Weekly Market Report –Week Ended Mar. 22, 2019

Global Equities Market: Market Sentiment Improves Over Dovish US Fed
On Wednesday, the US FED disclosed its intention to not raise interest rates in 2019 despite initial forecast of two rate hikes in December. The FED’s reasons were mainly related to challenges arising from tightened financial conditions and weak global growth. Also, after gaining the support of the UK parliament in delaying Brexit last week, Theresa May secured a two-week extension from the EU in preventing a no deal Brexit. On Thursday at the summit in Brussels, the EU leaders stated that Theresa May had until next week to reach a deal with UK lawmakers. Otherwise, the UK faces a no deal Brexit or a much longer extension by April 12, 2019.

Following the trends discussed above, performance across the developed market was mixed. In the US markets, the S&P 500 and NASDAQ rose 0.2% and 1.0% W-o-W respectively. Furthermore, Hong Kong’s Hang Seng (0.3% W-o-W) and Japan’s Nikkei 225 (0.8% W-o-W) advanced during the week. On the flip side, the UK FTSE All Share index fell 0.2% W-o-W while the France's CAC 40 and Germany's XETRA DAX declined 2.0% and 2.1% W-o-W respectively.

Across BRICS, performance was largely bullish as 4 of 5 indices under our coverage trended northwards, save Brazil’s Ibovespa. China’s Shanghai Composite recorded the largest gain, up 2.7% W-o-W, followed by Russia's RTS and India’s BSE Sens with gains of 1.5% and 0.4% W-o-W respectively. Similarly, South Africa’s FTSE/JSE All Share advanced by 0.1% W-o-W. On the flip side, Brazil’s Ibovespa closed the week on a negative note, down 4.5%.

In Africa, performance was bearish as 5 out of 6 markets under our coverage recorded losses W-o-W. The Egypt’s EGX30 recorded the largest loss, down 1.4% W-o-W followed by Mauritius’ SEMDEX (-0.7% W-o-W), Ghana’s GSE Composite (-0.6% W-o-W) and Kenya’s NSE 20 (-0.3% W-o-W). Furthermore, Nigeria’s All-Share Index closed the week with a loss of 1bps W-o-W. On the flip side, Morocco’s Casablanca MASI was the lone gainer, up 1.8% W-o-W following the deal between KCB Bank Kenya Limited and Morocco’s giant lender's - Attijariwafa Bank Group - to drive cross-border trade and financial inclusion.

In Asia and the Middle East, performance was mixed as 2 of 5 indices closed in the green W-o-W. UAE's ADX General Index led the laggards, declining 2.5% W-o-W, followed by Saudi Arabia's Tadawul ASI (-1.4% W-o-W) and Turkey's BIST 100 (-0.9% W-o-W). On the flip side, Qatar's DSM 20 and Thailand’s SET indices rose 0.2% and 0.1% W-o-W respectively.

Domestic Equities Market: Domestic Bourse Extends Run of Losses… ASI Down 1bps W-o-W
The local bourse regained losses from earlier trading sessions to close slightly bearish, as sell-offs in market bellwethers outpaced last-minute bargain hunting activities. The benchmark index posted losses on 4 of the 5 trading sessions, falling 1bps W-o-W to settle at 31,139.35 points. The YTD return moderated to -0.9% while market capitalisation shed N1.3bn to close at N11.6tn. Activity level was mixed as average volume rose 7.6% to 239.2m units while average value traded declined by 8.9% to N2.5bn. The top traded stocks by volume were ACCESS (317.4m units), UBA (103.2m units) and ZENITH (102.9m units) while ZENITH (N2.3bn), ACCESS (N2.0bn) and GUARANTY (N1.7bn) topped trades by value.

The week started off on a negative note as the ASI dipped 6bps due to sell pressures in UBN, ZENITH, and WEMABANK. The negative performance was sustained for 3 successive sessions, as the ASI declined 0.1%, 0.1% and 0.5% on Tuesday, Wednesday and Thursday respectively. However, the market turned on Friday with the ASI rising 0.8%, largely on the back of bargain hunting in GUARANTY (+3.7%), DANGCEM (+0.9%), and INTBREW (+8.1%).

Performance across sectors was mixed as only 2 of 5 indices under our coverage advanced W-o-W. The Banking index (+3.8%) led gainers due to sustained buy interest in ACCESS (+18.1%) and FIDELITY (+10.7%), followed by the Industrial Goods Index which gained 2.4% as investors positioned in CCNN (+10.0%) and WAPCO (+0.8%). Conversely, sell pressures in SEPLAT (-7.9%), TOTAL (-2.0%) and FO (-1.1%) drove a southward movement in the Oil & Gas index which fell 4.0%. In the same vein, the Consumer Goods index declined 2.3% on the back of price depreciation in CADBURY (-17.5%) and NIGERIAN BREWERIES (-7.3%), while the Insurance index trimmed -1.1% following losses in SOVRENINS (-12.0%) and NEM (-6.4%).

Investor sentiment as measured by market breadth (advance/decline ratio) strengthened to 0.9x from 0.4x in the previous week, following 31 stocks that advanced against 36 that declined. The best performing stocks for the week were ACCESS (+18.1%), DANGFLOUR (+13.7%) and FIDELITY (+10.7%), while CUTIX (-17.8%), CADBURY (-17.5%) and IKEJAHOTEL (-17.4%) led the laggards.  Following four days of losses this week, we expect bargain hunting activities seen on the last day of trading to extend to early trades next week. This could potentially drive positive returns in the NSE ASI.

Money Market: Investor Appetite for Longer Tenor Instruments Stays Upbeat
Activities in the money market this week were relatively upbeat as the CBN conducted two OMO auctions on Tuesday and Thursday as well as a Primary Market Auction (PMA) on Wednesday to keep system liquidity in check as maturing OMO and Treasury bills worth N169.4bn hit the financial system.

Tuesday’s auction saw the CBN offer OMO Bills worth N100.0bn; although, the 93-Day OMO bill was undersubscribed at a bid-offer of 0.87x, the 205-Day was oversubscribed at bid-offer of 2.56x whilst Thursday’s auction for three OMO tenors (91-Day, 182-Day and 350-Day) witnessed a similar trend as the mid-to-long tenor instruments were also oversubscribed at bid to offer of 1.14x (182-Day) and 3.82x (350-Day) respectively. These OMO bills had stop rates ranging between 11.8% and 13.04%. For the PMA issued on Wednesday, our observation was that buoyant investor interest drove oversubscription across all tenors: 2.62x (stop rate - 10.3%), 3.59x (stop rate - 12.2%) and 5.93x (stop rate – 12.345%).

Money market rates - OBB (Open Buy Back) and OVN (Overnight) – surged to 14.3% and 14.8% at close of the week from 11.2% and 11.7% respectively in the prior week. Notably, the steep upticks in these rates was driven by Thursday OMO auction which mopped N293.4bn in system liquidity. In the secondary T-bills market, average yields rose 46bps as bullish sentiment from the last two weeks subsided, hence, average yield settled at 13.24% from 12.78% in the prior week.

Next week, the Apex bank is scheduled to repay N54.1bn maturing OMO bills which we expect to be rolled over in line with its tight system liquidity posture. Overall, we expect activity level in the market to be relatively weaker as we do not expect a further PMA in the coming week.

Foreign Exchange Market: Foreign Capital Inflows Still Driving Reserves Accretion
The increases in the foreign reserves continued this week based on sustained foreign capital inflows into the fixed income market. These inflows are on the back of the attractive yields in the fixed income market which have become more attractive as political risks have abated following the conclusion of the 2019 General Elections. Hence, the reserves levels were further up US$520.3m from US$43.0bn (14-03-2019) to US$43.5bn (20-03-2019). Liquidity levels in the foreign exchange market have remained elevated, prompting the Central Bank of Nigeria (CBN) to halt its weekly interventions into the foreign exchange market while rates have remained stable within tight bands.

In terms of direction of rates, the CBN spot rate opened the week at N306.45/US$ on Monday but closed the week lower at N306.40/US$. At the parallel market, the naira traded flat while at the I & E window, the naira appreciated 5 kobo W-o-W to settle at N360.20/US$. However, activity level in the NAFAEX window further declined 2.3% to US$1.7bn while the subscriptions on the FMDQ OTC open futures contract rose 3.1% W-o-W to US$7.5bn from US$7.3bn last week. This uptick was driven by continued subscriptions on the January 2020 instrument, up 17.7% W-o-W. We note continued investor interest on open futures contract with tenors ranging from 8-12 months which may indicate hedged positions taken by foreign investors in the fixed income market.

In the coming week, we expect the naira to remain stable at current levels with the various FX market.

Bonds Market: Yield Curve Transitioning to Normality Imminent
Average sovereign bond yield peaked mid-January at 15.36% and has gradually moderated since then with faster pace post-2019 elections; by the close of trade this week, yield settled at 14.2%. Nigerian sovereign yield on bonds is considered relatively attractive and has driven increased capital flows into the country. The Central Bank Governor (CBN) – Godwin Emefiele – estimated that since the conclusion of elections in February, inflow of over US$6.0bn have been recorded in the naira bond market. During the week, the bullish momentum continued though at a softer pace with average yield closing 3bps lower up until Thursday before reversing on Friday to close 4bps higher W-o-W.

The sovereign yield curve has maintained its inverted shape and presents more opportunities to ride the yield curve. Considering the continuous moderations recorded in the T-bills and OMO short term rates, we see the attractiveness of sovereign bonds instruments becoming more compelling in the near term. In our view, this will drive more demand for risk-free bonds and further compress the yield curve as it would then tend to transition to normality. Consequently, there is a short-term value in going long, especially in sovereign bonds with high modified duration; we recommend benchmark bonds with ≥4.5 modified duration. Next week Wednesday, the Debt Management Office (DMO) will be conducting its March 2019 Bond auction with a total of N100.0bn on offer. APRIL 2023 (N40.0bn), MARCH 2025 (N40.0bn) and FEBRUARY 2028 (N20.0bn) instruments will be re-opened at the auction. In line with trends, we expect instruments to be oversubscribed though prices are likely to be issued at discount to par given the current prevailing market yield.

The Eurobonds market also experienced a bullish performance across sovereign and corporate instruments during the week as 25 and 6 instruments respectively moderated in yield out of 30 and 9 instruments we track. On the sovereign front, yield on SOUTH AFRICA 2019 dropped the most, shedding 197bps W-o-W, given the nearness of the maturity due in May. This was followed by GHANA 2026 and GHANA 2029 instruments which shed 23bps and 20bps respectively on the back of the country’s US$3.0bn Eurobond offering during the week (Tuesday) which was 6.6x (N20.0bn) oversubscribed. On the corporate end, FIDELITY 2022 and ZENITH 2019 also moderated in yield by 25bps and 13bps respectively. With the recent dovish turn in some of the systemically important central banks, we believe the appetite for higher yield on emerging market Eurobonds instruments would sustain the current bullish momentum into the coming week.