Review and Outlook of Global, Nigeria Markets

Global Market Review
Performance across the developed markets was largely bullish. Indices in the Advanced markets trended higher on Donald Trump’s plan to overhaul business taxes and cut regulation in the United States. This is expected in in the coming weeks. The US S&P 500 and NASDAQ added 0.5% and 0.9% W-o-W respectively driven by interest in Aviation stocks. Also, the UK FTSE rose 0.7% as manufacturing and industrial production in December surpassed expectation and boosted confidence in the British economy.

Positive sentiment also trickled into the Asian markets. The Japanese NIKKEI appreciated the most, up 2.4% while the Hong Kong HANG SENG followed with a 2.0% W-o-W uptick.  Across the European markets, performance was mixed with the France CAC closing flat W-o-W while the German DAX declined 0.1% W-o-W.

All indices in the BRICS classification closed in the green save for the RUSSIAN RTS which slid 0.6% W-o-W. The China SHANGHAI COMP appreciated the most, up 1.8% as Trump agrees to support 'One China' policy in a discussion with Xi Jinping, easing tensions between both economies.  Similarly, the Indian BSE-SENS added 0.4% while the South African FTSE/JSE gained 0.2% W-o-W.

Across the African region, performance was generally bullish with the Nigerian NSE ASI emerging the lone loser (-1.8%) as sentiment on equities stayed soft. On the contrary, the Kenyan NSE and the Egyptian EGX sustained gains, up 2.5% and 2.4% W-o-W respectively while the Ghanaian GSE added 0.3% W-o-W.

Equities Market Review and Outlook
Performance of the Nigerian equities stayed bearish as investors snubbed equities on weaker earnings expectation. The All Share Index (ASI) depreciated 1.8% W-o-W while YTD loss worsened to -5.7%. Also, market capitalization contracted N122.7bn settling at N8.8tn. Performance for the week was dragged by weaker appetite for Consumer and Industrial Goods bellwethers  such as NESTLE (-8.2%),  NIGERIAN BREWERIES (-6.1%), DANGCEM (-0.5%) and WAPCO (-5.9%) even as  FORTE tumbled 11.7%. However, market activity improved as average volume and value rose 9.8% and 3.8% W-o-W to settle at 208.7m units and N1.6bn respectively.

Sector performance mirrored the broader index as 2 of 5 sector indices gained. The Consumer Goods  index declined the most, losing 5.7% W-o-W against the backdrop of losses in PZ (-18.5%), NIGERIAN BREWERIES (-6.1%) and NESTLE (-8.2%) while the Industrial Goods index followed suit, shedding 2.6% W-o-W owing to declines in DANGCEM (-0.5%) and WAPCO (-5.9%). The Oil & Gas index lost 0.9% W-o-W as a result of sustained sell pressure on FORTE (-11.7%). On the flipside, the Banking index appreciated 0.4% W-o-W consequent on gains in GUARANTY (+4.3%) and ACCESS (+2.1%). Similarly, the Insurance index added 0.9% W-o-W as MANSARD (+5.3%) and AIICO (+3.4%) advanced during the week.

In line with market performance, investor sentiment softened, as reflected in the market breadth which settled at 0.5x (from 0.8x in the previous week) following 19 stocks that advanced against 37 decliners. CAVERTON (+12.5%), BETAGLAS (+10.2%) and NEIMETH (+6.5%) topped gainers’ list while UAC-PROP (-23.8%), PZ (-18.5%) and FORTE (-11.7%) led the losers’ chart. We expect performance to stay soft as low expectation on corporate earnings continue to dampen sentiment despite attractive market valuation.

Money Market Review and Outlook
Activities in the money market were mixed this week as Open Buy Back (OBB) and Overnight (OVN) rates trended northwards on most trading days of the week. OBB and OVN rates inched 1.0% and 0.8% points to close at 11.5% and 12.0% respectively on the first trading session of the week as the N391.7bn debit for successful OMO sales at last Friday’s PMA dragged system liquidity. Rates however retreated in the following two trading sessions despite the absence of a major inflow before trending northwards towards the end of the week. OBB and OVN rates settled at 11.33% and 12.17% on Friday, up 7.9% and 8.2% W-o-W respectively.

In contrast to last week’s performance, activities in the Treasury Bills market were mixed as investors sold off on shorter dated T-bills instruments. Consequently, average yields trended higher on 3 out of 5 sessions. The impact of the debit for last Friday’s OMO auctions weighed on system liquidity on Monday, this led to a 25bps increase in average yield as investors sold off particularly in the T-bills instruments maturing in February and March 2017. Buying interest however returned to the market on Wednesday and Thursday before the trend was reversed on Friday, eventually closing the week at 16.1%, up 83bps rise W-o-W. We believe investors may be liquidating their positions in anticipation for next week’s T-bills primary market auction (PMA). At the PMA, the CBN will be auctioning N32.4bn of the 91-day, N30.0bn of the 182-day and N80.0bn of the 364 day instruments. We expect that investors will subscribe to the longer dated instruments in expectation of a medium to long term moderation in yield environment.

In the week ahead, we project money market rates to trend northward as the demand for primary market instruments expected to be auctioned by the CBN and Debt Management Office (DMO) weigh on financial system liquidity.

Foreign Exchange Review and Outlook
The Naira/Dollar spot rate at the Interbank market closed the first trading session of the week at N305.25/US$1.00 similar to the prior weeks and traded at that level throughout the week, save for Friday when it marginally appreciated by N0.25 to N305.00/US$1.00. Parallel market rate however depreciated throughout the week, eventually settling at N506.00/US$1.00 on Friday. The spread between the interbank and the parallel market continues to widen despite the resumption of sale to the BDC operators earlier in the year.

Also, the Non-deliverable Naira settled OTC FX futures contracts continue to underperform. As at market close on Friday, none of the contracts on offer had been fully subscribed. Total value of open contracts as at Friday 10th February stood at US$3.9bn, a far cry from the total contracts value of US$12.0bn. The NGUS DEC 27 2017 contract currently commands the most attractive pricing at US$1.00/NGN279.50.

We expect rates at the interbank to remain at current levels while pressure on parallel market rates continue to mount.

Bond Market Review and Outlook
Performance in the domestic bonds market was largely bearish as average yield across benchmark instruments rose 14bps W-o-W to close at 16.3%. During the week, The FMDQ OTC Exchange signed an MoU with S&P DJI – the Global Index Provider and Rating Agency- and launched the S&P/FMDQ Nigeria Sovereign Bond Index. The agreement marks S&P Dow Jones Indices’s first-ever agreement with an Africa-based exchange to offer fixed income-based indices. We view this as a welcome development that is expected to improve the credibility of the Nigerian debt market going forward.
Across SSA Sovereign instruments, we observed mixed performance as average yields on the Nigerian, Gabon and Senegal instruments moderated 43bps, 25bps and 12bps respectively. In a recent development, the Federal Government of Nigeria successfully issued a US$1.0bn Eurobond offered at a coupon rate of 7.9% and oversubscribed to the tune of US$7.9bn (7.8x).

Corporate Eurobonds however witnessed positive performance as yields on all instruments eased but for the GUARANTY 2018 (up 2ps W-o-W) and FIRST BANK 2021 (up 20bps W-o-W) which rose marginally. The DIAMOND 2019 remains the best performing with a YTD return of 12.9% while the ACCESS 2017 remains the worst performer with a YTD loss of 9bps.

In the week ahead, activities are expected to be broadly driven by DMO’s scheduled primary market auction for the month of February. About N150bn worth of the FGN 2021, 2026 and 2036 bonds (re-opening) will be on offer.