Review and Outlook of Global, Nigeria Markets –Week Ended May 27, 2016

As the month of May winds out, there is a mixed bag of performances across regions. The major determinants of market performance in the month were hinged on the state of the US economy and a possible rate hike as well as the expectations of the BREXIT referendum. In June, we expect these factors to take precedence as the FOMC will be meeting between the 14th and 15th amidst growing expectations of a rates hike and the referendum will also be held on the 23rd. The Nigerian All Share Index was the best performing Index in month of May rising 15.3% MTD, followed by the India BSE (+4.1%) and the US NASDAQ (+2.9%) while the worst performing were the Brazil Ibovespa (-8.2%), China Shanghai Composite (-4.0%) and the Kenya NSE (-3.5%).

Performance across markets this week was broadly positive as major indices under our coverage closed higher. A general improvement was observed across the developed markets, as all indices in the region trended northwards W-o-W. The US NASDAQ and S & P 500 appreciated 3.0% and 2.0% W-o-W respectively. Investors await the Fed Chair’s speech later today, the speech is expected to give a guidance on rates hike. The UK FTSE also appreciated 1.6% W-o-W following gains recorded in commodities companies. On a MTD basis, all the indices across the developed markets closed higher with the US NASDAQ posting the highest return (+2.9%).

The positive sentiment trickled into the European markets as the France CAC and German Dax improved 3.8% and 3.5% W-o-W pushing both Indices into the green zone for the month of May, up 2.5% and 1.8% MTD. In the Asian markets, the Hong Kong Hang Seng rose 3.6% W-o-W as a late rally in the market offset losses recorded earlier in the week. Japanese Nikkei also rose 0.6% W-o-W on prospects of a delay in the proposed tax hike, also driving the market into the green for the month. Thus, MTD returns settled at 1.0%.

Performance was mixed across the markets in the BRICS classification, 2 indices advanced while 3 declined.  The India BSE Sens appreciated the most, advancing 5.3% W-o-W on account of gains recorded in the state owned Petroleum Company which posted better than forecast quarter earnings. The South African FTSE also trended northwards, up 2.7% W-o-W. Similarly, the Russian RTS grew 0.8% W-o-W following a rally in oil prices during the week. On the flipside, the Brazil Ibovespa fell 0.5% W-o-W while the China Shanghai Composite declined for the 6th consecutive week, down 0.2% W-o-W as expectations of a an improvement in the economy were further dimmed by a data report showing a decline in industrial companies profit for April.

In the African Market, performance was also mixed. The Nigerian All Share Index and the Egypt EGX were the only gainers, appreciating 6.5% and 0.4% W-o-W respectively. On the other hand, the Kenya NSE and the Ghana GSE lost 0.6% and 0.1% W-o-W respectively.

Weekly Equities Market Review and Outlook
The bullish trend in the Nigerian Equities garnered steam this week as investors remained stoked by the implementation of the 2016 budget and the removal of petroleum subsidy. Nonetheless, the decision of the MPC to introduce some flexibility into the forex market further boosted investor’s confidence.

On Monday, the market opened in the red for the first time in 4 weeks, losing 0.4% ahead of MPC meeting. However, the negative close was reversed on Tuesday as a mild rally towards the close of trade pushed the market 0.8% northwards. The decision of the MPC however triggered a renewed buying interest across board as the market surged 3.8% (2nd highest daily gain in 2016) on Wednesday. Momentum was sustained on Thursday (+2.2%) but slowed on Friday (+0.1%), even as investors sentiments remained upbeat driving the benchmark index level to a 6-month high of 28,902.3 points. With the upsurge recorded during the week, the All Share Index improved for the 5th consecutive week, up 6.5% W-o-W to settle at 28,902.3 points. Likewise, YTD return entered the positive region for the first time this year, settling at 0.9%. Investors gained N613.1bn during the week as market capitalization rose to N9.9tn. Activity level was mixed as average volume traded fell 4.4% to 467.4m units while average value traded rose 12.5% to N3.0bn.

Performance across sectors was broadly bullish as all sector indices closed in the green. The Consumer goods index led gainers, up 8.6% due to gains in GUINNESS (+15.5%) and NIGERIAN BREWERIES (+12.7%). The Banking sector closely trailed, appreciating 8.2 % on account of gains in ETI (+19.4%) and UBA (+13.3%). In the same vein, the Industrial goods index improved 5.2% on the back of price appreciation in WAPCO (+7.2%) and DANGCEM (+4.8%). The Insurance and Oil & Gas index closed out the positive performance advancing 3.5% and 1.6% respectively.

Investor sentiment received a massive boost during the week and this is reflected in the Market breadth (advancers/decliners ratio) which rose to 2.3x from 2.2x consequent on 53 stocks that appreciated as 23 stocks declined. The best performing stocks for the week were DIAMOND (+35.1%), NAHCO (+29.6%) and DNMEYER (+28.8%) while UNIONDICON (-14.4%), LEARNAFRCA (-10.6%) and IKEJAHOTEL (-9.9%) were the worst performing stocks for the week. The impressive gains recorded during the week have been broadly driven by domestic investors taking position ahead of expectations of an increase in foreign participation. While we envisage the uptrend in the market to be sustained in the week ahead, we advise investors to trade cautiously as we await the details of the modalities for the currency market flexibility as guided by the CBN.

Money Market Review and Outlook
Financial market liquidity in the week opened at N186.0bn on Monday, higher than N144.1bn last Friday. Liquidity levels improved to N198.4bn on Wednesday but declined to N156.6bn on Thursday, as a total of N80.0bn worth of OMO maturity as well as the weekly CRR maintenance impacted on system liquidity. However, system liquidity improved on Friday as FX refunded by CBN to DMBs drove opening balance with Banks/Discounts houses to N202.5bn. Driven by liquidity dynamics during the week, the OBB and O/N rates settled at 4.8% and 5.5% on Friday, down 3.7% and 3.4% W-o-W.

Activities in the Treasury Bills market this week was broadly driven by the decision of the MPC to retain key policy rates. Market sentiment started the week bearish as investors traded cautiously ahead of the MPC meeting. Thus, average T-Bills rate stood at 10.7% on Monday. Bearish sentiment was sustain on Tuesday as MPC concluded its 2-Day meeting. However, sentiment turned bullish on Wednesday and Thursday following MPC’s announcement to retain benchmark rate at 12.0%. Average T-Bills rate settled at 10.0% on Friday as against 8.5% in the previous week. With the decision of the Apex Bank to keep key rates unchanged, we expect money market rates to remain determined by liquidity dynamics in the system.

Foreign Exchange Review and Outlook
The foreign exchange market in the week was majorly driven by the outcome of the MPC meeting in which the Committee decided to introduce greater flexibility in the pricing of foreign exchange at the interbank market while retaining a small window to fund critical transactions. In excitement of the news, we noticed improved sentiments within the equities and fixed income segments of the market though few pressures are still noticed at the parallel market while the official/interbank market remains inactive.

The CBN’s weekly intervention window opened on Thursday with the Banks submitting their pent up demands for foreign exchange while the Apex Bank intervened at N197.00/US$1.00. At the parallel/BDC segments however, the pressure on exchange rate remained elevated in the week more so that the market awaits the CBN’s guidelines on the new FX workings at the interbank market. The Naira depreciated by 1.4% W-o-W at the parallel market after closing at N351/US$1.00 as against the previous week’s close of N346/US$1.00.

In the week ahead, we believe the forex market will be defined by the expected roll-out of the modalities for the operation of a new “Flexible Interbank Market” which the CBN has promised will be communicated in the coming days. In our view, a truly market determined exchange rate should be devoid of any peg and should reflect the real supply and demand dynamics. Whilst we hope the CBN’s move will take this into consideration, especially in reducing the rate of diminution of the external reserves, market speculators will still continue to study the market pending the information from the CBN.

Bond Market Review and Outlook
In anticipation of the MPC Meeting that held on Monday and Tuesday in the Week, the bonds market had anticipated a rate hike which had defined the yields dynamics in the previous week. However, we noticed some moderation in yields at the beginning of the week as investors, who perhaps got a hint on the possibility of no rate hike, took position in medium to long term bonds instruments. Following the decision of the MPC to retain MPR at 12.0%, the bonds market gained traction on Wednesday as average yields declined from 13.6% on Tuesday to 13.4%. But on Thursday average yields further moderated to 13.3% before closing at 13.7% on Friday.

The sovereign bonds yield curve also shifted downwards W-o-W on account of a generally bullish market in which case average yields moderated to 13.7% from 14.0% in the previous week. Our price analysis across term structure of bond yield curve shows that ten bond instruments are still selling at attractive discounts to par value as against only seven instruments that are trading at premium to par.

We believe the bonds market will likely trade bullish in the coming week as we expect most PFAs, HNIs and other institutional investors to pump in liquidity in order to take advantage of current low prices. We advise investors to continue to consider longer tenured bonds instruments with high modified duration in their portfolio as they tend to offer the highest return in a declining yield environment. To this end, we recommend the 20-year benchmark instruments (JUL-2030, JUL-2034 and MAR-2036) which are currently trading at discount to par values of N78.86, N90.93 and N94.05 respectively.