Dividend expectations trigger market rally

The equities market extended its positive momentum last week, albeit at a much slower pace than a week earlier. At the close of the week, the ASI was up 0.7%, settling at 25,988.4 with YTD now at -9.3%. While the Industrial goods sector lagged, positive sentiments filtered across the major sectors mostly driven by speculative play around plausible attractive dividend pay-out by listed companies as the FY-15 earnings season closes-in. The Oil and Gas sector (+4.4%) led gains, followed by the Financial Services sector (+2.4%) indices.

System liquidity opened at N329.9bn. However, an OMO announcement by the apex bank on Monday which mopped c.N160.7bn moderated liquidity levels, and ensured key money market rates trended higher.

While we think recent equity momentum will extend into the coming week, we expect a slow start to the week with investors likely to re-assess portfolio positions in line with their expectations of FY-15 earnings numbers and dividends which could cause some profit taking. Specifically, we anticipate strong sell-offs in counters such as DIAMOND, following the release of a profit warning with respect to its FY-15 results. That said, we think positive sentiments will gradually trickle-in and anticipate the market will close the week marginally higher.

Global and Macro-economic market update

ECB expands QE, but investors fixated on the strength of macro fundamentals

At the conclusion of its 2-day policy meeting, the European Central Bank in the past week cut its key lending rate to zero from 0.05%, pushed its deposit rate further into negative territory to -0.4% and significantly expanded the size and scope of its asset-buying program to 80bn euros from its current level of 60bn euros beginning in April. The ECB also said it would launch a new series of longer-term refinancing operations with maturities of four years which would include purchases of investment-grade, euro-denominated, non-bank corporate bonds. While euro first rallied, broad based sell-offs were seen towards the end of the week driven by investor worry over the strength of macro fundamentals of the Euro area.

Despite mixed reactions to policy moves by the ECB which further widened divergence in the interest rate trajectory globally ahead of the US FOMC policy meeting this week, US equities closed higher for the fourth consecutive week, mostly boosted by more upbeat sentiments around crude oil mostly driven by comments from the International Energy Agency which suggested prices might have bottomed out.

Asian stocks were choppy for the most part of the week, as investors brushed off a bigger than expected stimulus package from the European Central Bank. The week also the New Zeland’s central bank unexpectedly cut its cash rate by 25bps to 2.25% as it looked to lift stalling prices and support the economy. Overall, while stocks initially rallied on account of the announcements by the ECB, enthusiasm was short lived.

In our view, it appears  investors are losing a bit of confidence in central bank moves globally, and heading back towards relying on fundamentals, which essentially boils down to a U.S. economy slowly on a recovery path, and a more complicated growth scenario in Asia and the Eurozone.

On the domestic scene, the week saw the release of Q4-15 GDP numbers by the National Bureau of statistics (NBS), which showed that the Nigerian economy grew by a disappointing 2.1%. the non-oil sector grew by 3.1% in real terms in Q4-15, representing a rise of 0.08% from the Q3-15 estimates but lower by 3.3% during the corresponding quarter of 2014. In contrast, Oil sector growth contracted, as daily oil output fell to 2.16 mbpd in the fourth quarter or 0.3% lower than the 2.17mbpd produced in Q3-15.

Financial Markets Review and Outlook

Equities up for the second successive week, ASI adds another 70bps

The past week saw equities extending its positive run, though momentum slowed relative to a week earlier. For the week, the ASI was up 0.7%, settling at 25,988.4 thereby paring YTD return to -9.3%. While the Industrial goods sector underperformed, other major sectors were mostly driven by speculative positioning for attractive dividend pay-out by listed companies as the FY-15 earnings season closes-in.

The Oil and Gas sector (+4.4%) led gains, followed by the Banking (+2.4%) and Insurance (+1.8%) indices. Some of the major counters that drove the positive sentiments seen include TIGERBRANDS (+59.3%), OANDO (+53.3%), HONEYWELL (+25.0%), FLOURMILLS (+18.0%), FCMB (+15.5%), UBA (+10.6%), FIDELITY (+9.6%) and TOTAL (+8.9). Profit taking in DANGCEM (-2.4%) was the major driver of the loss recorded by the Industrial goods sector. Market activity as measured by average volume and value traded declined by 24.7% and 6.3% w/w, to close at 222.3mn and N1.5bn respectively. However, market breadth increased w/w, closing at 1.9x (vs. 1.4x in the previous week) as 39 stocks appreciated in price compared to 21 decliners.

While we think recent equity momentum will extend into the coming week, we expect a slow start to the week with investors likely to re-assess portfolio positions in line with their expectations of FY-15 earnings numbers and dividends which could cause some profit taking. Specifically, we anticipate strong sell-offs in counters such as Diamond bank following the release of a profit warning with respect to its FY-15 results. That said, we think positive sentiments will gradually trickle-in and anticipate equities will close the week marginally higher.

Money market rates trends higher as system liquidity thins out

In the past week, system liquidity opened at N329.9bn. However, an OMO announcement by the apex bank on Monday which mopped c.N160.7bn moderated liquidity levels, and ensured key money market rates trended higher. This happened in tandem with the weekly cycle of FX funding by the banks followed by refunds by the CBN. At the end of week, both Open buy back (OBB) and Overnight (O/N) moved north, closing at 5.1% and 5.6%, 192bps and 200bps higher than a week earlier. At the interbank, NIBOR also followed a similar pattern, with the IM, 3M and 6M adding 40bps, 20bps, 40bps in that order to close the week at 7.8%, 9.1% and 11.0% respectively. We expect rates will remain at current elevated levels at the start of this week, as attention shifts to the Bond PMA which will occur mid-week as well as FX funding by the DMBs. Barring surprise OMO calls by the Apex bank, rates should however assume a downtrend towards the end of the week, as CBN refunds, together with OMO maturity worth cN46.bn hits the system.

Sentiment mixed as the FI markets continue to respond to liquidity dynamics

While sell-offs were more pronounced at the short end, the week saw yields trend higher across maturities in the T-bills markets, mostly driven by the impact of moderating system liquidity. The 91day, 182day and 364day bills added 120bps, 30bps and 60bps w/w to close at 5.8%, 8.0% and 9.2% in that order. The week also saw the Apex bank release its T-bills issuance calendar for Q2-16, where it expects to issue a total of N1.1trn (91day – N303.8bn, 182day – N168.0bn, 364day – N599.6bn), 12.2% lower than amount issued in the first quarter.

The Bond market relayed mixed sentiments in the past week. While the bears dominated earlier on the week in response to tighter system liquidity, bargain hunting by the domestic Institutionals helped moderate yields closer to the end of the week as attention shifted to the upcoming PMA.

Overall, average yields at the short end of the curve dipped 30bps to 9.1%, while the short to long end of the maturity spectrum was flattish w/w, closing at an average of 11.2% and 12.1% respectively. The Debt Management Office (DMO) has also scheduled its monthly bond auction for the coming week, which will see the re-issue of N40.0bn of the JAN 2026 FGN bond, N20.0bn of FEB 2020 FGN bond and a fresh issue of N40.0bn worth of the 2036 FGN bond. We anticipate sentiment will be mixed in the T-bills market this week, as investors continue to respond to market liquidity dynamics. For bonds, we think yields will trend marginally higher especially at the short end, as investors free-up cash to take up positions at the PMA.

Naira gains marginally w/w, parallel market maintains relative stability

At the interbank, the naira gained 10bps to close the week at N199.1. However, the pressure on the naira in the parallel market eased somewhat, closing the week at N322/US$. With oil prices still tepid and FX policies unchanged, we believe the fundamental demand/supply imbalance currently rocking the FX market will continue, with attendant pressure on the domestic currency barring policy surprises around FX by the Apex bank.