Market Review and Outlook –Week Ended Nov. 23, 2018

Global Equities Market: Investors on Alert Ahead of US - China Meeting at G-20 Summit
Global investors will be looking for hints on the direction of trade policies as President Donald Trump of the US and Chinese President Xi Jinping meet during the G-20 summit in Buenos Aires, Argentina next week. Much of the negative sentiments in global financial markets continue to be driven by trade tensions between the US and China. Based on the potential for further trade restrictions, conditions in markets could worsen if an agreement is not reached. While the Chinese companies affected have benefitted from government support, there are indications that companies with global supply chains are rethinking their stay in China to avoid punitive US tariffs. In the US, President Trump continues to face pressures from farmers who are incurring storage costs as output have remained unsold due to the trade tensions.

As a result of concerns about the upcoming meeting, the performance of developed markets was largely bearish across board. In the US markets, the S&P 500 and the NASDAQ closed the week lower, down 3.2% and 3.8% W-o-W respectively while the UK FTSE shed 1.0% W-o-W. Similarly, France's CAC 40 (-1.9% W-o-W), Germany's XETRA DAX (-1.8% W-o-W) and Japan’s Nikkei 225 (-0.2% W-o-W) depreciated during the week. Additionally, Hong Kong’s Hang Seng declined 1.0% W-o-W.
Across the BRICS markets, performance was largely bearish as all indices trended southwards. The largest loss was recorded in China's Shanghai Composite, down 3.7% W-o-W, while South Africa’s FTSE/JSE All Share, Brazil's Ibovespa, and Russia's RTS trimmed 3.1%, 2.2% and 1.75 W-o-W respectively. Finally, India's BSE Sens had a decline of 1.3% W-o-W.
In Africa, there was a bearish performance as 4 of 6 markets under our coverage recorded losses W-o-W. The Ghana’s GSE Composite, Nigeria’s All-Share Index, Kenya NSE-20, and Mauritius SEMDEX declined by 2.9%, 1.2%, 1.0%, and 0.6% W-o-W respectively. On the flip side, Egypt’s EGX30 and Morocco Casablanca MASI were the only indices which closed the week positive, up by 1.4% and 0.3% W-o-W respectively.

In Asia and the Middle East, the markets showed a bullish performance as 4 of 5 markets recorded gains W-o-W. Thailand's SET index posted a strong return of 2.1% W-o-W to lead gainers, followed by UAE's ADX General Index (1.4% W-o-W), Saudi Arabia's Tadawul ASI (0.7% W-o-W) and Turkey's BIST 100 (0.7% W-o-W) indices. However, Qatar's DSM 20 index declined of 1.1% W-o-W.

Domestic Equities Market: Bears Tighten Hold on Domestic Bourse; Zenith Accounts for 62.2% of Total Value Traded
The downtrend in the local bourse persisted this week, as sustained sell offs in market bellwethers weighed on overall performance. Consequently, the NSE All Share Index closed in the red on 3 of the 4 trading sessions in the week, falling 1.2% W-o-W to settle at 31,678.70 points. Similarly, YTD loss expanded to -17.2% and market capitalisation shed N138.6bn W-o-W to close at N11.6tn.  Trading activity strengthened as average volume and value traded increased 24.8% and 150.7% to 320.5m units and N5.8bn respectively. The top traded stocks by volume were ZENITH (648.1m units), DIAMOND (138.1m units) and OANDO (95.3m units) while ZENITH (N15.6bn) – accounting for 62.2% of total value traded in the week, GUARANTY (N1.6bn) and NIGERIAN BREWERIES (N1.6bn) topped trades by value.

The week started on a positive note as buy interest in market bellwethers – NIGERIAN BREWERIES and NESTLE – lifted the benchmark by 51bps on Monday. However, sell pressures on DANGCEM, GUARANTY and ETI reversed previous gains as the All Share Index (ASI) shed 78bps on Wednesday. On Thursday, the ASI marginally gained 5bps, following price appreciations in FLOURMILL, ZENITH and GUARANTY. We also observed a major spike in volume traded on Thursday as a cross deal in ZENITH (600m units at N24.00) was recorded. On Friday, the market closed in the red, as sell-offs in DANGCEM, NIGERIAN BREWERIES and WAPCO dragged the index 96bps southwards. As a result, the benchmark index lost 1.2% W-o-W.

Performance across sectors was mixed as 3 of 5 indices under our coverage advanced W-o-W. The Insurance index gained the most, up 1.4% the back of price appreciation in CONTISURE (+6.4%) and AIICO (+1.6%). Similarly, the Consumer Goods and the Oil & Gas indices gained 1.1% and 0.3% W-o-W respectively due to investors taking positions in NESTLE (+1.4%) and INTBREW (+1.8%),  MOBIL (+10.0%) and TOTAL (+0.2%). On the flip side, the Industrial and Banking indices declined by 5.3% and 0.8% W-o-W respectively due to sell-offs in DANGCEM (-4.2%), WAPCO (-12.5%), GUARANTY (-1.4%) and ACCESS (-3.9%).

Investor sentiment strengthened this week, as market breadth increased to 1.2x from 0.7x in the previous week following 28 stocks that advanced against 23 that declined. The best performing stocks for the week were PRESTIGE (+41.1%), PZ (+18.3%) and FLOURMILL (+15.1%) while IKEJAHOT (-18.5%), WAPCO (-12.5%) and LAWUNION (-8.8%) led the losers’ chart for the week.  In the coming week, we expect an undulating trend in market performance as the impact of bargain hunting in fundamentally sound stocks is expected to be countered by subsequent sell offs. However, we maintain our bearish outlook on the market over the near-term

Money Market:  System Liquidity Remains Robust Despite OMO Mop Up
On Thursday, the Monetary Policy Committee of the CBN completed its last meeting for the year. The Committee elected to maintain status quo on key policy rates; Monetary Policy Rate (MPR) at 14.0% and asymmetric window around the MPR at +200 and -500bps, Cash Reserve Ratio (CRR) at 22.5%, and Liquidity Ratio at 30.0%. As expected, there was no kneejerk reaction in the money market as this decision was largely in line with expectations.

In the money market this week, liquidity levels remained robust following an OMO maturity worth N409.0bn that hit the system. However, in line with trend, the apex bank sought to keep liquidity levels in check by floating an OMO auction worth N450.0bn (only N199.6bn was mopped up).

At the auction, the 105-day (Offer: N50.0bn, Sale: N0.01bn), 182-day (Offer: N150.0bn, Sale: N16.4bn) and 350-day (Offer: 250.0bn, Sale: N183.1bn) instruments were issued at marginal rates of 11.5%, 13.0% and 14.5% respectively. Interestingly, despite the robust liquidity levels, all the instruments were undersubscribed, given expectations of higher short-term rates by investors. Hence, there was increased buying activity in the secondary market.

Accordingly, money market rates moved in line with system liquidity dynamics. The Open Buy Back (OBB) and Overnight (OVN) rates opened the week at 10.2% and 10.8% respectively (higher than 6.3% and 7.2% at the close of the prior week). However, as liquidity levels improved through the week, rates trended lower to 5.8% (OBB) and 6.7% (OVN), down 0.5% and 0.6% W-o-W respectively. Similarly, in the T-bills market, buying activity improved across tenors, with the average T-bills rate opening the week at 13.1%, before declining 1bp by Thursday. However, by Friday, sell offs were recorded which drove average yield northwards to end the week at 13.1% – up 4bps W-o-W.

In the coming week, we expect money market rates to remain within the single digit band as liquidity levels remain robust. Nevertheless, we expect the CBN to sustain its weekly OMO mop ups in the week.

Foreign Exchange Market: Naira Stable amid Energy Commodities’ Rout and Falling Reserves
Falling energy prices persisted into the week as emerging signs of oversupply, particularly, continue to pressure oil prices downwards; Brent Crude declined 7.2% W-o-W (as at the time of reporting) from US$66.76/b to US$61.96/b. Although declining global oil prices should fundamentally signal a devaluation of currency in the horizon or at least a depreciation of exchange rate at the “perceived market reflective” I&E window, the commitment of the CBN to the defence of the naira keeps providing stability for exchange rates at different segments of the FX market. Consequently, Nigeria’s external reserves, during the week, dropped to its 8-month low after shedding 27bps W-o-W to settle at US$41.5bn (21/11/2018); the currency reserves are down 13.1% June 2018 till date, falling from a high of US$47.8bn (21/11/2017).

In the week, the CBN sold a total of US$210.00m at various market segments, including US$100.00m sold at the Wholesale segment, US$55.00m at the SME segment and another US$55.00m offered at the invisible segment (tuition fees, medical payments as well as PTA and BTA). Accordingly, the CBN spot rate closed the week somewhat flat at N306.75/US$1.00 from N306.70/US$1.00 in the prior week. Similarly, the exchange rate depreciated by 19bps at the I&E window to close at N364.70/US$1.00 although activity level improved significantly by 24.0% to US$1.0bn from US$0.8bn in the prior week. At the parallel market, the naira traded at N364.00/US$1.00 throughout the week. However, at the FMDQ OTC FX Futures Market, the value of open contracts rose 0.4% W-o-W to US$5.01bn from US$5.00bn last week, with significant buying interest noticed in the AUG 2019 instrument.

Whilst the recent downside risk of capital flow reversals is not anticipated to disperse in the coming week, we expect the potency of the Apex Bank’s intervention supplies to steady exchange rates across major market segments.

Bond Market:  Market Performance Remains Restrained
The Debt Management Office (DMO) of Nigeria held a Primary Market Auction (PMA) on the 21st of November for three instruments – 12.75% APR 2023, 13.53% MAR 2025 and 13.98% FEB 2028 which were all re-opened and issued at marginal rates of 15.2%, 15.5% and 15.83%respectively. From the total amount of N115.0bn offered, N39.5bn was allotted, while subscription levels were also depressed at N102.7bn (0.9x of offer) with majority of the bids focused on the 2028 instrument (1.8x bid-to-offer). The 2023 and 2025 bonds recorded bid-to-offer levels of 0.1x and 0.5x respectively.

The average yield on FGN bonds declined moderately by 8bps W-o-W to 15.40% from 15.48% as activity levels have remained relatively weak. The average volume traded declined to N133.0bn in the week from N231.9bn between 12th and 16th of November. While the shorter week factored into the decline in activity, we note that this has been the trend over weeks, as discount rates on short-term instruments have risen.
The direction of activities at the PMA and in the secondary market this week is in line with our expectations for the market over the near-term. We expect that yields will increase as sell downs from foreign investors intensify and focus of demand on the shorter end of the curve exerts upward pressure.

The SSA Sovereign Eurobonds market was generally bearish, with yield increases recorded across all bonds in the market. Consequently, the average Ask-yield increased by 0.4% to settle at 8.4%. The largest increase was witnessed on the Republic of Tanzania bond, which recorded a yield increase of 87bps to settle at 5.1%. We believe the yield increases across bonds may be tied to increased risk profile of countries across emerging and frontier markets.

Nigeria’s sovereign Eurobonds recorded an Ask-yield increase of 0.4%, to bring the average yield across the ten instruments to 8.2%. This was expected given that the country’s risk profile is rising, as Brent crude oil price slipped to a 13-month low of US$59.88/b (23/11/2018), amongst other risk factors. We expect this trend to persist over the short-term, although at a slower pace, as investors become wary of capital losses in the event of ratings action given the negative outlook.

The average Ask-yield on Nigerian corporate Eurobonds increased in line with the general market trend. Consequently, the average yield increased by 31bps to 8.3%. This was primarily due to the increase in yield on the Diamond Bank PLC 2019 bond, which was up by 1.4% W-o-W to settle at 16.6%. We adduce this sell-down on the instrument to the recent downward revisions of the bank’s ratings by S&P (long and short-term issuer credit ratings) and Moody’s (deposit and issuer ratings), to CCC+ (with a negative outlook) and Caa1 (direction uncertain) respectively.