Weekly Market Review and Outlook –July 15, 2016

Global Market Review and Outlook
During the week, there were positive news coming out of China as the recently released GDP numbers showed a 6.7% growth in Q2:2016. This surpassed an earlier projection of 6.6% for the period, triggering questions about the sustainability of the Chinese output growth. Also, the Bank of England kept rates unchanged in contrast to recent statements from Governor Mark Carney which suggested a likely rate cut amid BREXIT worries.

Sentiments across global equities under our coverage were broadly bullish save for the African markets. In the developed market, the US S&P 500 and NASDAQ improved 1.7% and 1.5% W-o-W respectively. The UK FTSE rose 1.3% W-o-W even as the Central Bank kept rates unchanged against heightened expectation of a cut in rates. In the European Markets, the positive sentiments that have persisted since the BREXIT referendum were sustained as the German DAX and France CAC rose 4.4% and 4.2% W-o-W respectively. The Asian Markets also improved with the Japan Nikkei 225 appreciating 9.2%, while the Hong Kong Hang Seng advanced 5.2% W-o-W feeding off the positive sentiments in the Chinese market which was up 2.2% W-o-W.

Performance in the BRICS region was also positive as the Brazilian IBOVESPA appreciated the most, gaining 4.5% W-o-W on heightened expectation of government measures to lift the economy from the current recessionary state. The South African FTSE and Indian BSE Sens followed with 3.4% and 2.6% W-o-W appreciation respectively. As noted above, the Chinese market closed the week 2.2% northwards on the back of stronger GDP numbers which surpassed expectations while the Russian RTS climbed 0.9% higher W-o-W.

All indices in the African Market declined, save for the Egyptian EGX 30 which improved 5.6% W-o-W. The worst performing index was the Kenya NSE 20 which lost 2.5% W-o-W, the Ghana composite followed, declining 0.7% W-o-W while the Nigerian bourse slid 0.2% W-o-W.

Weekly Equities Market Review and Outlook
The Nigerian equities market opened the week on a bearish note as persistent sell-offs in large-cap stocks drove the broader index 14bps lower. On Tuesday there was a change in sentiment as equities rebounded 0.2% on account of price appreciation in bellwethers. However, the benchmark trended southwards on Wednesday and Thursday, down 0.4% and 0.1% respectively.  The All Share Index rose 0.4% on Friday as investors sort for bargains. Consequently, the stock market declined 0.2% W-o-W to close at 28,805.45 points. YTD return settled at 0.6% while market capitalization declined N17.0bn to N9.9tn. Activity level during the week also improved as average volume and value traded rose 21.7% and 49.6% to 229.9m units and N2.7bn respectively.

Performance across sectors was mixed for the week. The Industrial Goods index led sector gainers, up 1.5% W-o-W. The Consumer Goods index followed, appreciating 0.9% on account of gains in NIGERIAN BREWERIES (+3.1%) and NESTLE (+0.2%). On the contrary, the Oil & Gas and Banking indices declined 1.3% and 0.2% respectively against the backdrop of losses in OANDO (-14.5%), MOBIL (-4.4%), ETI (-5.4%) and GUARANTY (-0.8%). Likewise, the Insurance index declined 1.8% W-o-W.

Sentiments improved this week albeit soft as market breadth settled at 0.6x (relative to 0.2x in the previous week). 21 stocks advanced while 37 declined. The best performers for the week were HONYFLOUR (+14.8%), ZENITH (+6.0%) and LIVESTOCK (+5.0%) while SKYEBANK (-31.0%), NPFM (-0.9%), and TRANSEXPR (-1.0%) were the worst performers. In the coming week, we expect performance to be broadly shaped by further influx of H1:2016 corporate earnings.

Money Market Review and Outlook
As expected, rates in the money market trended upwards this week from last week’s close. Aggregate system liquidity at the start of the week opened at N41.3bn. Open Buy Back (OBB) and Over Night (O/N) lending rates trended at double digits on all trading days this week. On Monday, the debits for successful bids at last Friday’s T-bills primary market auction (PMA) (N190.0bn) took a drag on system liquidity levels, consequently, OBB and O/N rates climbed 7.5% and 8.8% to 16.5% and 18.2%. OBB rate rose 100bps to settle at 17.5% on Tuesday while O/N rate eased 2bps to 18.0%. By midweek OBB rate dropped 0.3% while O/N rate inched 0.8% higher, eventually settling at 18.2% and 19.0% respectively on Thursday. OBB and O/N rates rose 2.6% and 3.8% on Friday to close the week at 20.8% and 22.8%, up 11.8% and 13.4% W-o-W respectively.

Average rate in the Treasury bills market also trended higher than last week’s levels as the market reacted to the stop rates at the PMA in addition to the system liquidity levels during the week. On Monday, average T-bills rate rose 0.9% (from Friday’s 10.0%) to close at 10.9%. The uptrend continued on Tuesday as system liquidity remained low, average T-bills inched 0.6% at the end of trade. By Thursday, average T-bills rate increased to 11.5% even as N73.0bn OMO maturity hit the system, eventually setting at 11.6% on Friday, up 1.6% W-o-W.

Next week, we expect money market rates to remain in the double digits. There is a net T-bills maturity of N128.0bn and a scheduled rollover of the same amount expected next Thursday. We expect the auction to be oversubscribed as investors with unsuccessful bids at Wednesday’s DMO primary market auction redirect their attention to the T-bills auction considering the high stop rates at the previous auction. Thus, we think the Apex Bank may allot more than the offered amount.

Foreign Exchange Review and Outlook
Contrary to last week’s flattish performance, the local unit depreciated at both the interbank and parallel market this week. The second futures contract on the FMDQ OTC Futures market was sealed this week. Similar to the US$20.0m Naira-settled Futures contract agreement between Citibank and the Apex Bank, Stanbic IBTC also sealed a US$60.0m Naira-settled 10 months (APR 26 2017) Futures contract at N210/US$1.00.

At the spot market the Naira depreciated on all trading days closing at N282.47/US$1.00 on Monday and N282.67/US$1.00 on Tuesday from last week’s N282.02/US$1.00. By Thursday, the Naira spot rate settled at N283.77/US$1.00 and depreciated even further to N292.25/US$1.00 on Friday. Similarly, the Naira weakened at the parallel market for most of the week. On Monday, the Naira fell to N353.00/US$1.00 from N352.00/US$1.00 further weakening to N357.00/US$1.00 by midweek before closing at N365.00/US$1.00 on Friday.

The US$697.0m 1-month forwards contract sold by the Apex Bank at launch of the new interbank FX market will mature next Wednesday. The fulfilment of this commitment is expected to stoke investors’ confidence in the operations of the interbank market going forward.

Bond Market Review and Outlook
The bonds market sustained last week’s bearish trend as sell sentiment persisted this week. On Monday, average yield across benchmark bond instruments rose 0.3% (from 14.1% on Friday) to close at 14.4% following increased activity on JUL 2034 and MAR 2036 instruments as investors tried to free up liquidity ahead of Wednesday’s Debt Management Office’s (DMO) primary bonds auction. This continued on Tuesday as average yield across benchmark bonds rose 0.1% to close at 14.5%.

On Wednesday, the DMO issued N30.0bn, N35.0bn and N55.0bn of the JUL 2021 (New Issue), JAN 2026 and MAR2036 bonds instrument at the PMA at marginal rates of 14.50%, 14.90% and 14.98% respectively. Similar to recent PMAs, the total amount offered was oversubscribed by close to 2x. The DMO under allotted the JUL 2021 and JAN 2026 instruments by 15.0%and 12.5% respectively whilst the 10-Year MAR 2036 bond was over allotted by 12.5%. Also, at the bonds auction, the marginal rate of the JAN 2026 rose 0.5% from the rate the instrument cleared at the June auction. Total subscription at the PMA was N232.1bn whilst total bids ranged from 10.0% to 17.0%. Average yield across benchmark bonds moderated 0.1% to 14.4% as investors with unsuccessful bids at the PMA redirected attention to the secondary market, with increased buying interest in the MAR 2036 bond. Average yield eventually settled at 14.6% to close the week up 0.5% W-o-W.

In the Eurobonds market, the Sub-Saharan Africa sovereigns continued to enjoy buying interests on the back of the low interest rates expectation in the advanced markets. Increasing interest in emerging markets Eurobonds may also be linked to rising commodity prices (Bloomberg commodity index as appreciated 10.6% YTD). Yields on the 2023, 2021 and 2018 Nigerian sovereign Eurobonds dropped 0.4%, 0.5% and 0.3% W-o-W respectively.

We expect yields in the local bonds market to moderate in the week ahead as activities in the secondary market strengthens, considering the number of unsuccessful bids at the bonds auction during the week. Interest in FGN Eurobonds is also foreseen to persist in the week ahead.

Afrinvest Research