Global Market Review and Outlook
The global equities market rally that greeted the outcome of the US Presidential election continued this week as all indices in the developed and Euro-Asian markets closed in the green while performance in the BRICS and African markets stayed mixed.
In the US markets, the US NASDAQ and S&P 500 indices rose 1.1% and 1.0% W-o-W respectively as manufacturing sector data published during the week came in stronger alongside sustained optimism in the market post Trump's win. Stronger manufacturing readings is said to signal a likely rates hike in December. The UK FTSE also advanced 0.5% W-o-W with drug makers leading the market after Swiss biotechnology firm Actelion surged on a takeover approach by Johnson & Johnson. In the Euro-Asian markets, the Japan NIKKEI appreciated the fastest, up 2.3% W-o-W. This was followed by the Hong Kong HANG SENG which gained 1.7% W-o-W. The France CAC appreciated 0.7% W-o-W while German DAX rose 6bps.
All indices in the BRICS markets but the South African FTSE closed in the green as oil prices rose 3.1% W-o-W following indications that non-OPEC members may cut output ahead of its December meeting. The China SHANGHAI composite rebounded 2.2% W-o-W following last week’s decline. Also, the Brazilian IBOVESPA and the Russian RTS were up 2.4% and 1.1% respectively. While the Indian BSE SENS improved 0.6% W-o-W. As noted above, the South African FTSE was the sole decliner, down 0.5% W-o-W.
Performance in the African Markets was broadly bearish as all indices closed in the red save for the Egyptian EGX which sustained its gaining streak for the 5th consecutive week, although at a slower rate of 1.2% W-o-W. On the other hand, the Ghanaian GSE index depreciated the most, down 5.8% W-o-W while the Kenyan NSE lost 0.5% W-o-W. Macro-economic headwinds in Nigeria continued to depress sentiments as the Nigerian All Share Index extended losses to the 6th consecutive week, losing 0.2% W-o-W.
Equities Market Review and Outlook
The All Share Index (ASI) closed in the red for the 6th consecutive week as the broader index depreciated on four of five trading days. The week started on a negative note as the NBS published its Q3:2016 GDP report on Monday, indicating a further contraction in domestic output in Nigeria. Meanwhile, expectation of the outcome of the MPC meeting held from Monday to Tuesday kept market soft on the second trading day of the week. On Wednesday, market bucked 8 consecutive trading days of declines as bargain hunters bet on value counters following MPC’s decision to “do nothing”. However, equities closed lower for rest of the week. Consequently, the ASI dipped 0.8% W-o-W, YTD loss worsened to 11.6% while market capitalization depreciated N70.3bn W-o-W to settle at N8.7tn. The performance was broadly dragged by price decline in FORTE (-24.0%), TOTAL (-10.9%) DANGCEM (-0.9%) and WAPCO (-3.2%). Market activity was however mixed as average volume traded declined 22.2% to 128.1m units while average value traded improved 18.6% to N1.3bn.
Performance across sectors was mixed as two indices appreciated while three declined. The Consumer Goods index rose 0.4% on the back of strong interest in FLOURMILL (+20.3%) and NESTLE (+1.3%) while the Banking index trailed, up 2bps due to gains in ACCESS (+3.3%), GUARANTY (+2.4%) and UBA (+0.9%). On the flipside, the Oil & Gas index slumped 5.1% on account of price depreciation in FORTE (-24.0%) and TOTAL (-10.9%). This was followed by the Industrial Goods index which declined 1.6% as DANGCEM (-0.9%) and WAPCO (-3.2%) dragged the index lower whilst the Insurance index shed 0.3% W-o-W on poor investor appetite for CONTISURE (-3.8%).
Market breadth (advancers/decliners ratio) improved to 0.9x (from 0.5x in the previous week) owing to 24 advancing stocks against 26 declining stocks. Top gainers were FLOURMILL (+20.3%), AFRIPRUD (+14.5%) and FIDSON (+12.9%) while top losers were FORTE (-24.0%), OKOMUOIL (-13.8%) and NEIMETH (-12.8%). The current downtrend of the Nigerian bourse signals opportunities for bargain hunters most especially for speculative purposes. Overall, we caution investors to stay invested only in market bellwethers.
Money Market Review and Outlook
In the absence of financial system liquidity data, we perceived liquidity levels to be tapered given the trend in OBB and O/N rates in the week. OBB and O/N traded largely stable for the week though increased marginally to settle at 11.9% and 12.6% from the previous Friday’s close of 12.5% and 13.2%. There were no money market (OMO or T-Bills) and bonds auctions during the week, hence money market rates remained moderate. Average REPO rates for up to 6M tenor however declined closing at 13.9% from the previous week’s close of 16.8%.
The Treasury Bills market in the week also sustained the high rate but remained largely calm though investors continued to be attracted to the market. From the average T-bills close of 17.6% in the previous week, the market opened the week bearish with average yield settling at 19.2% on Monday but was reversed on Tuesday as average yield moderated to 18.3%. By Thursday, average yield further rose to 19.0% before closing the week at 20.1%, resulting in a W-o-W rise of 2.5% in yield. Next week, a T-Bills maturity worth N117.2bn will be hitting the system with auction of the same sum expected to be conducted on 91-Day, 182-Day and 364-Day instruments. In line with recent auctions and the attraction to short term fixed income instruments, we expect the auction to be largely successful.
Whilst the T-bills instruments continue to be preferred by most investors than bonds, we expect the secondary market to trade much cautiously in the coming week as investors would likely target the primary auction market for a better yield.
Foreign Exchange Review and Outlook
Against expectation of FX reforms pronouncements at the end of the MPC meeting on Tuesday, the Committee stayed silent on the current state of the interbank market while reinstating its commitment to continue to allocate FX to critical sectors of the economy – a practice devoid of a truly flexible FX market. As has been the case in recent times, the naira exchange rate to the dollar remained largely stable closing at N305.25/US$1.00 from the previous week’s close of N305.50/US$1.00.
At the parallel market however, the demand pressure remains noticeable as the naira depreciated N5.00/US$1.00 against the greenback on Monday from N465/US$1.00 on previous Friday to N470.00/US$1.00 at the close of trade. However, the currency stayed flat at N470.00/US$1.00 for the rest of the week implying a 1.1% weakening on a W-o-W basis. We expect the liquidity constraints in the market to continue to drive the overall performance of the FX market in the coming week.
At the currency derivatives market, the value of opened contracts closed the week lower at US$3.6bn from the previous week’s close of US$3.8bn on the back of NGUS NOV 2016 contract (with open value of US$421.7m) that was settled by the CBN on Wednesday and replaced with NGUS NOV 2017 (open value subscribed at US$89.5m). On the contract list, the 11-12 month term to maturity currently presents the most attractive hedging opportunities (prices at N260.00/US$1.00 and N262.00/US$1.00) since the contracts are not opened for speculative purposes. Our analysis is premised on the potential FX depreciation in the horizon when the necessary inevitable reforms of the market become operative. The 1-year derived futures price, if we assume 18.0% risk free rate and the current interbank and parallel market spot prices, suggests N365.45/US$1.00 (CBN Spot) and N550.72/US$1.00 (parallel) as against the CBN’s price of N260.00/US$1.00 for 1-year FX futures contract rate. Overall, only 30.1% of the futures contracts have been subscribed from inception to date.
Bond Market Review and Outlook
In expectation of a possible retention of key monetary policy rates by the end of MPC meeting on Tuesday, yields across term structure of sovereign bond instruments opened the week 5bps lower to settle at 16.9% on Monday. The elevated inflationary pressures, coupled with the high yield on short tenured money market instruments, have continued to shape investor pricing of bond instruments especially at the medium to long term end of the yield curve. Accordingly, the week witnessed a somewhat downward repricing of yields, which have consistently increased over the past two weeks, after settling at an average of 16.7% at the close of the week.
The sovereign yield curve remains fragmented across tenors with the curve inverted at less than 1.5- year term to maturity while opening the week at an average of 20.3% from 20.4% in the previous week but closed Friday at 19.8%. On 2 to 19-year term to maturity however, the yield curve continues to trade around normality, opening the week lower at an average of 15.9% to close at 15.7%. Nonetheless, overall analysis of the sovereign yield curve suggests an inverted yield curve which characterizes a recessionary period. Given the expectation of possible moderation of inflation in the coming months due to base effect and the anticipation of probable FX market reforms in Q1:2017, our prognosis favours potential moderation in yields as the current high yield on short term securities becomes unsustainable in the near term. As such, we recommend investors go long on risk free bond instruments. In the coming week, the bonds market will likely stay calm on the back of T-bills auction scheduled for next Wednesday.
In the Eurobonds market, most sovereigns (South Africa, Ghana, Gabon, Senegal and Zambia) save for Nigeria traded bullish with their respective average yield closing 7bps, 8bps, 62bps, 27bps and 14bps lower W-o-W respectively. Average yield on Nigerian sovereign Eurobonds on the other hand closed bearish, 1bp higher. Elevated macroeconomic risks, especially relating to domestic forex market and external sector imbalances, continue to drag investor sentiment. South African instruments remain the most expensive, trading at premium to par while the Ghana Jan-2026 and Nigeria Jul-2023 present attractive discounts at US$93.40 and US$93.44. In the corporate space, Eurobonds traded bullish with average yield declining by 1.1%. Fidelity 2018, Diamond 2019 and Access 2021 with similar “B-“credit rating present the most attractive discount quotes at US$82.96, US$71.70 and US$90.47 respectively.