICO (+8.6%) and CONTINSURE (+5.9%). On the contrary, the Oil & Gas index declined the most, dipping 4.0% W-o-W as a result of sell pressure on OANDO (-16.7%) and SEPLAT (-5.0%). The Banking index followed suit, down 3.2% W-o-W on the back of losses in GUARANTY (-5.0%) and ETI (-6.6%). The Consumer Goods index also depreciated 0.3% W-o-W due to declines in 7UP (-5.0%) and NIGERIAN BREWERIES (-2.7%).

Investor sentiment improved slightly as reflected in the market breadth which settled at 0.6x (from 0.5x the previous week) as 22 stocks advanced while 35 stocks declined. LEARNAFRCA (+23.4%), AIRSERVICE (+15.5%) and OKOMUOIL (+14.6%) topped the gainers’ list while OANDO (-16.7%), UPL (-15.1%) and UAC-PROP (-13.9%) led the losers’ chart. The influx of poor 9M:2016 earnings numbers continue to reflect the adverse effect of macroeconomic pressure on corporate performances across sectors. Accordingly, sentiment in equities has weakened significantly, as the All Share Index hit a 5-month low this week. Thus, we see speculators strategically hunting for bargain ahead of a likely December rally. Nonetheless, we advise long term investors to overweight on our top picks in the Banking sector.

Money Market Review and Outlook
Money market rates rose this week as liquidity remained tight due to several primary market issuances by the CBN and debit of Deposit Money Banks (DMBs) for the US$500.0m FX forwards sale. The CBN conducted 2 OMO auctions in addition to a scheduled T-Bills auction mid-week to mop-up liquidity and guide interbank rates to target level. Consequently, Open Buy Back (OBB) and Overnight (O/N) rates rose to 13.0% and 13.5% on Friday, up 3.4 percentage points apiece W-o-W (from 9.7% and 10.3% recorded the previous Friday).
The OBB and O/N rates inched 5.8 and 6.5 percentage points higher to 15.5% and 16.8% respectively at the start of the week due to expectation of a debit for the US$500.00m FX forwards sale. Rates dropped slightly by an average of 100bps on Tuesday as the CBN deferred debiting banks for the FX auction and despite a N50.8bn OMO auction for the 198-day and 345-day tenors issued at stop rates of 18.0% and 18.5% respectively. Rates held steady on Wednesday as N123.0bn worth T-bills matured while N87.4bn was rolled over. On Thursday, maturing OMO bills worth N138.8bn bolstered liquidity; hence OBB and O/N rates dipped 4.5 and 5.0 percentage points to settle at 10.0% and 10.9% respectively. The CBN responded by floating another OMO auction (N117.4bn) on Thursday where the 196- and 364-day papers were sold at 18.0% and 18.5% respectively. Rates inched higher slightly to close the week at 13.0% and 13.5% respectively on Friday.

Sentiments in the Treasury Bills market was largely bullish as T-bills rate (on average) trended downwards on 4 of 5 sessions. Average T-bills rate opened the week 32bps higher to close Monday’s session at 17.9% on the back of bearish sentiments in the market attributable to tight liquidity and expectation of FX forwards sale debit. The next 3 sessions saw Average T-bills rate trend lower (especially for shorter dated instruments) amid a T-bills maturity of N122.9bn and a rollover of N87.5bn – implying a net credit of N35.5bn. The CBN allotted N22.1bn of the 91-day, N18.7bn of the 182-day and N46.8bn of the 364-day T-bills instruments at stop rates of 14.0%, 17.5% and 18.5% respectively. Average rate settled at 17.3% on Friday, 29bps lower W-o-W.

In the week ahead, we expect the Central Bank to continue mopping up liquidity through OMO auctions and thus expect money market rates to revolve around liquidity dynamics with a floor of 10.0%. October Inflation report should also drive sentiment in the T-bills market.

Foreign Exchange Review and Outlook
Contrary to recent trend, the naira weakened against the greenback at the Interbank market but closed flat on W-o-W basis at the parallel segment. At the Interbank market, the local unit weakened to N308.81/US$1.00 at the start of the week (from N304.5/US$1.00 on Friday) before making a comeback on Tuesday, appreciating to N304.75/US$1.00 and remained stable till Friday when it dropped to N328.00/US$1.00, implying a 7.1% W-o-W depreciation. The parallel market was relatively stable, trading within a band of N465.00/US$1.00 – N470.00/US$1.00. The naira appreciated N5.00 on Tuesday to N465.0/US$1.00 but weakened on Wednesday to settle at N470.0/US$1.00.

The CBN intervened in the interbank market with daily spot sales of US$1.5m and a major US$500.0m forward sales at the Special Secondary Market Intervention Retail Sales (SMIS) window. According to the CBN, manufacturers, airlines and agro-allied industries were given preference at the forward retail sales to be settled in 60 and 90 days.

In the Futures market, the value of open contracts stood at US$3.6bn (from the previous value of US$3.5bn recorded last Friday). During the week, the 20 SEP 2017 instrument witnessed increased subscription with an addition of US$85.7m. The 26 APRIL 2017 Instrument remains the most subscribed with a value of US$794.4m while the recently listed 27 OCT 2017 contract is the least subscribed at US$26.7m.

In the interim, we expect the exchange rate at the parallel market to remain pressured due to restricted access to official windows and surge in dollar demand associated with the festive season. The CBN is yet to guide to a metric that would trigger a shift from its current peg; thus, we expect FX rate at the official market to remain stable whilst the CBN intervenes via spot/forward sales of the greenback.

Bond Market Review and Outlook
Contrary to the bullish sentiment in T-bills, it was a bearish week in the local bonds market as yields rose across tenors on all trading sessions. Average yield on benchmark bonds closed at 15.2% on Friday, up 10bps W-o-W. The week started on a bearish note, largely driven by 2bps increase in medium- to long-term bonds yield, and persisted through the week as sentiment remained negative. The bearish run could be explained by investors’ expectation for October Inflation report (scheduled for release next week) and traders preference for dealing at the shorter end of the curve (T-bills and OMO) which witnessed increased activity this week with several primary market issuances. We expect activities to remain soft in the bonds market in sessions ahead but yields would likely remain at current levels.

Sentiment on Sub-Saharan Africa Sovereign Eurobonds stayed bearish this week as yields rose on a range of instruments within our coverage. The major driver of the bearish sentiment appears to be interest rate outlook in the advanced economies, particularly market consensus forecast of a hike in US Fed Fund rate by December 2016 following strong economic data. Yields on all Gabon, Côte d’Ivoire, Kenya, Zambia and Senegal Sovereign Eurobonds rose W-o-W. Yield on Nigeria’s 5-Year Note maturing in 2018 dropped 3bps W-o-W to 4.6% but rose on the 2013 instrument by 8bps to 7.0%.  Longer-dated South African Sovereign bonds surprisingly fell, despite the political turmoil gripping the country, but shorter term yields for instruments maturing between 2017 and 2020 rose. With the US Fed now expected to hike rate in December – save a Republican victory at the US Presidential Poll next week – issuers in emerging and developing countries would increasingly find dollar liquidity more expensive and we expect sentiment to remain bearish on outstanding bonds.

Performance of Nigerian Corporate Eurobonds remained mixed this week as investors took profit in the ACCESS 2017 bond (YTM up 47bps W-o-W to 5.3%), likewise the ZENITH 2019 (YTM up 2bps W-o-W to 7.1%). Renewed buying interest in FIDELITY 2018 and the 9.3% ACCESS  2021 bonds saw yields decline 54bps and 20bps W-o-W to 16.3% and 10.8% respectively. GUARANTY 2018 Eurobond has returned the highest YTD at 8.4% while the DIAMOND 2019 has the highest YTD loss at 16.6%.