Dividend play triggers momentum in equities

The equities market recorded a week-long uptrend, returning 6.4% w/w last week, its strongest week performance in 2016. This trimmed YTD loss to -9.9%, with the ASI settling at 25,820.1 points.

In line with recent patterns however, sector performance remained mixed with the Industrial goods index leading the charge (+11.4%), mostly driven by a combination of impressive FY-15 results by DANGCEM (+24.4), and an appreciable growth dividend payout. The Banking (+5.5%) and Insurance indices (+1.4%) also closed the week higher. On the other hand, the Oil and gas (-6.1%) and Consumer sectors (-1.4%) posted negative returns.

System liquidity opened at 498.8bn long, buoyed by refund of unfilled FX bids by the Apex bank. In the course of the week however, the impact of FX funding by DMBs combined with 2 OMO auctions by the Apex bank (Monday – N101.8bn, Friday –129.9bn) to ensure money market rates ended the week higher.

In line with our call, we believe attractive dividend play by investors has triggered momentum in equities, a theme we think will continue in the coming week as investors continue to speculative. It is on this basis that we expect equities will close higher this week although gains will likely be tempered by profit booking on prior positions as investors remain cautious.

Global and Macro-economic market update

Positive sentiments dominate markets on strong US labor numbers

In the past week, US equities posted gains as data released showed the U.S. economy generated 242,000 new jobs in February, snapping back from a modest slowdown in hiring seen in the first month of 2016.The unemployment rate held steady at 4.9%, while the participation rate moved up to the highest level since May, as more than half a million people joined the labor force.

However, there was  a drop in hourly wages and in the number of hours worked, which might give the Federal Reserve sufficient cause to hold off on raising rates at its policy meeting slated for later this month, after starting to normalize monetary policy back in December.

European markets also found a firmer footing, after release of the monthly U.S. jobs data ensured it enjoyed a third weekly win in a row. Also, following disappointments in December, there is now renewed optimism that the ECB will introduce more measures aimed at fighting still-low inflation and lackluster economic activity in the Eurozone at its policy meeting set to hold this week.

Positive momentum also extended into Asia, even as investors focus turned to China’s annual legislative sessions which commenced in Beijing over the weekend. The meeting will bring to the fore the strategic plan for reforms for the world’s second largest economy. We note that a regional recovery has taken shape since mid-February, which has seen investor worries about weak global growth ease, supported by rebounding commodity prices and signs that the U.S. economy is recovering.

On the domestic scene, the week saw the Minister of State for Petroleum, Ibe Kachikwu announce government plans to unbundle the Nigerian National Petroleum Corporation (NNPC). This will create 30 spin-off companies; a move he believes will improve efficiency and increase revenue.

Also, there were comments credited to the CBN’s Deputy Director of Financial System Surveillance, stating excess that excess liquidity from Banks’ high domiciliary account balances (c. $20bn) may prompt the CBN to embark on aggressive liquidity mop-up after the  2016 budget is passed.

Financial Markets Review and Outlook

Dividend play lifts equities market, ASI up 6.4% w/w

Last week saw the equities market record a week long gain, returning 6.4% w/w, its strongest week performance in 2016. As a result, YTD loss was pared to 9.9%, with the ASI settling at 25,820.1 points. Sector performance were mixed with the Industrial goods index leading the gainers’ chart (+11.4%), mostly driven by impressive FY-15 results and corporate action by DANGCEM (+24.4%).

The company declared an attractive dividend of N8.00 which was 33.3% higher than a year earlier, equating a dividend yield of 5.4%. The Banking (+5.5%) and Insurance indices (+1.4%) also closed the week higher, driven by counters such as APR (+27.7), ETI (+14.3%), DIAMOND (+12.5%), MANDARD (+4.6%) and NEM (+4.2%).

On the other hand, the Oil and gas (-6.1%) and Consumer sectors (-1.4%) posted negative returns underpinned by downtrend in prices of the likes of FORTE OIL (-14.3%), CONOIL (-9.7%), INTBREW (-6.9%) and NB (-3.7%).

Market activity as measured by average volume and value traded declined by 67.0% and 30.4% w/w, to close at 295.2mn and N1.6bn respectively. However, market breadth increased w/w, closing at 1.4x (vs. 0.6x in the previous week) as 34 stocks appreciated in price com-pared to 24 decliners.

In line with our earlier call, we believe attractive dividend play by investors has triggered momentum in equities, a theme we think will continue in the coming week as investors continue to speculative. It is on this basis that we expect equities will close higher this week although gains will likely be tempered by profit booking on prior positions as investors remain cautious.

Money market rates respond to CBN OMO calls, trend higher.

In the past week, system liquidity opened at 498.8bn long, buoyed by refund of unfilled FX bids by the Apex bank. In the course of the week however, the impact of FX funding by DMBs combined with 2 OMO auctions by the Apex bank (Monday – N101.8bn, Friday –129.9bn) to ensure money market rates ended the week higher.

Both Open buy back (OBB) and Overnight (O/N) rates closed the week at 3.2% and 3.6%, 2.6ppts and 2.3ppts higher than the previous week respectively. NIBOR also hinged marginally higher at the interbank, with the 1M, 3M and 6M rates closing the week at 7.4%, 8.9% and 10.6%, 20bps, 35bps and 14bps higher than the previous week.

This week, with no major inflows expected, we anticipate that OMO calls by the Apex bank, as well as cycle of provisioning for FX by banks as well as refunds by the Apex bank will continue to dictate money market rates. Hence, we expect rates to hover around current levels.

FI market continues to relay mixed sentiments

The T-bills market relayed mixed sentiments in the past week, as investors continued to seek bargains following the reissuance of matured bills worth c.N330.bn. At the PMA where N45.9bn, N62.0bn and N222.1bn were issued for the 91, 182 and 364 day bills, stop rates came in at 5.2%, 7.6% and 9.0% respectively, higher than secondary market rates.

This drove a selective approach to bills by investors, with the 91 and 182 day bills closing the week at 4.6% and 7.7%, 70 bps higher than the previous week on both counts, while the 364 bill closed at 8.6%, 40 bps lower than a week earlier.

The bond market enjoyed a relatively quiet week, as play more concentrated in the T-bills market. That said, yields moved marginally lower at the close of the week, with average yield at the short and mid portions of the sovereign curve closing at 9.3% and 11.2%, 20bps lower on average than the previous week.

The long end of the curve closed flat at 12.1%. We anticipate sentiments will be mixed in the T-bills and Bond markets in the coming week, as investors continue to respond to market liquidity dynamics. Attractive dividend yield in equities may also see investors re-allocate funds in the near term, which should set the FI markets in a more cautious mood.

Naira depreciates marginally w/w, parallel market still pressured

At the interbank, the naira lost 10bps to close the week at N199.3. However, the pressure on the naira in the parallel market continued as it weakened from the previous week to close at c.N325/US$.

While the Apex has offered some clarity with regards to its stance on health care bills and offshore tuition, we believe the fundamental demand/supply imbalance currently rocking the FX market will sustain pressure on the domestic currency. Thus we expect palpable volatility to remain at the parallel market barring policy surprises around FX by the Apex bank.