October 4, 2018/Cordros Report
September in retrospect
- Equities performance across our coverage was broadly positive, save for emerging and frontier markets.
- The Nigerian bourse sustained losses from the prior month, posting another 6.0% (YTD: -14.32%) negative return for the period, and taking the benchmark index to 32,766.37 points.
- The overnight lending rate inched up 33 bps to close the month at 7.17%, following a slight decrease in system liquidity.
- Bearish sentiments were sustained in the treasury bills market, as yields rose for the second consecutive month on average, driven by a hike in short term rates.
- In line with our expectation, the bearish trend persisted in the FGN Bond market, weighed by increasing signs of monetary tightening, higher OMO rates, and rising inflation.
- The USD/NGN remained largely stable over the review period, gaining +0.4% in the I&E window and remaining flat in the parallel market.
In the nearest term
- We reiterate our cautious outlook for domestic equities, with selloffs likely to persist ahead of the 2019 elections, and amidst the dearth of catalytic macro stories.
- Notwithstanding expected inflows via maturing OMO bills (NGN1.00 trillion), bond coupon payments (NGN38.69 billion), as well as budgetary allocations (we estimate NGN400 billion) to state and local governments, overnight rate is unlikely to soften materially in October, with the central bank’s OMO auctions and FX sales keeping a lid on liquidity position.
- Our expectation of a tighter liquidity position, as discussed above under money market, suggests constrained demand in the NTB secondary market.
- Our theme for the bond market favours modestly higher yields in the medium term, anchored on (1) strengthening signs of monetary tightening, (2) capital flight amid higher yields in safe haven assets, (3) political uncertainty stemming from the upcoming elections, and (4) increased government borrowing to fund the 2018 budget.
- We continue to hold positive view of the naira, in spite of the persisting decline in FX reserves. With oil price already treading the USD85/barrel waters, combined with stable crude production (which portends strong upside for oil inflows), we believe the apex bank will b