October 6, 2017/Cordros Research

Nigerian Capital Market

Equities

The Nigerian equities market rebounded this week, in line with our outlook, as the ASI closed higher to completely reverse last week’s loss. The market had started the holiday-shortened week on Tuesday (-0.38%) with a negative performance largely due to losses recorded by DANGCEM (-1.40%), NB (-1.82%), and PZ (-6.81%) – specifically, the sell-off in PZ was on the back of the not-so-impressive Q1 scorecard wherein it posted pre-tax and post-tax losses of N181 million and N123 million respectively. The bulls resurfaced on Wednesday, with gains extending till Friday (with a cumulative gain of 2.85%), driven by robust investor interest in fundamentally sound large cap counters across sectors – DANGCEM, WAPCO, ZENITHBANK, GUARANTY, UBA, GUINNESS, NB, NESTLE, SEPLAT, and TOTAL – which more than outweighed snippets of profit taking. Overall, the All Share Index advanced by 2.49% w/w to 36,320.93 points, improving the YtD return to 35.15%. Notably, the management of UBA announced that it has completed the process for the cancellation of the 2.08 billion shares in its Staff Share Investment Trust Scheme (SSIT) which had been hitherto crossed to the Bank, bringing the total outstanding shares to 34.19 billion. Also, DANGCEM in a press release today, stated it has withdrawn its interest in acquiring the entire share capital of PPC, in a transaction estimated at USD700.47 million (in line with the bid by AfriSam).

Sectoral performance during the week was broadly bullish, save for the Insurance index (-1.21% w/w) which closed negative stemming solely from profit taking in the shares of CONTINSURE (-12.00%). The Industrial Goods (+6.15% w/w) and Banking (+3.17% w/w) indices recorded the largest gains, as demand for the shares of WAPCO (+13.08%), DANGCEM (+2.17%), UBA (+9.26%), and ZENITHBANK (+6.88%) was robust during the week. In the same vein, the Oil &Gas (+1.80% w/w) and Consumer Goods (+1.42% w/w)indicesposted positive returns, as investors huntbargain in the shares of SEPLAT (+4.97%), TOTAL (+4.33%), GUINNESS (+3.67%), and NB (+3.03%).

Market breadth remained strong, closing positive with 37 gainers (previously 32) – led by CILEASING (+19.63%) – and 24 losers (previously 30) – led by MRS (-14.13%). Total volume traded increased by 12.60%, with FCMB, DIAMONDBNK, and FBNH accounting for 44.76% of total market volume. In the same vein, total value of trades rose by 7.25%, with GUARANTY, ZENITHBANK, and NB accounting for 44.34% of total value.

Global Equities

Performance across global equities was mostly bullish, driven by encouraging economic data and currency swings – which subdued the impact of regional political turmoil.  

U.S. stocks rose early in the week, as President Donald Trump addressed a mass shooting in Las Vegas that left scores dead and injured. Following that, appetite remained strong, driven primarily by a flurry of encouraging economic data, including (1) Jobless claims dropping 12,000 to 260,000, as disruptions from hurricanes ease, (2) the moderation in the U.S. trade deficit moderated by 2.7% in August to USD42.4 billion from USD43.6 billion in July, (3) the ISM manufacturing and services index strengthening in September, (4) auto sales coming in better than expected, and (5) a jump in construction outlay in August. Gains were particularly strong yesterday after Congress passed a budget resolution – a step seen as setting the stage for an overhaul of the tax code. Today however, modest selloff ensued amid September data showing the U.S. economy posted its first monthly decline in jobs in about seven years due to hurricanes in the Gulf Coast and Florida. On the balance, the DJIA and S&P 500 had posted weekly gains of 1.51% and 1.30% respectively at the time of writing. Despite trading in tight range after violent clashes in Catalonia in Spain during the weekend’s independence referendum, European stocks were boosted by a weaker euro, before retreating slightly – as investors reassessed what could be termed a tumultuous week of political drama in Spain and the U.K. while looking ahead to the closely watched jobs report in the U.S. The FTSE 100 (+2.01% w/w) and Euro Stoxx 50 (+0.29% w/w) closed higher.

Although several major markets were shut for holidays (including China’s week-long holiday) during the week, Asian equities benefitted from the broadly upbeat sentiment across most regions and gains in the U.S. dollar. Suffice to say that the Japanese Nikkei tracked overnight strength on Wall Street to move closer to levels last seen in 1996, and posted a weekly gain of 1.64%. Buoyed by a relatively strong return in Brazil (+2.20% w/w), the MSCI EM index (+1.95% w/w) advanced, while a rebound in Nigeria (+2.49% w/w) supported the MSCI FM index (+1.71% w/w) despite selloffs in Kenya (-0.76% w/w) and Ghana (-1.64% w/w).

Fixed Income

Money Market

The overnight money market rate expanded by 1,175 bps to 26.00% against 14.25% last week, following outflows via (1) OMO auction, wherein N422.66 billion (vs N320 billion offered) was sold – comprising N15.20 billion (vs N100 billion offered) of the short-tenured bill and N407.45 billion (vs. N220 billion offered) of the mid-tenured bill; and (2) debit for FXsales worth USD195 million. The outflows outweighed the inflows recorded during the week via OMO bills worth N283.41 billion (on Thursday) and the refund of excess debits for FX sale (on Wednesday). Notably, rates contracted on most trading sessions of the week save for today – which halted the eight consecutive days of moderation in rates – following the outflows recorded at today’s OMO auction (1.04x oversubscribed), wherein N103.46 billion was sold. 

Treasury Bills

At the NTB auction this week, the apex bank sold bills worth N130.37 billion – comprising N11.77 billion (vs. N28.69 billion offered), N12.23 billion (vs. N33.49 billion offered), and N106.37 billion (vs. N68.18 billion offered) of the 91-day, 182-day, and 364-day bills respectively. Notably, the 182-day and 364-day bills were sold at lower stop rates of 15.50% (previously 16.80%) and 15.73% (previously 17.00%), while the 91-day bill was sold higher at 13.25% (previously 13.15%). Furthermore, the bills were 4x oversubscribed, with pressure on the long and mid ends of the curve, while the short end was under-subscribed. Sentiments in the secondary market were bullish – on the back of relatively improved system liquidity — with average yield contracting by 52 bps to 16.90%.Yield contracted across board – short (-79 bps), mid (-79 bps), and long (-25 bps) segments to 17.32%, 16.90%, and 16.64% respectively as investors demanded for the 4-JAN-2018 (-205 bps), 11-JAN-2018(-248 bps), and 21-JUN-2018(-119 bps) bills. Save for today wherein snippets of selloff ensued, average yield contracted on all trading sessions of the week.

Bond

In line with our expectation, average yield in the bond market contracted by 68 bps week-on-week to 15.16%, as the relative improvement in system liquidity earlier in the week drove demand across all ends of the curve. However, following the decline in system liquidity today (discussed above), yields expanded on the short and mid ends of the curve relative to yesterday’s level. Overall, yields contracted across all ends of the curve week-on-week – short (-98 bps), mid (-101 bps), and long (-54 bps) – following robust demand for the 29-JUN-2019 (-98 bps), 13-FEB-2020 (-128 bps), and 14-MAR-2024 (-90 bps) bonds, respectively. 

Foreign Exchange

Following the steady accretion to the foreign reserves, currently at USD32.74 billion – highest since February 2015 — the CBN, during the week, further injected USD195 million into the FX market, comprisingUSD100 million, USD50 million, and USD45 million to the wholesale, SME, and invisibles windows respectively. In the I&E FX window, total turnover for the week stood at USD799.70 million (excluding today’s data), however, the FMDQ’s referenced USD/NGNdepreciated by 0.07% to N360.64 against N360.40 last week.

In the parallel market, the LCY gained across all the currency we track – USD (+0.55%), GBP (+1.44%), and EUR (+2.09%) to N363, N478, and N421 respectively. Similarly, the naira appreciated against all Bloomberg’s referenced rates– USD/NGN (+0.97%), GBP/NGN (+3.65%), and EUR/NGN (2.00%) to respective rates of N355.49, N463.42, and N415.64. Accordingly,the CBN USD/NGN spot rate appreciated by 0.03% to N305.65.

OUTLOOK

Equities: We expect performance in the coming week to be driven by (1) investors taking position in fundamentally sound stocks ahead of Q3 earnings releases, and (2) profit taking in large cap counters, following the gains recorded this week. Overall, the impact of bargain hunting will more than outweigh the snippets of profit taking. 

Money Market: We expect the overnight lending rate to trend northwards in the coming week, as outflows via OMO auctions outweigh inflow via maturing OMO bills worth N61.59 billion. 

T-bills: We expect the persisting demand to further moderate average yield in the coming week, albeit modestly, as system withdrawal further pressures liquidity position

Bond:We expect mixed reactions in the coming week, albeit with a bullish bias, as investor interest remain stoked, with the average yield closing lower. 

Currency:Given the CBN’s sustained intervention, we expect the naira to appreciate modestly in the interbank market and the I&E window in the coming week, while trading within its current band in the parallel market.

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