GLOBAL
Global growth expectation unchanged even in the midst of new pressure points
Global growth has strengthened as expected in recent months, largely driven by advanced economies, where easier financial market conditions and gradually improving consumer and business confidence have supported growth. While emerging economies have benefited from the stronger external demand, domestic demand has remained weaker than expected in many of them, reflecting in part, tighter financial conditions. While global growth is projected to continue improving, the recovery is uneven and fragile and significant downside risks remain just as adverse geo-political developments in both Ukraine and Venezuela have exacerbated a negative market tone in selected developing countries.
Global Equities rebounded as worries tapered
In line with our outlook, equities rebounded strongly in February after shrugging of a number of negative factors. During the month for example, economic performance data from China remained weak on average while January 2014 manufacturing data in the U.S dipped, together with a downward revision of the country’s Q4-13 GDP growth estimate. The Ukraine-Russia unrest was one of the popular headwinds that confronted global markets during the month. Notwithstanding, stocks remained resilient, driven by increased risk appetite, less emerging market worries, improved economic performance of the euro area and better-than-expected corporate performances.
In terms of outlook, we expect the global market (particularly in the advanced region) advance to persist in March, but gains may be way less than in February. In contrast, we believe that sentiment towards emerging markets is still low and that the recent gains may not be sustained in the coming month.
Crude Oil: A cold weather and geopolitical risk market
February was bullish for crude oil as a couple of factors worked in favour of a price rally. Brent crude appreciated by 2.5% and the U.S West Texas Intermediate (WTI) rose higher by 5.2% to close US$111.06/bl and US$102.59/bl respectively.
In terms of outlook, weather factors and geopolitical concerns will sustain oil price rally in March. The frosty weather in U.S is likely to continue until mid-April while there are no indications that supply disruptions in Libya and the North Sea would end anytime soon. However, the strength of the rally will depend on the quality of data from U.S, China and Europe.
Flight to safety drives Gold price
The month of February was bullish for gold as investors increased demand for the commodity given the safe haven status. Following increased worries over global economic growth amid emerging market worries and disappointing U.S data, investors’ sentiments towards gold brightened relative to equities and the Dollar.
Better-than-expected economic data (which will be a plus for equities), coupled with profit-taking activities on the recent gains could see prices retreat in March. Otherwise, investors would likely continue to seek safety in gold and provide support for price rallies.
NIGERIA
Politics and Security
The rumble in the political environment continued in February, with the leading People’s Democratic Party (PDP) and the opposition (All Progressive Congress – APC) still the primary characters. With peace having returned to River State, as it appears (recall that this is one of the grounds under which the APC initially stalled hearings on the budget), the 2014 Appropriation Act has remained a subject of political vendetta.
The insurgency in the North rose to elevated heights in the month under review. Accordingly, the number of causalities rose drastically from January levels as the main architects – the Boko Haram sect – spread their operations. Having operated mainly in Borno and Yobe states since the beginning of the year, Adamawa and Plateau were recently struck by the same group in February, thus increasing the number of death tolls recorded year-to-date.
Inflation rate up to 8% in December 2013; 100bps left of CBN’s 2014 upper target
January 2014 Consumer Price Index (CPI) rose by 8% year-on-year (y/y), representing unchanged growth from December 2013 level, but lower than 9% reported in January 2013. This is the result of a moderate month-on-month (m/m) growth in the various components of the sub-indices (food and core) as upside pressures subsided after the festive period. The Headline Index rose by 0.64% m/m, lower than a faster growth of 0.78% recorded in December 2013.
Notwithstanding the unchanged growth rate achieved in January, a combination of pre-election spending, weakening Naira, insecurity in the North and the wearing-off of the base-effect advantage make achieving the CBN’s 9% upper target impossible, in our view.
Naira weakens in February, with concerted interventions by the CBN stemming a collapse
The Naira was caught in a bearish stranglehold in February as the market (especially foreign investors) reassessed the return structure of various instruments giving changing global, regulatory and political risks. The Naira lost 1.51% against the US Dollar to close the month at N164.95/US$. The local currency depreciated further against the Pound and Euro, losing 3.32% and 3.80% to N276.26/£ and N227.72/€ respectively.
We expect the Naira to show stability at the inter-bank market in March, a stability that may not necessarily extend to the BDC and parallel segment of the market.
Trend decline of reserves accelerates in February as the CBN pushes back the selling tide
The decline in the foreign reserve accelerated in February as the CBN went all out to maintain Naira stability. On a month-on-month basis, the reserve fell by $3billion in February after declining by $490million in January.
We see negligible upside for the foreign reserve in March as the after effects of the suspension of the CBN governor and its deleterious impact on the perceived independence of the apex bank begins to be fully factored into investor’s (especially offshore investors) decision making processes going forward (to the detriment of the Naira).
THE NIGERIAN CAPITAL MARKET
Equities: Domestic challenges further weakened sentiments
Trading in the month of February ended in line with our outlook as the benchmark index fell by 2.5% to 39,558.89 points and the market capitalization reduced by N298.7billion to N12.71trillion. The emerging market worries as well as the instability of the local currency had an impact on the market as foreign investor activity remained at low levels. Meanwhile as investors were also struggling to adjust to the CRR hike-induced banking shares sell-off, news of the suspension of the Central Bank governor filtered into the market on February 20th and created a more serious unrest across board.
Unlike in January, the factors that would affect equities trading in March are skewed more to the upside than downside.
Fixed Income
A T-Bill rout averted as local investors take advantage of attractive yields
The T-Bill market began the month under pressure as the first CRR debit following the hike in public sector CRR to 75% (on February 4) appeared to have at least in part induced liquidation of T-Bill holdings by banks seeking to manage their liquidity position. Yields subsequently moderated to the downside but this reprieve was short-lived.
Considering the sharp moderation in the average T-Bill yield from the highs of February (average yield fell by 61bps), our outlook for the market is bearish as we expect investors to book profits ahead of the next MPC which could see policy makers implement aggressive policies.
Expected resilience of the bond market materialised in February
Considering the souring investment climate as discussed above, the bond market put in a resilient performance in the month of February which we put down to some of the idiosyncratic features of the market.
Our outlook for the bond market in March is bearish given our outlook for MPR (already discussed above), the less attractive yields relative to the T-Bill market (given the better liquidity it offers), profit-taking activities, and what appears to be demand exhaustion (according to information from our traders).
Cordros Capital Limited
