United Capital: Investment views this week

The bulls dominate as market defies expectation

The local bourse traded positive at the start of the week as investors continued to bargain hunt in value stock driven by attractive valuation and a clearer economic path of the country. However, news flow on the planned removal of FGN bonds from the GBI-EM index which came on Wednesday steered panic in the market for two trading sessions (Wednesday & Thursday); positive trading recommenced on Friday as domestic investors went bullish on domestic assets. As a result, the benchmark index (NGSE ASI) returned 0.6% w/w to close at 29,689.08 points while market capitalization gained N107.9bn to close at N10.2trn. Market activity as measured by average volume and value traded declined by 42.3% and 35.9% w/w to 281.2mn units and N2.7bn respectively.

The Treasury bill and bond markets traded bullish for most part of the week with average yield dipping by 40bps and 42bps respectively. Sentiment swung to the bearish note on Wednesday following JP Morgan’s announcement of the removal of Nigerian bonds from its GBI EM indices, but this was short-lived as domestic institutional investors went bullish on FI assets due to attractive yields and expectation of a downward trend in yields in the near term. FMDQ OTC widened the bid-ask spreads on bond trading to N1.00 from 0.30 kobo to contain volatility from sell-offs in the market.

While we expect bargain hunting to be sustained this week as the coast seems clearer and valuation remains attractive, we look forward to speculators locking-in on profit. Furthermore, FOMC meeting scheduled for 16th and 17th which decision on a hike in rates seems uncertain will calm activities by FPIs this week, as we expect global market to go into hibernation before the decision of the meeting. Thus, we anticipate the market will trade sideways this week, tilting towards the positive.

Global and Domestic Macro-Economic Updates

Sentiments resilient across markets … Will the US FOMC throw a spanner in the works?

Led by China, most Asian markets closed higher in the past week. China’s consumer-price index rose 2.0% in August from a year earlier, quicker than a 1.6% year-over-year rise in July, according to data released by its National Bureau of Statistics. We note that the     increase in the consumer-price index remains well within the government’s annual target. Despite the pickup, the August CPI figure still is not a threat for Beijing to change its policy stance in our view, especially when factory-gate prices remain in the deflationary territory. As such we expect China’s central bank to keep easing its monetary policy throughout the year.

European stocks also edged up w/w, as stronger-than-expected trade data from Germany assuaged some concerns about slowing global growth. The trade surplus in Europe’s largest economy rose to €22.8 billion euros ($25.6 billion) in July, outstripping consensus forecasts of €22.3 billion. Markets were further supported by news that Eurostat revised upwards the Eurozone’s second quarter GDP reading to 1.5% from an initial estimate of 1.2%, aided by a pickup in exports across major European countries.

The US markets took a cue from Asia and Europe, as investors’ sentiments showed resilience to stay upbeat. This was despite increased market volatility, driven by the FOMC policy meeting scheduled for later this week, where a major rate decision is expected.   Meanwhile, the producer-price index was unchanged in August on a seasonally adjusted basis, the Labor Department announced last week, beating consensus estimate of a 0.2% decline.

On the domestic scene, the week saw JP Morgan remove Nigeria from announce its decision to remove Nigeria bonds from each of its six GBI-EM indices. Nigeria will be phased out of the J.P Morgan GBI-EM index series over a two-month rebalancing period, beginning September 30th, 2015 and ending on October 30th, 2015. We note that Nigeria joined the Index in 2012 with 3 FGN Bonds with tenors of 2, 7, and 10 years included in the GBI-EM. The 2014, 2019, 2022 and 2024 bonds were added as liquidity improved. At the time of the announcement, the weight of Nigeria in the GBI-EM global diversified index was 1.5%.

Liquidity Pressure wanes as OMO auctions was a “No Sale”

System liquidity last week was relatively high as opening balance on Monday stood at N248.9bn and stayed around that band for the week, this was driven by no sale on OMO floated and OMO repayment. OMO auction by the CBN last week made no sale as investors seek for higher rates coupled with the need to fulfil financial obligations.

Treasury Bills (OMO) worth N101.5bn matured in 2 tranches, 195-day (N55.3bn) and 196-day (N46.2bn). Standard deposit facility increased by 4.8% to N557.4bn while standard lending facility declined by 18.8% to N90.6bn. Consequently, NIBOR trended south with the 90-day NIBOR hitting 16.2% from 16.4%. The Open Buy Back (OBB) and the Overnight (O/N) rates fell to 7.5% and 7.0% from 8.2% and 8.7% respectively. We expect rates to moderate further this week on the back of liquidity boost from maturing bills of N76.5bn.

FI assets traded bullish despite news flow of FGN bonds exclusion

The Treasury bill and bond market traded bullish for most part of the week despite with average yield dipping by 40bps and 42bps respectively. Sentiment swung to the bearish note on Wednesday following JP Morgan’s announcement of the removal of Nigerian bonds from its GBI EM indices, but this was short-lived as domestic institutional investors went bullish on FI assets due to attractive yields and expectation of a downward trend in yields in the near term. FMDQ OTC widened the bid-ask spreads on bond trading to N1.00 from 0.30 kobo to contain volatility from sell-offs in the market. The Treasury bill market will likely trade bullish this week as investors move to safe haven. However, we expect the bond space to oscillate between gains and losses.

Naira firms against the Greenback w/w

In line with on-going patterns, activities in the FX market remained relatively calm in the past week, as stakeholders continue to respond to recent policy tweaks by the apex body.  Consequently, the Naira gained 60bps against the dollar on a w/w basis, to close the week at N197.10. We expect recent stability in the USD/NGN to be sustained this week to be driven by the impact of the central bank’s recent slew of policy maneuver around FX.