What To Expect From The Markets This Week - 020919

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Saturday, August 31, 2019 08:00 AM / Proshare Content


Nigeria: Economic Dashboard @ 300819  

 

 

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Editor’s Pick 

Source: Afrinvest Weekly Update–August 30, 2019

 

Bailout Funds to States: The FG's Wild Goose Chase

In a surprising turn of events, the Minister of Finance, Budget & National Planning recently demanded the refund of the bailout provided to Nigerian states to support their budgets and enable them cope with low oil revenues. The states were unable to balance their budgets between 2014 and 2016 due to the significant reduction in government revenues after the oil price crash of mid-2014 and a slump in oil production in 2016. This led to the accumulation of salary arrears, pension arrears, contractor debts and uncompleted capital projects. There was no reprieve from weak Internally Generated Revenues (IGR) nor in the debt market as states were already highly leveraged, with huge interest payments. In 2015, the National Executive Council (NEC) of the Federal Government of Nigeria (FG), with the help of the CBN, took measures to assist states. First, existing loans with commercial banks were restructured, leading to reduced debt service costs. The second measure, which is our primary focus, was the budget support to states struggling to meet salary arrears. 

The CBN provided a facility to states through on-lending from commercial banks at an interest rate of 9.0%, a tenor of twenty years (Ogun State - 10 years) and two years grace period. The minister estimates the size of the bailout provided to 35 states to be N614.0bn but CBN data show that this was N656.5bn as at December 2018. States issued Irrevocable Standing Payment Orders (ISPOs), which ensures that repayments will be deducted at source, before FAAC allocations are disbursed. 

Based on the terms of the loan, a positive response from states to the sudden request for repayment by the minister of finance is unlikely. The terms of the loan are such that repayments are supposed to be over the long-term while the risk of default is significantly minimised by ISPOs. As the CBN loan was extended to states through commercial banks, we believe the ministry of finance is not best placed to demand for repayments. This further raises concerns about the independence of the CBN, which continues to take cues from the fiscal policy arm of the economy. 

Fiscal Conditions in States: Still Under Water
Looking at the fiscal profile of states, we see that they are only just getting back on their feet. FAAC allocations to states recovered from a low of N1.0tn in 2016 to N2.2tn in 2018, the highest in nominal terms based on CBN data from 1981. We attribute this improvement to an increase in oil prices and production. We note that collections through FAAC remain poor mainly as a result of petrol subsidies. The more resilient VAT collections have grown at a CAGR of 8.2% to N533.7bn between 2014 and 2018. IGR collections have also accelerated at a CAGR of 11.7% from N707.9bn to N1.1tn between 2014 and 2018. Excluding Lagos with a share of 34.6% of total states IGR, the increase to N721.2bn from N431.7bn at a CAGR of 13.7% is even more impressive.  

Despite the progress made so far, the prospects of sustained improvements in the fiscal finances of states is weak, especially due to the 67.0% increase in the national minimum wage to N30,000.0/month. Upon implementation, the general increase across the salary structure of civil servants in states would have huge cost implications. Our analysis shows that as at 2018, no state can fund recurrent expenditure with IGR, only sixteen states can cover recurrent expenditure with total revenues and only three states (Lagos, Kwara and Rivers) can meet payroll expenses with IGR. We expect this metrics to worsen as states implement the new minimum wage. 
 
Global Equities Market: Optimism over Trade Talks Buoys Markets
China slightly de-escalated trade tensions this week as its proposed retaliation to the latest tariffs imposed by the US was put on hold. The expectation early in the week was that China would impose tariffs ranging from 5.0% to 10.0% on US$75.0bn worth of US goods, with the timeline for implementation matching the two phases - September and December 2019 - established by the US. As the deadline is only a month away, negotiations have resumed, with China more disposed towards a resolution. Meanwhile, the chance of a 'no-deal-Brexit' rose in the UK as the Prime Minster got an approval to suspend the parliament till mid-October, paving the way for swift negotiations ahead of the Brexit deadline of 31st October, 2019. While this decision is likely to be tightly contested, the lack of clarity has dampened investor sentiment and the prospects of the UK's economy post-Brexit.  

Performance in the developed markets under our coverage were largely bullish W-o-W, partly because investors reacted positively to softening trade tensions. In the US, the S&P 500 and NASDAQ indices gained 3.1% and 3.0% respectively. The France's CAC, Germany's XETRA DAX and UK's FTSE All Share indices also inched higher by 3.0%, 2.9% and 1.4% respectively despite elevated risks of a 'no-deal-Brexit' deal. Meanwhile, Hong Kong's Hang Seng and Japan's Nikkei 225 indices lost 1.7% and 3bps respectively W-o-W. 

All but 1 of the indices under our coverage in the BRICS market ended in the green territory W-o-W. Brazil's Ibovespa index led the pack, appreciating 3.6% W-o-W while Russia's RTS index trailed, gaining 1.7% during the week. South Africa's FTSE/JSE and India's BSE Sens indices also advanced W-o-W by 2.2% and 1.7% respectively on the back of renewed investor sentiment in both markets. However, China's Shanghai Composite index was the lone loser, down 0.4% W-o-W despite better than expected developments on the trade front. 

In the African markets under our coverage this week, performance was mixed. Egypt's EGX 30 index gained the most, up 3.5% while Ghana's GSE Composite and Morocco's Casablanca MASI indices followed, advancing 1.8% and 1.0% respectively W-o-W. On the flip side, Nigeria's ASI led the losers following a 1.0% decline in the benchmark index due to dampened sentiment in the market. Similarly, Kenya's NSE 20 and Mauritius' SEMDEX indices lost, shedding 0.4% and 0.2% respectively W-o-W. 

Across the Asian and the Middle East market under our coverage, performance trended downward as 3 of 5 indices lost W-o-W. Saudi Arabia's Tadawul ASI advanced 5.3% following positive sentiment stirred by its inclusion on the MSCI Emerging Market Index. Similarly, Turkey's BIST 100 index inched 0.4% higher. Conversely, Qatar's DSM 220 continued its negative trend as it dropped 3.5% while UAE's ADX General index moderated 2.5%. Also, Thailand's SET index depreciated 0.5% W-o-W.

Domestic Equities Market: Bearish Streak Resumes... NSE ASI Down 1.0% W-o-W
The local bourse resumed its bearish streak this week as profit taking in SEPLAT (-18.8%) and UACPROP (-17.8%) dragged the market, halting the positive trend from last week. Losses were recorded on 3 of 5 trading sessions during the week, pulling the benchmark index down -1.0% W-o-W to 27,525.81points while YTD loss worsened to -12.4%. Similarly, investors lost N133.5bn as market capitalisation dipped to N13.4tn. However, activity level declined as average volume and value pared 50.4% and 31.8% to 142.6m units and N2.7bn respectively. The top traded stocks by volume were TRANSCORP (101.8m units), ZENITH (57.2m units) and ACCESS (48.9m units) while MTNN (N4.8bn), GUARANTY (N1.3bn) and ZENITH (N1.1bn) led by value.

Losses in bellwethers, SEPLAT, DANGCEM, GUARANTY and CCNN, resulted in the ASI declining 39bps and 32bps respectively on Monday and Tuesday. However, the trading session on Wednesday ended in the green territory as the benchmark Index rose 2bps following gains in MTNN, CCNN and DANGCEM. The bearish sentiment continued on Thursday as the ASI dipped 0.7% but on Friday, it ended in the green, up 0.4% following gains in MTNN and STANBIC.

Across sectors, performance was bearish as 4 of 6 indices under our coverage posted losses W-o-W. The Oil & Gas index led the laggards, paring 10.8% on the back of sell-offs in SEPLAT (-18.8%). Trailing, the Banking and Consumer Goods indices declined 3.5% and 0.6% respectively following price depreciation in ETI (-9.4%), FCMB (-8.8%), INTBREW (-15.2%) and CHAMPION (-9.5%). Similarly, the Industrial Goods index lost 0.3% due to profit taking in DANGCEM (-2.7%). Conversely, the Insurance index was the lone gainer, up 1.2% due to buying interest in CONTINSURE (+11.5%) and MBENEFIT (+10.0%). 

Investor sentiment as measured by market breadth (advance/decline ratio) weakened at 0.7x as 24 stocks gained against 35 that declined. The top gainers were JOHNHOLT (+19.6%), CONTINSURE (+11.5%) and UNITYBANK (+11.1%) while SEPLAT (-18.8%), UACPROP (-17.8%) and INTBREW (-15.2%) led the decliners. The bearish streak is expected to continue in the absence of any economy stimulus that would reverse the negative sentiment in the market.

Foreign Exchange Market: Naira Stable Despite Decline in Oil Prices and Foreign Reserves 
Last week Friday, the ongoing US - China trade war intensified following China's retaliatory tariffs against US$75.0bn worth of US goods, putting up to 10.0% on existing tariffs, mostly agricultural products. This comes after an additional tariff on $300.0bn worth of Chinese goods effective from September 1 and December 15, 2019. As a result, the price of brent crude oil slumped to as low US$58.35/bbl during the week while the foreign reserves level fell to US$43.7bn (08/28/2019), down 0.9% from US$44.5bn recorded last week Wednesday. We note that China has put on hold the proposed retaliatory measures as at the end of the week. 

The CBN spot rate traded flat all week to close at N307.00/US$1.00, depreciating 5kobo W-o-W from N306.95/US$1.00. Similarly, at the parallel market, rate opened at N360.00/US$1.00 and traded flat all week. At the Investors' & Exporters' (I&E) FX Window, the NAFEX rate opened the week at N362.69/US$1.00 and closed at N362.93/US$1.00 on Friday, appreciating 21obo W-o-W from N363.14/US$1.00. Activity level in the I&E Window fell 7.9% to US$1.6bn from US$1.8bn recorded in the previous week. 

At the FMDQ Securities Exchange (SE) FX Futures Contract Market, the total value of open contracts settled at US$11.0bn, up US$82.0m (0.8%) from US$10.9bn in the prior week. The SEPT 2020 instrument (contract price: N365.47) received the most buying interest in the week with additional subscription of US$8.4m which took total value to US$14.15m. On the other hand, the OCT 2019 instrument (contract price: N363.82) was the least subscribed with a total value of US$1.1bn, with subscription declining by US$54.0m. Despite external reserves at US$43.7bn (as at 08/28/2018) and declining crude oil prices, we maintain a positive outlook on the CBN’s continued ability to support FX market liquidity and stability.

Money Market: Bullish Momentum in the Secondary Treasury Bills Market
This week, OBB and OVN opened at 12.6% and 13.5% respectively, lower than previous week's close of 17.7% and 18.8% as system liquidity stood at N29.3bn. However, on Thursday, as OMO maturities worth N393.3bn flooded the system, the rates trended even lower at 6.3% and 7.4% respectively. By the close of the week OBB and OVN settled at 9.3% and 10.5% in that order as system liquidity closed at N1.1tn.

At the Primary Market Auctions, there was a roll-over of N208.6bn in maturing T-Bills across all maturities. The marginal rates across tenors closed higher at 11.1%, 11.6% and 12.9% for the 91-day, 182-day and 364-day tenors respectively compared with previous auction marginal rates of 9.7%, 11.4% and 12.0%. The higher rates indicate increasing investor appetite for higher yields in compensation for the country’s riskiness. As recorded in previous auctions, demand was tilted to the 364-day instrument with a bid-to-cover ratio of 1.9x (Offer: N145.5bn; Subscription: N272.5bn). The 91-day and 182-day were also oversubscribed at 1.2x (Offer: N38.8bn; Subscription: N46.2bn) and 1.2x (Offer: N24.4bn; Subscription: 29.1bn) respectively.

The CBN also held two OMO auctions this week. For the first auction on Thursday, the bank offered a total of N400.0bn across three instruments to keep system liquidity in check in the face of huge maturities. Investors again preferred the long-term instruments as it recorded oversubscription with bid-to-cover ratio of 1.5x (Offer: N200.0bn, Subscription: N290.83bn) while the short-and medium-term bills were grossly undersubscribed at 0.1x bid-to-cover ratio apiece. Sales were underwhelming at N48.1bn (12.0% of offer amount) and the instruments were issued at stop rates of 11.6%, 11.8% and 13.0% for the 91-day, 189-day and 364-day instruments, higher than those of previous auction and rates at the treasury bills auction. On Friday, the CBN held another auction with a total offer of N400.0bn across three instruments; 90-day, 188-day and 363-day instruments. Again, the longer-dated instrument enjoyed the most demand at bid-to-cover of 1.1x while the short and medium dated instruments were poorly subscribed at 0.03x and 0.05x bid-to-cover ratio respectively. Instruments worth N222.1bn were sold at stop rates of 11.6%, 11.8% and 13.5% for the 90-day, 188-day and 363-day instruments respectively. Investors remain unrelenting in the demand for higher rates thereby, widening Nigeria’s risk premium.  

In the secondary treasury bills market, performance was bullish as average rate fell by 69bps to close at 12.6% W-o-W. The medium-term instruments recorded the highest buying interest as rates dipped 154bps to close at 12.9%, rates on the short-term instruments also declined by 55bps to 12.3% while the long-term instruments closed flat at 12.5%. We expect the apex bank to keep liquidity in check through regular auctions, albeit at higher rates, given OMO maturities of N204.1bn expected next week.

Bonds Market: Bullish Sentiment Resurfaces in the Domestic Market 
This week, bullish momentum resurfaced in the domestic bonds market as average yield declined 25bps to settle at 14.2% W-o-W. The market recorded bullish performance on 4 of 5 trading days of the week; Monday (-17bps), Tuesday (-11bps), Wednesday (-1bps), Thursday (-2bps) and a bearish outing on Friday (+7bps). Across the term structure, the short-term bonds enjoyed the most buying interest and yields declined 141bps while yields on the medium-term and long-term instruments fell 22bps and 8bps respectively.
 
In the SSA Eurobonds segment, the trend remains the same as all instruments that we track posted gains W-o-W. As observed in past weeks, the Zambian 2022 and 2024 instruments led the pack with yields shedding 206bps and 192bps respectively. The Ghanaian and Nigerian 2049 instruments trailed again with 88bps and 83bps drop in yields respectively.

For the corporate Eurobonds market, we increased our coverage universe to include instruments from other African countries and the bullish momentum remains strong as all instruments gained W-o-W save for the SOUTH AFRICAN SIBANYE GOLD LTD 2023 instrument that recorded a 2bps rise in yield. The NIGERIAN SEPLAT 2023 instrument enjoyed the most buying interest as yields declined by 72bps while the MAURITIUS NEERG ENERGY LTD 2022 trailed with a 64bps decline in yields.  Given weakening global growth, investors are expected to remain attracted to emerging market instruments.


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Sunday, September 01, 2019

Mutual Benefits Assurance Plc will on this day hold its Annual General Meeting at the Shell Hall, Muson Centre, Onikan, Lagos.

 

 

Monday, September 02, 2019

The 55th Annual Scientific Conference & Workshop will hold on this day at the International Conference Centre, Abuja.

 

Tuesday, September 03, 2019

The Nigerian British Chamber of Commerce will on this day hold its September Breakfast Meeting with the theme: Succession Planning Strategies: Growing your Business Beyond You at the Lagos Oriental Hotel VI, Lagos Oriental Hotel, Victoria Island, while the Chartered Institute of Taxation of Nigeria will on the same day hold its training on Mandatory Professional Training Program.

 

Forte Oil Plc will on this day hold its Annual General Meeting at Bespoke Event Centre Lekki-Ajah Expressway, Lagos, while the Nigerian International TV Summit will hold on the same day at the Alliance Française de Lagos / Mike Adenuga Centre / Maison Eric Kayser Ikoyi, Lagos.

 

The National Bureau of Statistics will on this day release the Nigeria Gross Domestic Product by Output Report (Q2. 2019) while Access Masters One-to-One will hold on the same day at the Lagos Continental Hotel, Lagos

 

The African Sovereign Wealth and Pension Fund Leaders' Summit & Infrastructure Awards 2019 will hold on this day at Cape Town - South Africa.

 

 

Wednesday, September 04, 2019

EFInA in collaboration with the Shared Agent Network Expansion Facility (SANEF) will this day hold its Quarterly Financial Services Agent Forum at the Space & Function Event Centre Abuja, while Phillips Consulting Limited will on the same day hold a Webinar with the title "Information Security: A Key Enabler of Business Continuity".

 

Flour Mills of Nigeria Plc will on this day hold its Annual General Meeting at the Grand Ballroom, Eko Hotel & Suites, Adetokunbo Ademola Street, Victoria Island, Lagos, while SpeedWealth Business Seminar will hold on the same day at Gabriel Akinmade Taylor Plaza, Lagos.

 

 

Thursday, September 05, 2019

The Northern Nigeria Flour Mills Plc will on this day hold its Annual General Meeting at the Ahir Guest Palace Hotel, Kano, while Best Practice in Franchise Development & Management will hold on the same day at Oriental Hotel, Victoria Island Lagos.

 

The Female Entrepreneurship Empowerment Network International Summit will hold on this day in Abuja  while the Ophthalmological Society of Nigeria Annual Scientific Conference & Annual General Meeting at Calabar International Convention Centre, Calabar.

The KingsThrone Investment Performance Evaluation Retreat (KIPER) will commence on this day at the Lagos Sheraton Hotel, Ikeja, with the theme "Kick-starting The VALUE-IN-INVESTMENT Communications Journey".

 

Friday, September 06, 2019

The Lagos Retail Festival will hold on this day in Ikeja, Lagos

 

Saturday, September 07, 2019

The CEO's Enclave: Enterprise Vitality an Emotional Intelligence Pathway to a Vital Organisation will hold on this day at The Lagos Continental Hotel, Lagos.

 

 

  

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Check out our Events Calendar for event details and follow us on Web, TV, APP and Social Media for updates as the week unfolds. Yours to Serve!

 


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