4/9/2018/Cordros Report
August in retrospect
- Returns across global markets within our coverage were mixed, with the US market posting solid gains, investors in the Euro area recording losses, and mixed returns emanating from Asia.
- Investors in the domestic equities market recorded losses in August, as the benchmark index dropped 5.86% to 34,848.45 points.
- In line with our expectation, the overnight lending rate fell by 275 bps, to close the month at 6.83%, as banking system liquidity remained buoyant throughout the month.
- The eighth month of the year saw treasury bill yields expand by 39 bps on average, to 12.20%, as market players reacted to higher than expected primary auction stop rates
- The bearish trend persisted in the FGN Bond market with sustained selloffs from foreign players, as a result of persisting risk-off sentiments across emerging markets.
- However, the naira remained relatively stable during the month, as it weakened marginally against the dollar by 0.28% and 0.07% to NGN361 and NGN362.64 in the parallel market and I&E FX window, respectively.
In the nearest term
- We remain conservative in our outlook for Nigerian equities, as selloffs are likely to persist, amidst the absence of a one-off positive triggers and likely negative sentiments of investors (particularly foreign players), as a result of (1) contagion effect of emerging market selloffs, and (2) political concerns ahead of the 2019 election.
- We expect current buoyant liquidity to persist on the back of inflows from maturing OMO bills (NGN1.01 trillion), bond coupon payments (NGN146.83 billion), and the budgetary allocations (c. NGN326.06 billion) to state and local governments. In effect, a contraction in the overnight rate is likely.
- Our expectation of a healthy liquidity position in the coming month, as discussed above under money market, suggests likelihood of high demand in the NTB secondary market.
- We reiterate our expectation for higher yields – albeit not at significant level above current rates – in the medium term, anchored on (1) domestic monetary policy direction, (2) capital flight amid higher yields in safe haven assets, (3) general risk off sentiments towards emerging markets, (4) political uncertainty stemming from the upcoming general elections, and (5) government borrowing to fund the 2018 budget. At the next bond auction on 26th Sep 2018, the DMO is expected to offer NGN90 billion – NGN25 billion of the APR-2023 (re-opening), NGN25 billion of the MAR-2025 (re-opening) and NGN40 billion of the FEB 2028 (re-opening) – in bonds to investors.
- Despite continued decline in the foreign reserves, our outlook for the FX market remains stability, as oil prices continue to rise and production remains fairly supportive, aiding inflow of oil revenues, which provide the apex bank sufficient legroom to sustain its interventions in the currency space.