18/8/2017/Cordros Research

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Nigerian Capital Market

Equities

After five consecutive weeks of bullish streak, Nigerian equities booked a negative return this week with declines across sector indices. The market started the week negative (extending the negative close in the previous week which ended a 7-day bullish spree) and extended till Wednesday (with a cumulative loss of 5.58%), as investors took profit on previous gains recorded in the market. However, the negative performancewas bucked on Thursday – helped by gains in DANGCEM following news of a regulatory approval of the sale of N200 billion worth of shares in the company by Dangote Industries Limited – and extended to Friday (with a cumulative gain of 2.26%), as investors hunted bargain in value stocks in the Industrial, Banking and Insurance indices. Overall, the All Share Index lost 3.35% w/w to 36,920.56 points, dropping MtD and YtD returns to 3.00% and 37.38% respectively.

Performance across sectors was broadly bearish, led by the Industrial Goods (+6.02% w/w) and Consumer Goods (+2.76% w/w) indices, as investors took profit in the shares of CCNN (-13.91%), WAPCO (-6.35%), DANGCEM (-6.25%), GUINNESS (-7.41%), CADBURY (-4.96%) and DANGSUGAR (-1.76%), respectively. Players in the downstream oil and gas sector have recorded significant contraction in gross margins, following the rising landing cost of PMS and the intervention by the NNPC in bringing down the price of AGO across its depots, thus, investor interest in the oil & gas sector (-2.31% w/w) has been downbeat with sell-offs across most counters during the week, with the most notable being TOTAL (-8.39%), FO (-7.41%), ETERNA (-6.01%), OANDO (-5.94%), and MOBIL (-5.00). In the same vein, investors booked gains in the Insurance (-1.01% w/w) and Banking (-0.45% w/w) sectors, as the shares of NEM (-12.73%), MANSARD (-4.65%), ACCESS (-5.65%) and UBA (-5.36%) recorded losses.

Market breadth weakened during the week to close negative, with 19 gainers (30 last week) – topped by FIDSON (+9.70% w/w) – versus 48 losers (37 last week) – led by CCNN (-13.91% w/w). Total volume traded declined further by 8.13% to 1.39 billion shares (1.52 billion last week), with ACCESS, ZENITHBANK, and GUARANTY accounting for 47.03% of the market volume. The value of trades also plunged by 13.27% to N25.04 billion (previously N28.87 billion), with GUARANTY, ACCESS, and ZENITHBANK accounting for 48.66% of total value.

Global Equities

Global equities staged a mixed performance, with investors taking cues from tapering geopolitical tensions, currency weakness, terrorist attack, and economic data, and government action. 

U.S. investors, while sorting mixed economic data (industrial production, consumer sentiment/retail sales, and jobless claims), grappled with a host of negatives during the week, including (1) concerns about President Donald Trump’s ability to pursue pro-business policies amid a continued controversy over his response to weekend violence in Charlottesville, and (2) tweets showing that the U.S. president is disbanding a pair of advisory panels following the departure of more corporate leaders. On the positive, stocks recorded modest gains after Federal Reserve minutes suggested that the central bank is wrestling with sluggish inflation but eager to commence an unwind of its USD4.5 trillion asset portfolio, further supported by ebbing geopolitical turmoil. Overall, the magnitude of selloff outweighed demand, causing the DJIA and S&P 500 to post weekly losses of 0.62% w/w and 0.46% w/w respectively. European stocks rebounded from last week’s sizable loss, sustaining a three-day win streak through Wednesday. The gains were driven by renewed interest following last week’s losses, after senior U.S. officials over the weekend sought to play down the risk of a nuclear conflict with North Korea. Investors were further encouraged by North Korea’s decision not to follow through with its threat to attack U.S. island territory Guam, and big exporters shares being boosted by a weaker euro – following minutes from the European Central Bank’s meeting last month. On the flipside, demand tapered, with banking stockstaking the biggest hit amid doubts about another U.S. interest rate hike in 2017. A fall in Spanish stocks – on the back of a deadly terrorist attack in Barcelona – equally weighed on investor appetite. In all, the FTSE 100 (+0.5% w/w) and Euro Stoxx 50 (+0.87% w/w) were both resilient.

In Asia, activities were mixed across markets, with the CSI 300 (+2.12% w/w) recording the highest weekly gain within our coverage universe while the Nikkei 225 (-1.31% w/w) closed in the red. Similar to the pattern observed in advanced markets, proceedings were bullish at the start of the week, following calming moves by senior U.S. officials over North Korea-U.S. rancour, and a complementary pullback by North Korea. Gains persisted, as investors interpreted minutes of the Federal Reserve’s meeting as revealing a deeper-than-expected divide on the timing of the next interest rate increase.  Meanwhile, overnight weakness on Wall Street pressured stocks.

Fixed Income

Money Market

The overnight money market rate contracted w/w by 4,637 bps to 12.88% from last week’s 59.25%. The week started off with a surge in the overnight rate by 4,000 bps to 99.25% on Monday (following reduction in system liquidity as the apex bank sold OMO bills worth N9.39 billion), while it contracted on Tuesday and for the remaining trading days of the week, as the market anticipated the inflow of N168.04 billion via maturing OMO bills (on Thursday) and  the refund of excess cash deposited by banks for FX purchase today.

Treasury Bills

At Wednesday’s NTB auction, the apex bank fully allotted N62.44 billion worth of T-bills, – comprising N32.44 billion and N30.00 billion of the 91-day and 182-day bills — at lower stop rates of 13.35% (previously 13.42%) and 17.35% (previously 17.40%), respectively. In the secondary market, activity remained bearish, with average yield expanding further by 25 bps to 18.62%, from 18.37% last week. Yields expanded across board, — short (+46 bps), mid (+33 bps) and long (+4 bps) ends of the curve — following selloffs of the 13DTM (+694 bps), 153DTM (+66 bps), and 209DTM (+35 bps) bills, respectively.

Bond

Proceedings in the bonds market remained bearish, albeit with marginal yield expansion, as average yield inched by 2 bps to 16.49%. Yields expanded at the short and long ends of the curve by less than 1 bp and 5bps, owing to the 13-FEB-2020 (+10 bps) and the 22-JAN-2026 (+22 bps), respectively. Conversely, yield at the mid (-7 bps) contracted driven by sell off of the 15-JUL-2020 bond.

Foreign Exchange

In line with our prognosis of an improved intervention by the apex bank in the currency market for the week, the CBN, on Tuesday, sold USD364 million at the interbank market (bringing total intervention Month-to-Date to USD754 million) – comprising USD264.19 million in the Retail Secondary Market Intervention Sales (SMIS) window and USD100 million in the wholesale market. Accordingly, at the time of writing, the NGN had appreciated across all referenced rates by Bloomberg – USD/NGN (+0.63%), GBP/NGN (+2.33%), and EUR/NGN (+2.01%) to close at N362.89, N464.14, and N423.01, respectively. In the same vein, the FMDQ referenced USD/NGN in the I&E FX window had appreciated by 0.63% to N362.89. On the other hand, there were mixed reactions in the parallel market, as the NGN depreciated against the USD (-0.82%), strengthened against the GBP (+0.42%), and closed flat against the EUR at N370, N475, and N430, respectively. The 3 months, 6 months and 12 months forward contracts appreciated w/w against the USD by 1.37%, 1.29%, and 2.09% to N379.04, N400.18, and N438.59, respectively. Meanwhile, the CBN’s referenced spot rate depreciated by 0.03% to N305.65.

OUTLOOK

Equities: Given the gains recorded towards the end of the week, we believe interest in the equities market remains robust as H2-17 earnings performance speaks to positive expectation for Q3-17 earnings. We believe the market is near the overbought region and some corrections eminent given the significant gains recorded for five consecutive weeks. However, fundamental drivers of investors’ interest in key counters reflect a divergence from the levels in the previous years, revealing the likelihood of the settlement of a new resistance level for the market. Overall, we expect a mixed performance, with modest gains in the weeks ahead.

Money Market: While we acknowledge the inflow of N95.66 billion via maturing OMO bills, and likely inflow via monthly budgetary allocations to state and local governments, we expect liquidity to remain pressured as the apex bank continues its aggressive liquidity mop up – in addition to its intervention in the currency space. Thus, we look for the overnight rate trending higher in the coming week.

T-Bills: We expect average yield to trend northward in the coming week, as demand remains constrained amid tight liquidity position.

Bond: At next week’s primary market auction, the DMO, on behalf of the FGN, will offer N135.00 billion worth of bonds – comprising N35.00 billion of the FGN JUL 2021 bond and N50.00 billion apiece of the FGN MAR 2027 and FGN APR 2037 bonds – all in reopening. We expect demand, in the auction, to broadly reflect liquidity position, with investors in the secondary market taking a cue from the auction stop rates.

Currency: In the week ahead, we believe the NGN would appreciate further against the USD, while remaining stable against the GBP and EUR, given the recent move by the apex bank to provide FX to oil marketers using the official window (discussed above) in settlement of port and maritime charges, which is expected to soften demand in the Bureau De Change and parallel segments by oil marketers. Also, the intervention by the central bank during the week (discussed above) shows the bank’s continued commitment to support the NGN given the improvement in the FX reserves in the past weeks (rose week-on-week by 1.06% to USD31.55).

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