Nigeria & Global Markets: Review & Outlook –Week Ended June 24, 2016

Global Market Review and Outlook
After weeks of spirited and passionate debate for and against BREXIT, Britain has chosen to leave the European Union (EU) in a shocking and unprecedented democratic exercise sending a shock wave across global markets. The British pound plunged by more than 11.0% today (24/06/16), touching a 30 year low even as David Cameron, the British Prime Minister announced his resignation following the outcome of the referendum. About a week to the referendum, the IMF had warned that a decision to exit the EU could pound British living standards, trigger higher inflation rate and wipe off close to 5.5% GDP.

Accordingly, key indices in the US market witnessed a sharp pullback with the S&P 500 and NASDAQ depreciating 0.6% and 0.2% W-o-W respectively. Germany DAX crashed 6.3% on Friday, closing 0.2% lower W-o-W while France CAC plunged to a 4 month low, down 1.0% W-o-W as European investors flew to safety. The Japanese Nikkei was the most hit, tumbling 4.2% W-o-W as against observable rally in the value of the Yen. Interestingly, UK FTSE added points, up 1.8% W-o-W following Mark Carney’s (Governor of the Bank of England) statement to inject £250.00bn into the UK economy to stabilize the system. The Hong-Kong Hang Seng also rose 0.4% W-o-W.

Performance in the BRICS markets were broadly negative with most indices trending southwards save for the Brazil IBOVESPA which improved 1.4%. Russia RTS fell 4.1% W-o-W, China Shanghai trailed, dipping 1.1% W-o-W as investors weigh China’s vulnerability to BREXIT.  This was followed by India BSE Sens (-0.9%) and S/Africa JSE/FTSE (-0.6%), both closing lower W-o-W on BREXIT fever.

African markets however exhibited mixed performances, the Nigeria All Share index rallied 4.8% W-o-W as investors bet on a largely successful opening week for the new FX regime. Similarly, Ghana GSE advanced 0.8%. However, Kenya NSE and Egypt EGX depreciated 2.3% and 2.1% W-o-W respectively.

Weekly Equities Market Review and Outlook
The Nigerian equities market opened the week lower on Monday, declining 1.6% on profit taking. However, the local bourse extended gains in leaps and bounds, advancing 2.3%, 2.4% and 3.1% from Tuesday to Thursday as strong buying interest across sectors drove the benchmark index above 30,000pts for the first time in 2016. Nevertheless, profit taking as well as BREXIT driven panic selling moderated gains on Friday as the NSEASI slumped 1.4% on the last trading day of the week to settle at 30,649.7pts, up 4.8% W-o-W. Accordingly, YTD return closed at 7.0% with market capitalization improving by N481.6bn during the week to settle at N10.5tn. Performance was majorly driven by the introduction of the new FX policy which saw the local unit settling at N281.00/US$1.00 as CBN cleared pent-up demand on Monday. Activity level also improved as average volume and value traded surged 10.6% and 29.4% W-o-W after 2.4bn units of stocks worth N26.4bn exchanged hands.

Performance by sector was positive across board with all sector indicators closing higher W-o-W. The Industrial Good index was the best performer, up 4.3% W-o-W on the back of uptrend in DANGCEM (+8.9%), The Banking index trailed, appreciating 4.1% W-o-W on account of price appreciation in GUARANTY (+11.8%) and STANBIC (+4.8%). The Consumer Goods sector followed closely having gained 3.0% W-o-W on strong buying interest in NESTLE (+12%) and FLOURMILL (+8.0%). The Insurance index as well as the Oil & Gas sector index both rose 2.8% and 1.4% respectively as CUSTODYINS (+13.6%) and TOTAL (+12.7%) appreciated during the week.

Similarly, market sentiments was majorly positive as market breadth, measured by the ratio of advancers to decliners, closed at 1.2x. A total of 38 stocks appreciated W-o-W while 30 stocks depreciated. The best performing stocks for the week were GLAXOSMITH (+55.6%), CHAMPION (+44.3%) and TRANSCORP (+31.6%), while NEM (-13.8%), TRANSEXPR (-10.2%) and DNMEYER (-9.1%) were the worst performers. We expect the market to regain uptrend next week as investors shake-off the outcome of the BREXIT referendum while keeping their eyes on Q2:2016 earnings scorecards.

Money Market Review and Outlook
This week, money market rates were largely dictated by CBN’s special interbank FX market intervention. Financial system liquidity opened the week at N750.5bn. Open Buy Back (OBB) and Over Night (O/N) rates rose from 1.6% and 2.2% on Friday to close at 17.3% and 18.7% respectively on Monday due to special FX intervention carried out by the CBN where a backlog of about US$4.0bn of pent-up FX demand was cleared. The surge continued on Tuesday as OBB and O/N rates climbed to 45.0% and 51.0% as the debits for Monday’s special FX intervention auction hit the system, causing system liquidity to shrink significantly. By midweek, OBB and O/N rates crossed the 50.0% mark to settle at 63.3% and 68.5% respectively. OBB and O/N rates however moderated to 30.0% and 34.4% at the end of Thursday’s trading session, eventually settling at 19.2% and 21.2%, up 17.6% and 19.0% W-o-W respectively.

On Monday, average T-bills rate rose 0.5% to close at 9.7% as the market reacted to the special FX intervention. Average T-bills rate continued northwards on Tuesday surging to 11.3% as liquidity levels dropped on debits for naira settlement of Monday’s FX intervention auction. On Wednesday, there was a T-bills maturity of N107.5bn and a rollover of N167.5bn (N50.0bn more than the maturing T-bills). The auctioned T-bills at the primary market auction were the 91-days, 182-days and 364-days at stop rates of 9.99%, 12.30% and 14.99%. Consequently, average T-bills rate rose to 11.8% at the end of Wednesday’s trading session. However, average T-bills rate moderated by 0.2% to settle at 11.6% at the end of Thursday’s trading session as a result of increased buying interest in the market, eventually closing the week at 11.1% on Friday, up 1.9% W-o-W.

In the week ahead, we believe money market rates will moderate slightly as the May 2016 FAAC allocation (between N180.0bn-N200bn) to hit the system. We also expect the frequency of the special FX intervention auction to reduce and the impact of the debits on liquidity levels tapered whilst interbank market remains liquid.

Foreign Exchange Review and Outlook
The new interbank FX market framework announced by the CBN Governor last week became operational this week. The adoption of a single interbank market saw the end of the official peg of N197.00/US$1.00 (official exchange rate since February 2015) on the local unit which depreciated to N281.50US$1.00 at the interbank market whilst appreciating at the parallel market.  On Monday, opening bids at the interbank market ranged largely between N250.00/US$1.00 and N266.00/US$1.00 as market participants geared up for the start of trade whilst market tried to determine the new interbank rate. However the CBN held a special FX intervention auction where months of US$4.02bn pent-up FX demands were cleared, at N280.00/US$1.00. At the auction, the CBN cleared US$532.0m via spot settlements, US$697.0m of 1 month, US$1.2bn of 2 months and US$1.57bn of 3 months forwards settlements. Consequently, interbank rate closed at N281.50/US$1.00 at the end of Monday’s trading session. Average Interbank rate trended circa N282.00/US$1.00 throughout the week.

Despite the adoption of a single interbank FX market, we observed that some deposit money banks continued to charge rates close to parallel market rates for dollar transactions on naira debit cards. At the parallel market, the naira traded at N345.00/US$1.00 on most days during the week, save for Wednesday when it appreciated to N335.00/US$1.00.

We applaud the recent moves by the CBN to liberalize and stabilise the currency market. We expect the interbank rates to trend around current levels of circa N280.00/US$1.00 in the week ahead.

Bond Market Review and Outlook
This week, activities in the Bonds market were mixed. On Monday, average yield across benchmark bonds closed flat  but moderated by 4bps on Tuesday amidst major buying interest in the FGN MAR 2036 bond. However, by midweek, average yield across benchmark bonds inched 0.2%northwards, to settle at 14.6%, despite sustained buying interest in the MAR2036 bond which shed 0.1%. On Thursday, average yield rose 7bps, eventually settling at 14.5% on Friday, up 0.1% W-o-W.

In the Eurobonds market, contrary to last week where there was renewed buying interests in Nigerian sovereign Eurobonds on the back of the reforms in the FX market, the decision of Fitch Ratings to downgrade Nigeria’s credit rating to B+ triggered a sell sentiment across the three Nigerian sovereign Eurobonds. Nonetheless, with a YTD return of 8.5%, the FGN 2023 Eurobond has outperformed all other sovereign bonds in the Sub-Saharan African region YTD, followed by the Republic of Gabon 2024 bond (+8.4% YTD) and Republic of South Africa 2014 bond (+8.0% YTD). Nevertheless, contrary to last week when the Nigerian corporate bonds witnessed selloffs as investors worried about their default risk due to the new FX framework, most corporate bonds witnessed buying sentiments this week save for the Diamond Bank 2019 bond (+0.2%) and the FBN 2021 bond (+3bps) as investors weigh the fundamentals of the issuers.

In the week ahead, we see the bonds market witnessing increased buying pressure, thus we expect yields to soften. Yields of the Nigerian sovereign Eurobonds are expected to moderate as the impacts of the FX reforms will strengthen investor sentiment despite Fitch Rating’s decision to downgrade Nigeria’s credit rating.