What To Expect From The Markets This Week – 070119

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Saturday, January 05, 2019 08:00 AM / Proshare Content



Nigeria: Economic Dashboard @ 040119

 

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Source: Afrinvest Weekly Update - January 04, 2019 

Nigeria’s Debt Strategy Threatened as Interest Rates Rise Globally
The Debt Management Office (DMO) recently published data on Nigeria’s debt profile as at Q3:2018 and this showed that total public debt was largely unchanged at N22.4tn (US$73.2bn) from the previous quarter. This reflected lower borrowings by both government and states in both the external and domestic debt market. Interestingly, there was also the redemption of the US$500.0m (N153.3bn) 5-year Eurobond which was issued in 2013. Hence, while Federal Government’s (FG) domestic debt increased by N135.4bn to N12.3tn in Q3:2018, its external debt holdings reduced by the value of the Eurobond redemption to US$21.5bn (N6.6tn). For states, total domestic debt slightly increased by N50.0bn to N3.5tn. While we note that the lack of data for some states prevents gaining an accurate picture – data reported for thirty-one states was as at H1:2018 while three states reported data as at FY:2017 –, the external debt of states is already captured in FG’s external debt balance.

In view of the US$2.8bn (N858.0bn) Eurobond issued in Q4:2018 and additional local bonds, which we estimate at N233.4bn, the total debt stock of the FG has increased to N20.0tn as at FY:2018. This represents an 8.6% increase over its total debt of N18.4tn as at year-end 2017.
 
Debt Servicing Costs Still Elevated
In 2017, the FG started implementing its new debt strategy which was to increase external debt holdings to 40.0% and increase the proportion of long-term debt. This was part of the FG’s plan to reduce the cost of debt and limit the crowding out of private sector borrowers. As at Q3:2018, the FG’s debt profile reflected some of the progress made on these plans; the share of external debt increased to 35.0% while the share of the long-term debt is now 77.1%. In Q4:2018, we estimate that the FG was closer to its target as external debt was projected at 37.4% of total debt.

However, debt servicing costs have remained elevated, with debt service to revenue worsening to 69.2% as at 9M:2018 (FY:2017- 61.6%). While this would have been worse if the share of local debt had remained unchanged, we note that the current strategy seems to be unfavourable over the long-term if the persistent devaluation of the currency and higher interest rates on foreign debts are taken into consideration. On a related note, the crowding out of the corporates has persisted given currently high yields on the FG’s domestic debt. Also, although the government has reduced its borrowings locally, the CBN’s tightening activities through OMO issuances at high interest rates have crowded out the private sector. 
 
Is There Still Room for Aggressive Borrowing?
The FG’s debt sustainability indicators are not alarming on the surface, especially considering debt to GDP at 16.2%, which is lower than the recommended threshold of 56.0% by the IMF/World Bank. Also, the government is still in a strong position to repay its external debt obligations as indicated by a healthy but fast-growing external debt service to exports ratio of 46.5% as at 9M:2018 (below IMF threshold of 100.0%). However, the major concern remains the FG’s elevated debt servicing costs. Without an improvement in revenues, if borrowing continues at the current pace, the government may be using all of its revenues to meet debt obligations. This would reduce spending on public goods and services, which the government is expected to provide. We believe that there is still scope for improved revenues if petrol subsidies are removed and the official exchange rate moves towards the NAFEX rate of N360/US$. By our conservative estimates, the FG’s debt service to revenue could moderate to 56.2% from 69.2% as at 9M:2018 if petrol subsidies are removed. Also, the government can rein in its administrative costs to reduce spending, and in turn borrowings. We are less optimistic about this and considering the imminent minimum wage increase, we expect government finances to remain pressured.

Global Equities Market: Market in Suspense Ahead of President Trump’s Meeting with the US Congress 
As the U.S. government shutdown approaches two weeks, President Donald Trump and Congress leaders are set to meet this Friday in the hopes of breaking the impasse around funding for the President Trump’s US-Mexico border wall as well as other alternative security measures. With no decision reached at a prior meeting on Wednesday, the 2nd of January 2019, there are expectations that a deal could emerge this Friday, the 4th of January 2019 as the new House Speaker, Nancy Pelosi, takes over. To prevent a total government shutdown, we see that the US Congress has swung to action. Congress leaders have passed two bills; one bill to fund eight closed U.S. departments through September 30 and the other to reopen the Department of Homeland Security through February 8.
 
As a result of concerns about the meeting, performances were largely bearish across markets. In the US markets, the S&P 500 and the NASDAQ closed the week lower, down 1.5% and 1.8% W-o-W respectively while UK FTSE gained, up 0.6% W-o-W. Furthermore, France's CAC 40 (0.3% W-o- W) and Japan’s Nikkei 225 (2.3% W-o-W) declined during the week. On the flip side, Germany's XETRA DAX and Hong Kong’s Hang Seng rose 0.3% and 0.5% W-o-W respectively. We note that concerns around a slowdown in global growth and interest rate tightening in advanced economies have continued to underpin a bearish streak in markets.
 
Across BRICS countries, performance was mixed as 3 of 5 indices trended northwards. Brazil’s Ibovespa recorded the largest gain, up 4.1% W-o-W, followed by Russia’s RTS and China’s Shanghai Composite with a 3.5% and 0.8% advancement W-o-W respectively. The upward trend in China’s Shanghai Composite was due to optimism around easing trade tensions as the US and China hold another trade meeting on Monday. On the flip side, the largest loss was recorded by India's BSE Sens, down 1.1% W-o-W. Finally, South Africa’s FTSE/JSE All Share closed the week with a loss of 0.9%.
 
In Africa, performance was mixed as 3 out of 6 markets under our coverage recorded gains W-o-W. The Egypt’s EGX30 recorded the largest gain, up 3.3% W-o-W, followed by Morocco’s Casablanca MASI (0.3% W-o-W) and Mauritius’ SEMDEX index (0.3% W-o-W). On the flip side, the largest loss was recorded by Nigeria’s All-Share Index, down 1.3% W-o-W, followed by Kenya’s NSE-20 (0.6% W-o-W) and Ghana’s GSE Composite (0.2% W-o-W).
 
In Asia and the Middle East, there was a bearish performance as 4 of 5 markets recorded losses W-o-W. Turkey's BIST 100 emerged as the lone gainer with a return of 4.1% W-o-W. On the flip side, UAE's ADX General Index recorded the worst return of 1.4% W-o-W to lead laggards, followed by Saudi Arabia's Tadawul ASI (-1.0% W-o-W), Thailand’s SET index (-0.7% W-o-W) and Qatar's DSM 20 index (-0.6% W-o-W).
 
Domestic Equities Market: Bearish Performance Persists… ASI Down 1.3%W-o-W 
The rout on the Nigerian equities market continued this week – the first week of trading activities this year – as investors reduced and/or exited positions in stocks ahead of the elections. As a result, most counters on the local bourse remain undervalued, trading near 1-year lows. Persistent sell pressures in market bellwethers - ACCESS (-14.7%), STANBIC (-12.7%) and NIGERIAN BREWERIES (-3.0%) drove the All Share Index (ASI) 1.3% lower W-o-W to 30,638.90 points, YTD return settled at -2.5% while market capitalization decreased by N88.4bn to N11.4tn. Similarly, activity level weakened, as average volume and value traded declined 50.0% and 47.0% to N411.6m units and N2.1bn respectively. The top traded stocks by volume were DIAMOND (401.3m units) UNIONDAC (268.3m) units and NEM (146.4m units) while ZENITH (N2.0bn) GUARANTY (N1.0bn) and DIAMOND (N0.8bn) led by value.

At the start of the week and close of 2018 (31/12/2018), the market gained 127bps after which it maintained a downtrend till Friday (4/01/2019). Sell pressures on DANGCEM, NIGERIAN BREWERIES, GUARANTY and STANBIC drove the benchmark index 211bps lower on Wednesday and Thursday, and by the close of the week, the cumulative loss extended to 254bps on the back of price depreciation in FBNH, ZENITH and DIAMOND.

Across sectors, performance was equally negative as 4 of 5 indices closed in the red W-o-W. The Industrial Goods index was the biggest loser, down 3.9% due to losses in WAPCO (-9.6%) and CCNN (-7.5%). The Banking index trailed, falling 2.7% as ACCESS (-14.7%) and ZENITH (-5.7%) witnessed price depreciation. In the same vein, sell-offs in MANSARD (-3.7%), AIICO (-7.2%), DANGFLOUR (-12.4%) and NIGERIAN BREWERIES (-3.0%) dragged the Insurance and Consumer Goods indices 1.0% lower apiece. The Oil & Gas index was the lone gainer for the week, up 2.9% following buy interest in SEPLAT (+8.0%) and TOTAL (+3.6%).

Investor sentiment as measured by market breadth (advance/decline ratio) softened to 0.4x from 2.8x recorded last Friday consequent on 19 stocks advancing against 44 that declined. The best performers for the week were CUSTODIAN (+16.2%), JBERGER (+15.7%) and VITAFOAM (+16.2%) while FCMB (-16.5%), GLAXOSMITH (-14.5%) and ACCESS (-6.8%) led laggards. In the coming week, we anticipate a bearish performance as sell pressures persist due to pre-election jitters.

Money Market: Uptick in Yields Continue as System Liquidity Wanes.
In addition to PMA re-issuances, the CBN sustained its OMO auctions this week in order to control system liquidity and ultimately check speculative exchange rate pressures. As a result, yields maintained an upward trend in the week, reflecting soft sentiments and an overall bearish performance. 

Liquidity levels this week were bolstered by a N690.0bn inflow from OMO repayments (N424.5bn) and Net PMA repayments of N265.5bn. However, this was short lived as system liquidity declined following Wednesday’s PMA which was oversubscribed. The attractive stop rates drove investor appetite as subscription levels rose across all tenors issued, with the 91-day (stop rate - 10.899%), 182-day (stop rate – 13.100%) and 364-day (stop rate - 14.500%) with instruments oversubscribed by 2.0x, 1.2x and 1.6x respectively. Thereafter, on Thursday, the CBN held an OMO auction which was undersubscribed given the diminished level of system liquidity despite higher rates offered on the instruments (91-day: 11.9%, 182-day: 13.5% and 364-day: 15.0%). Bid-to-offer levels on the 91-day, 182-day and 364-day instruments were recorded at 0.6x, 0.4x, and 0.6x respectively on offers of N50.0bn, N100.0bn and N300.0bn accordingly.

Based on this, money market rates: Open Buy Back (OBB) and Overnight (OVN) rates closed the week higher at 20.0% and 23.8% respectively compared to 17.2% and 18.4% at the close of the prior week. Furthermore, buying activities in the secondary market drove average T-bills rate 2bps lower to close the week at 14.07% against 14.09% the prior week.

Next week, we expect money market rates to slightly moderate as OMO maturities worth N375.4bn hit the system. Nevertheless, we believe the CBN will continue with its weekly OMO mop ups to keep liquidity levels in check.

Foreign Exchange Market: Naira Appreciates 
The foreign reserves contracted this week as the balance decreased by 0.2% to US$43.1bn (as at 2nd January) from US$43.2bn last week. In its intervention in the forex market this week, the CBN injected a total of US$210.0m across various market segments – US$100.0m in the Wholesale and US$55.0m each in the SME and Invisibles (tuition fees, medical payments and BTA) segments.
 
In the parallel market, naira appreciated 0.5% from N364.00/US$1.00 to close the week at N362.00/US$1.00 due to CBN’s market support in the wholesale segment of the market. Similarly, the CBN spot rate appreciated by 5kobo from N307.00/US$1.00 to close N306.95/US$1.00; while in the Investors’ & Exporters’ (I&E) FX Window, the naira opened the week at N364.35/US$1.00 but depreciated 95kobo to close the week at N365.30/US$1.00.
 
Likewise, activity level in the I&E FX window fell by 22.5% W-o-W to US$549.9m from US$709.5m in the prior week. In the FMDQ OTC open futures contract market, total subscriptions rose 2.9% W-o-W to US$4.8bn from US$4.7bn last week, with prominent buying interest observed in the December 2019 contract. In the coming week, we expect activity level to improve as Christmas festivities wrap up; and further anticipate that the central bank will continue in its pursuit to stabilize the value of the Naira should any market volatility occur, possibly owing to pre-election uncertainties.
 
Bond Market: Market Settled into Pattern of Weak Activity
The average Ask-yield on Treasury bonds increased in the week, advancing 20bps to settle at 15.4%. There were increases in yields recorded across most of bonds, save for on five instruments – 16.00 29-JUN-2019, 7.00 23-OCT-2019, 13.53 23-MAR-2025, 12.50 22-JAN-2026, 16.2499 18-APR-2037 – which recorded yield increases of 2bps, 15bps, 4bps, 8bps and 30bps respectively. Also, activity levels remained weak, with the total volume traded on the FMDQ OTC declining by 69.2% toN 30.0bn in the four-day trading week from N94.2bn in the prior week, which was a three-day trading week.

The direction of yields remains in line with our general expectations given the structure of market yields at the present time. We expect upward pressure to be exerted through Q1:2019 as participation in the bonds market is expected to remain weak in the face of attractive yields on short-term instruments.

The buying activities in the SSA sovereign Eurobonds market picked up in the week, as the average yield on the instruments pared by 2bps to bring the average yield to 7.9%. The largest increases in yields were recorded on the Zambia Eurobonds, which recorded an average Ask-yield increase of 16bps to 15.4%. Dissimilarly, the yields on the Nigeria Sovereign Eurobonds declined, paring by 6bps to settle at an average yield of 7.9%. We expect continued interest in the country’s debt, driven by local demand over the coming weeks, as investors take position in safe foreign currency assets given heightened polity risk.

In the corporate Eurobonds market, yields across instruments declined by 12bps to settle at 9.0%. There were yields declines across all bonds save for the ACCESS 2021, EBN FINANCE CO BV, FBNH 2021 and UBA 2022 bonds, which recorded yields increases of 8bps, 3bps, 3bps and 11bps respectively. We expect the yields on corporate Eurobonds to pare in the coming weeks as flight to safety imperative becomes stronger in the face of the impending elections.


 

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Tuesday, January 08, 2019

The United States Trade Balance report Nov 2018 & 3 Year Note Auction will be released on this day while the PWAN Real Estate Seminar will hold same day at 36B, Freedom Way, Lekki Phase I, by VFS Global, Directly Opp. Delta Afrique Atlanta Lagos

 

Wednesday, January 09, 2019

The United States FOMC Minute of Meeting Release & 10 Year Note Auction will be released on this day

 

Thursday, January 10, 2019

The Performance Management for SME Executives will on this day hold at 19, Ire Akari Estate Road, Ire Akari Estate, Isolo, Lagos while NMRC will sound theClosing Gong to commemorate the listing of N11Billion 13.80% Series 2 Fixed Rate Bonds at Nigeria Stock Exchange House

 

Friday, January 11, 2019

 

The United States December CPI (YoY & MoM) will be released on this day

 

 

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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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