March 28, 2018/Cordros Capital
Global Economy
Final reading of the US GDP growth for Q4-2017 showed economic growth slowed less than was previously estimated, as GDP expanded at an annual rate of 2.9% during the quarter. This is higher than the previous estimate of 2.5%, and above polled expectations of 2.7%, but still below the 3.2% growth recorded in the preceding quarter. The higher estimate was driven by the upward revision of personal consumption expenditure (which accounts for two-thirds of the US economy) and private inventory investment. The pace of growth in the first quarter is likely to be slower (as has been the common theme in previous years), with retail sales coming lower in February and a 9-year high trade deficit in January. However, the tax cut and improved government spending is expected to buoy growth in 2018FY.
The South African Reserve Bank cut its benchmark interest rate by 25 bps to 6.5%,the lowest in two years, in line with market expectations. While the (1) 100 bps increase in VAT rate to 15%, (2) expected petrol price increase, and (3) monetary easing, suggest higher inflation rate, a stronger rand may ease pressure. The rate cut, particularly if extended further, supports growth of the South African economy to meet the upwardly-revised growth projections of 1.7% (previously 1.4%) in 2018.
Global Equities
Global equities within our coverage were broadly bullish, with most stock indices closing positive, away from the selloffs in the previous week. The defining factors include the ease in trade war fears, economic data, and higher crude oil prices. Proceedings turned positive in the U.S. (DJIA: +2.01%; S&P500:+0.65%), as well as in Europe (FTSE100: +2.12%; Euro Stoxx50: +1.99%), while sentiments were mixed in Asia (Nikkei 225:+1.89%; CSI 300: -0.28%). The MSCIEM (-0.80%) index closed lower, driven by losses in China and other regions, which outweighed the gain in Brazil (+0.33%). Meanwhile, gains in Ghana (+1.19%) and Nigeria (+0.08%) buoyed the MSCI FM (+0.19%) index, while investors in Kenya (-1.22%) were downbeat.
Nigeria
Economy
According to the National Bureau of Statistics’ (NBS) Domestic and Foreign Debt report for Q4-17 and 2017FY, Nigeria’s foreign and domestic debts stood at USD18.9bn and NGN3.35trn respectively as at 31st December 2017. Disaggregating the figure, the FGN debt accounted for 78.23% of total foreign debt while all States and the Federal Capital Territory (FCT) accounted for the balance of 21.77%. From both foreign (35.6%) and domestic (10.9%) standpoint, Lagos state accounted for the most of debt stock. Widening debt profile amid (1) increasing vulnerability of the economy to external shocks, (2) government’s inability to effectively diversify its revenue base, and (3) frail economic growth, raises concern over the fiscal sustainability of the economy.
It was reported during the week that the Senate passed the harmonized version of the Petroleum Industry Governance Bill (PIGB), following the adoption of the report by the Conference Committee on the PIGB. Among other things, the harmonized version of the bill seeks to unbundle the Nigerian National Petroleum Corporation and merge its subsidiaries such as the Department of Petroleum Resources and the Petroleum Products Pricing Regulatory Agency into one entity. While awaiting presidential assent, we reiterate our optimism about the PIGB vis-à-vis unlocking investment potentials in the petroleum industry.
Equities
The holiday-shortened week closed on a positive note, halting two consecutive weeks of losses, as the ASI inched higher by 0.08% to 41,504.51 points. The week’s positive close was aided by a last-session-gain of 1.72%, which outweighed a three-session cumulative loss of 1.62%, following bargain-hunting. However, the Month-to-Date return remained negative at 4.21% (marking the second consecutive month of loss), while the Year-to-Date gain increased marginally to 8.53%. Among sectors, the Consumer Goods (+1.73%) index was the sole gainer, while the Oil & Gas (-3.75%), Banking (-3.09%), Industrial Goods (-3.98%), and Insurance (-1.18%) indices closed in the red. Meanwhile, GLAXOSMITH (+33.33%) remained top gainer, while JAPAULOIL (-14.49%) emerged top loser.
Still-positive macroeconomic fundamentals continue to strengthen our medium-to-long term outlook for Nigerian risky assets, while lower prices of value stocks suggest likely bargain-hunting in the short term.
Fixed Income and Money Market
Money Market
In line with our expectation, the overnight lending rate eased to 8.08%, representing a 484bps w/w contraction, against last week’s close of 12.92%. In the absence of any major outflows, inflows from matured OMO bills (NGN201.12 billion) supported system liquidity.
Next week, inflows totaling NGN833.55 billion — maturing OMO bills (NGN338.50 billion); maturing treasury bills (NGN190.40 billion); FAAC allocation (NGN304.65 billion) — are likely to outweigh outflows; thus, higher liquidity. In effect, a contraction in the overnight lending rate is likely.
Treasury Bills
Proceedings in the NTB market were bullish, with sentiments driven by increased liquidity levels. As a result, average yield fell by 14 bps to 14.74%. High demand for the 21DTM (-157 bps), 98DTM (-92 bps), and 189DTM (-43 bps) bills caused yield contraction at the short (-7 bps), mid (-18 bps), and long (-9 bps) ends of the curve, respectively.
Yields are expected to drop in the meantime, supported by expected buoyant system liquidity.At the NTB auction scheduled for next week, the CBN will offer NGN95.20 billion – N9.52billion of the 91-day, N47.60 billion of the 182-day, and NGN38.08 billion of the 364-day – worth of bills to the market.
Bonds
In the bond market, average yield rose by 16bps, to 13.69%, on the back of quarter-end profit-taking.Yields expanded at the short (+18 bps), mid (+13 bps) and long (+16 bps) segments, following selloffs of the JUL-2021 (+26 bps), MAR-2027 (+14 bps), and MAR-2036 (+25 bps) bonds.
Our theme on the bond market continues to favour lower yields, driven by (1) investors continued reaction to sustained moderation in inflation, (2) strengthening signals of monetary easing, and (3) the FGN’s new debt management strategy.
Foreign Exchange
Theme on the forex market remained stability, as the USD/NGN traded flat at NGN362 all week in the parallel market, while it strengthened by 0.14% to NGN360.20 in the I&E FX window. The apex bank continued to support the naira, injecting USD210 million into the FX market during the week, comprising USD100 million, USD55 million, and USD55 million disbursements to the wholesale, SMEs, and invisibles windows, respectively. The foreign reserves continued to record steady accretion, as it increased by 1.21% to cross the USD46 billion-mark at USD46.21 billion. Meanwhile, total turnover in the I&E FX window in the holiday-shortened week was 13.47% lower than the previous week at USD950.62 million.
Rates are likely to continue trading within current bands, as oil revenues (driven by stable oil prices and production) further shore up foreign reserves, aiding the apex bank’s interventions in the forex market.