Domestic Investors Retain Dominance in Equities Trading

The Nigerian Stock Exchange (NSE) recently released a report on Domestic & Foreign portfolio participation in equities trading for February 2017. The report showed total transactions decreased M-o-M for the first time since November 2016, settling at N74.1bn, a 22.1% M-o-M decline from N95.3bn recorded in January 2017. The figure also came in 36.8% lower Y-o-Y compared to the N117.3bn recorded in the same period in 2016. A segmented analysis of the monthly transactions data showed that domestic participation (53.4%) in the market outstripped foreign participation in February (46.6%) to extend the dominance of domestic investors in equities market transactions.

Domestic investors have dominated monthly transactions on the exchange since February 2016 with the exception of June 2016 when foreign participation was bolstered by the half-hearted implementation of the flexible exchange rate policy by the CBN. Nonetheless, domestic transactions decreased by 22.9% M-o-M to N39.6bn in February 2017 from N51.3bn while Foreign Portfolio Investments (FPIs) transactions fell 21.5% M-o-M to N34.5bn from N44.0bn.  Similarly, FPI inflow in February fell 28.8% M-o-M to N16.1bn whilst outflow declined 13.8% M-o-M to N18.4bn, resulting in a net outflow of N2.3bn from a net inflow of N1.2bn in January.

Despite the improvements in the FX market in March, we do not expect to see a significant improvement in FPI participation nor investment capital inflow for the month as investors continue to probe the sustainability of CBN’s FX market interventions and efficiency of the current market structure. The spread between exchange rates at the official and parallel markets has been gradually declining since the tail end of February 2017 with a possible convergence of rates in sight. This has largely been as a result of improved current account balance and external reserves which enabled the Apex Bank to resume FX sales through the deposit money banks for PTAs, BTAs, Medical and Tuition Fees as well as maturing letters of credit. However, there are still backlogs of FX demand for dividend and investment capital repatriation which are yet to be on the priority list of the CBN. Accordingly, we expect the Nigerian bourse performance in the shorter term to continue to be shaped by domestic participation as foreign investors monitor developments in the FX market.

Equities Market Review and Outlook
Similar to the previous quarter, performance in the equities market in Q1:2017 remained underwhelming as the All Share Index (ASI) ended the quarter 5.1% lower. However, the local Bourse closed positive in the last trading week of the quarter, appreciating 0.2% W-o-W while market capitalization added N21.9bn to settle at N8.8tn. The week started on a rather positive note, halting a 4-day bearish run on increased interest in FMCGs as well as Tier-1 banks. However, the benchmark index retreated on Tuesday and Wednesday on account of sell-offs in DANGCEM and a dividend adjustment in GUARANTY. Market witnessed a rebound on Thursday despite some unimpressive FY:2016 corporate earning - SEPLAT (Gross Revenue down 43.9% to N63.4bn, Loss after Tax of N45.4bn) and STERLNBANK (Gross Earnings up 1.0% to N114.4bn, PAT down 49.7% N5.2bn), although major players in the insurance sector - AIICO (GPI up 188.4% to N30.0bn, PAT up 756.3% to N10.2bn), CUSTODYINS  (GPI: up 20.2% to N28.4bn; PAT: up 26.9% to N5.3bn) and MANSARD (GPI: up 25.0% to N20.7bn; PAT: up 58.5% to N2.6bn) reported impressive numbers.. Activity level surged during the week as average volume and value traded rose 189.2% and 989.1% W-o-W to settle at 639.1m units and N20.8bn respectively. The massive spike in activity level was majorly driven by the N90.3bn acquisition of Exxon Mobil’s Shares in MOBIL Oil Nigeria by NIPCO Limited which was executed in the week.

Sector performance for Q1:2017 mirrored the broader index as all indices closed in the red save for the Industrial Good index which was up 7bps Q-o-Q on account of sustained positive sentiments towards BETAGLASS (+46.1%) and renewed interest in WAPCO (+5.0%). The Consumer Goods index (-11.1%) was the worst performer due to declines in NIGERIAN BREWERIES (-14.2%), NESTLE (-7.4%) and GUINNESS (-27.1%). The Banking sector index also slid 3bps while Oil & Gas and Insurance indices declined 6.5% and 2.0% Q-o-Q respectively.

Performance for the week was mixed as 3 indices gained while 2 declined. The Oil & Gas index emerged the best performing sector, up 4.0% W-o-W on account of strong buying interest in SEPLAT (+10.2%) and FORTE (+6.2%). The Industrial Good index followed, adding 2.2% W-o-W as a result of a rally in WAPCO (+4.8%) while the Consumer Goods index inched 0.2% higher on account of gains in CADBURY (+11.7%) and 7UP (+9.2%). On the flip side, the Banking Index lost 1.0% as GUARANTY (-6.0%) and ETI (-5.2%) closed lower while the Insurance Index dipped 0.7% W-o-W despite impressive result submitted by key players during the week. 

In line with market performance, investor sentiment improved, as reflected in the market breadth which settled at 1.4x (from 0.5x the previous week) as 33 stocks advanced while 23 stocks declined. The best performers for the week were AIRSERVICE (+14.8%), CADBURY (+11.8%) and SEPLAT (+10.2%) while LIVESTOCK (-16.9%), UAC-PROP (-6.3%) and GUARANTY (-6.0%) were the worst performers for the week. This week’s performance was largely immune to the corporate announcements made during the week as investors continue to bet on cheaply valued stocks. With the improvement observed on key macroeconomic variables lately, we imagine that investors will want to see how this pans out on Q1:2017 earnings to reorganize their investment strategies for the rest of the year.

Money Market Review and Outlook
Money market rates this week traded within a band of 12.2% and 13.0%. The week opened with system liquidity of N13.9bn as money market rates –OBB and OVN rates settled at 12.7% apiece owing to CBNs OMO mop ups and SMIS interventions. The Apex bank in a bid to squeeze excess liquidity from the system conducted OMO auctions on all trading days of the week save for Wednesday. An OMO maturity worth N51.5bn hit the system on Thursday, however, the impact was offset by the OMO sales conducted that same day bringing system liquidity to N92.1bn. Money market rates eventually closed at 10.5% and 11.5% indicating 1.0 and 1.5 percentage points increase W-o-W.

As an outcome of the several OMO mop ups conducted this week, performance in the Treasury Bills market was bearish. Average yield closed higher on all trading days as investors sold off on instruments in order to partake in the several OMO auctions conducted by the CBN in the week. Average yield closed the first trading day at 16.9 %( 35bps higher) and eventually settled at 17.5% on Friday, up 0.6% W-o-W.

Next week, there will be maturing Treasury Bills of N35.0bn, N33.5bn and N166.4bn for the 91-day, 182-day and 364-day tenors respectively as well as rollovers of the same amounts. We expect liquidity levels to be hampered by the different primary market activities to be held next week, including Treasury Bills and Savings Bond auctions.
Foreign Exchange Review and Outlook
After sustaining intervention in the currency market to achieve a convergence between official and unofficial rates, the CBN issued a directive to Deposit Money Banks (DMBs) on Monday to sell FX for BTA, PTA, School and medical fees to retail users at N360.00/US$1.00, from the N375.00/US$1.00 it sold in the previous week. The Apex Bank sold to DMBs at N357/US$1.00 while Bureaux de Change (BDCs) who are to sell to end-users at N362.00/US$1.00 were sold to at N360.00/US$1.00. A sum of US$100m wholesale forward intervention was offered and fully allotted to Banks on Monday while another US$100m was offered to wholesale dealers on Thursday. According to a media report, the CBN has intervened by about US$2.0bn since its recent resolve to force convergence between parallel and official rates.

Accordingly, the exchange rate at the parallel market appreciated further, AbokiFX reported a selling price of N375.00/US$1.00 on Tuesday in contrast to N400.00/US$1.00 at the close of business on Friday (24/03/2017). However, Black market rate retreated from Wednesday to Friday, weakening to N390.00/US$1.00 on Friday. Interbank (NIFEX) rate also improved from N315.00/US$1.00 to N314.87/US$1.00 on Friday while CBN spot rate settled at N306.04/US$1.00.

In furtherance of its determination to sustain liquidity in the FX market, the CBN on Thursday announced its decision to commence bi-weekly FX sales to licensed BDCs operators from Monday, 3rd April 2017. Sales amount to BDCs will also be increased to US$10,000.00 (US$5,000/bid) at a new rate that will be announced on Monday. Licensed BDCs are to fund their accounts on Mondays and Wednesdays while they receive their purchases on Tuesdays and Thursdays respectively. In line with the above, we expect market rates to continue to appreciate until the CBN attains a market reopening rate.

Bond Market Review and Outlook
In contrast to last week’s performance, sentiment in the domestic bond market was bearish this week as yields trended upward across benchmark bonds by 2bps on average to 15.77%. The market initially opened the week bullish, particularly at the longer end of the curve, with yields moderating 1bps and 2bps on Monday and Tuesday respectively. Sentiment however turned bearish on subsequent trading sessions as investors’ booked profit. Consequently, yields rose W-o-W across all benchmark maturities, save the 3-Year FEB 2020 (-16bps to 15.8%) and 20-Year JUL 2034 (-6bps to 15.6%) bonds which rallied.

Our medium-term outlook remains bullish as we expect yields to moderate on falling inflation expectation and improving current account and fiscal balance. Relatedly, the Nigerian Stock Exchange listed the Series 1 of the Federal Government of Nigeria (FGN) Savings Bond, maturing March 2019. The Bond was priced at 13.01% at issuance and has an outstanding value of N2.1bn. The April 2017 offer opens on Monday, 3rd April 2017 and will close on Friday, 7th April 2017. The DMO is expected to release the issuance rate next week.

In the Eurobond market, Nigeria successfully raised US$500.0 mid-week to conclude its US$1.5bn Global Medium Term Note due FEB 2032. The bond was issued at a yield of 7.5%, 38bps lower than the issuance yield of the US$1.0bn tranche issued in February. The two instruments, which have the same maturity date, have subsequently been consolidated into a single US$1.5bn bond with the market yield trending further downwards to 7.4% as of writing.

Riding on the coattail of the successful issuance, Nigeria’s other three outstanding Eurobonds rallied with yields declining 12bps on average. Contrarily, other SSA Sovereigns performance was less impressive as all South African Eurobond yields rose in response to a long-drawn political gridlock which came to a head yesterday 30th March with the sacking of cabinet members including the influential Finance Minister Pravin Gordhan. Also, investors sold off on Ghanaian debts after the resignation of the hawkish central bank Governor, Dr. Abdul-Nashiru Issahaku, earlier in the week for “personal reasons”. Nigerian Corporate Eurobonds were mostly bearish this week but investors continued to swoop on the highest yielding Nigerian Corporate debt - the DIAMOND 2019 Note - with yield further declining 1.2% W-o-W to 15.0%, taking YTD price gain to 16.2%. ACCESS 2021 (YTM down 3bps to 9.1%) also pared previous week’s loss while ZENITH 2019 (YTM down 1bps to 5.7%) rallied further.