Monday, August 07, 2017 9:49AM /Afrinvest
On Wednesday, the CBN released the Purchasing Manager’s Index (PMI) for July, with data showing an expansion in manufacturing activity for the fourth consecutive month while non-manufacturing sector growth entered the third month.
The sustained development in PMI readings since the turn of the second Quarter coincides with the period the economy is recording improvements in FX liquidity and fiscal spending following rebound in oil earnings and external reserves, which are attributable to largely stable oil prices and rebound in production volumes as well as increased flexibility in the CBN’s FX policy.
July’s manufacturing PMI expanded from 52.9 points in June 2017 to 54.1 points in July – the highest level since the CBN started the data series in 2014. The major drivers of the expansion were Production Level (59.3 points), New Orders (52.7 points), Supply Delivery Time (51.3 points), Employment level (51.8 points) and Raw Materials Inventory (53.6 points) sub-indices which grew 1.1ppts, 1.7ppts, 1.0ppt, 0.7ppt and 1.3ppts respectively.
The outcome of the enhancement in business sentiment was evident in ten of sixteen subsectors which recorded growth in the period. Appliances & components, computer & electronic products, cement, primary metal, chemical & pharmaceutical products, food, beverage & tobacco products, textile, apparel, leather & footwear, printing & related support activities, paper products, electrical equipment and transportation equipment all expanded while petroleum & coal products, fabricated metal product, furniture & related products, non-metallic mineral products and plastics & rubber products declined.
Likewise, the Non-manufacturing PMI rose to 54.4points (compared to 54.2points in June 2017) after two consecutive months of progress. The Composite index was buoyed by increases in Business Activity (56.8 points), New Orders (55.1 points), Employment level (54.0 points) and Inventory (51.9 points). Accordingly, of the eighteen non-manufacturing subsectors, sixteen recorded growth.
A composite PMI above 50 points indicates that the manufacturing/non-manufacturing economy is generally expanding, 50 points indicates no change and below 50 points indicates that it is generally contracting.
The positive trend reveals optimistic perception of manufacturers and business owners for the second half of the year on account of FX market flexibility and stability in cyclical anchors of the business cycle - oil production and prices - as well as economic development plans of the federal government; thus, further reaffirming our positive outlook for growth in 2017 (+0.8% FY:2017 growth forecast).
Nonetheless, we note that GDP growth below 3.0% will have little impact on quality of life in Nigeria as per capital income growth is likely to remain negative; hence, the need for more constructive policymaking to address structural constraints to high and sustainable growth – high interest rate, FX market distortion and low investment spending.
Global Market Review and Outlook
In global markets this week, Oil continued to trade bullish, as Brent Crude touched a two month high of US$52.93pb on Tuesday August 1st on the back of a tightening in US oil production and the threat of sanctions against OPEC-member, Venezuela.
Traders however are wary at this time as the likelihood of an oscillation in prices due to unprecedented revamps in US shale production and increasing OPEC-output – on account of increased production from curb-exempted countries such as Nigeria and Libya - remains high.
Contrary to the bullish performance of the oil market, benchmark global equity indices under our watch was mixed this week as 8 of 16 indices closed in the green.
In the developed markets, the UK FTSE climbed 1.3% W-o-W amidst the decision by the BOE on Thursday to leave interest rates unchanged at 0.25%. Although the price-weighted US Dow Jones Index reached an all-time high mid-week – spurred by apple’s better than expected earnings result – the broader market-cap weighted NASDAQ index slid 0.5% W-o-W while the S&P 500 was flattish as of writing due to recent developments in the investigation regarding Russia’s involvement in Donald Trump’s presidential campaign which erupted concerns amongst investors.
Most investors, nevertheless, await July’s US Job Data set to be released today for cues on the economic health of the country. In the Eurasia Region, performance was bearish as all indices declined W-o-W save for the Hong Kong HANG SENG which advanced 2.1% W-o-W.
The France CAC 40 closed flat while the Germany XETRA DAX slid 0.2% W-o-W despite an impressive earnings season.
Across the BRICS markets, all indices trended northward W-o-W save for the India BSE which dipped 0.4% W-o-W despite an interest rate cut by the Reserve Bank of India (RBI) on Wednesday.
The Brazil IBOVESPA and Russia RTS rose 2.0% and 0.1% W-o-W respectively following the rise in global oil prices recorded during the week. Similarly, the China SHANGHAI COMPOSITE inched 0.3% W-o-W amidst a restrain by the PBOC in easing liquidity in the financial system while the South Africa FTSE rose 1.8% W-o-W.
Across the African markets, all indices dipped W-o-W save for the Nigeria All Share Index which climbed 0.7% W-o-W due to positive H1:2017 earnings releases. On the flip side, the Egypt EGX 30 slid 1.4% W-o-W while the Kenya NSE fell 0.7% W-o-W due to heightening political tension ahead of the country’s general election holding next week.
Equities Market Review and Outlook
Following a 16-day bullish streak in equities which ended last week Friday, the Nigerian bourse witnessed some profit taking in the early trading sessions of this week but sentiment turned bullish on Tuesday against the backdrop of renewed interest in Consumer Goods companies and investors' reaction in positive H1:2017 earnings.
Consequently, the All Share Index advanced on the last four trading days of the week, gaining 1.5% W-o-W to settle at 37,425.56 points on Friday while YTD gain expanded to 39.3%.
Also, investors accumulated N194.0bn as market capitalization advanced to N12.9tn while activity level improved as average volume and value traded rose 26.5% and 319.3% to N502.6m units and N22.8bn respectively.
The activity level this week however partly driven by an off-market cross of 416.0m units of DANGCEM in 6 deals valued at N87.4bn.Sector performance was mixed, although positively skewed, as 3 of 5 indices trended northward.
The Consumer Goods index led sector gainers, up 4.9% W-o-W due to appreciation in UNILEVER (+6.0%) and NIGERIAN BREWERIES (+2.3%) while buy sentiment towards NEM (+5.5%) and MANSARD (+3.3%) nudged the Insurance index 2.8% upwards W-o-W. Similarly, the Industrial Goods index gained 0.1% on account of upticks in DANGCEM (+2.8%) and CCNN (+6.7%). On the flip side, the Oil & Gas and Banking indices declined 3.0% and 1.6% due to depreciation in MOBIL (-8.3%) and profit-taking in GUARANTY (-2.7%) respectively.
Market breadth – a gauge of investor sentiment – softened to 1.3x (from 2.2x recorded last week) as 35 stocks advanced against 28 which declined. The best performing stocks were CILEASING (+44.9%), DANGSUGAR (+37.3%) and LINKASSURE (+27.1%) while MORISON (-16.9%), REDSTAREX (-12.4%) and CUTIX (-9.9%) were the worst performers.
Although valuation multiples have increased since the macro-themed rally started in April, that does not imply the market is overvalued and we remain convinced there are opportunities for investors to key into.
Thus, even as the earnings season draws to a close, we expect the broader index to sustain the current momentum to deliver a positive return in the last five months of the year, albeit moderate in the single digit range.
Money Market Review and Outlook
Despite several OMO mop ups, SMIS sales and the NTB auction held during the week, financial system liquidity remained positive on all trading sessions this week.
Interbank market rates remained at single digit at the start of the week but spiked to double digit mid-week following special OMO sales. At the start of the week, Open Buy Back (OBB) and Overnight (OVN) lending rates traded within a 5.0% - 5.8% range on the first 2 trading sessions due to surplus system liquidity as against a deficit of N115.4bn from previous Friday’s close.
The CBN conducted an OMO auction which saw a debit of N72.8bn on Monday and held its weekly SMIS sales with an offer amount of US$100.0m; however, short term Naira rates stayed in single digit on both days.
The trend reversed on Wednesday as OBB and OVN rates spiked to 19.7% and 20.2% respectively following a drop in liquidity level to N26.9bn at market open while the CBN floated a special OMO auction. Rates remained in double digits till Friday, eventually closing the week at 22.0% and 22.5%, up 17.0 and 16.7 percentage points W-o-W respectively.
Activities in the secondary treasury bills market was largely quiet this week as average yield across benchmark bills closed flat on 3 of 5 sessions. Average yield closed the first session at 17.9% and remained at that level till Thursday before dropping 14bps to close at 17.7%.
Sentiment reversed on Friday due to tight liquidity as average yield inched up 0.2%, indicating a 0.1% climb in yields W-o-W. At the T-bills Primary Market Auction (PMA) held mid-week, investors expectedly positioned at the longer end of the curve as market continues to anticipate a drop in interest rate.
The 364-day instrument offered by the CBN recorded excess subscription to the tune of N91.1bn, whilst the CBN allotted N136.5bn at a stop rate of 18.5% relative to the offered amount of N120.0bn.
The 91-day (Offer amount: N29.1bn; Subscription: N26.1bn) and 182-day (Offer amount: N80.0bn; Subscription: N69.75bn) instruments were however undersubscribed, whilst the CBN allotted N23.2bn and N69.57bn at stop rates of 13.4% and 17.4% respectively.
In the week ahead, there will be an OMO maturity of N113.1bn on Thursday but we expect the CBN to issue several OMO auctions to guide financial liquidity to target levels.
Foreign Exchange Review and Outlook
This week, the CBN conducted its weekly SMIS sales of US$100.0m in order to buoy FX liquidity whilst activities in other segments of the FX market recorded marginal improvements.
At the Official market, the CBN continued to keep rate steady, as the Naira maintained the previous Friday’s close of N305.65/US$1.00 on the first session whilst appreciating slightly to N305.55/US$1.00 by close of week.
Meanwhile, at the Parallel market, the Naira touched another 2017-high of N363.00/US$1.00, both on Tuesday and Wednesday, but depreciated to N365.04/US$1.00 on Thursday, eventually closing the week at that level, indicating a flat W-o-W close.
Activities at the I&E window remained robust, with US$994.0m recorded (as at Thursday) compared to US$1.0bn the previous week. However, the FMDQ- NAFEX fixing, depreciated marginally by 0.3% to N367.00/US$1.00 at market close on Friday against N366.08/US$1.00 in the prior week.
At the Naira-Settled OTC FX Futures market, trading activities improved by US$84.6bn, as total value of open contracts closed the week at US$2.5bn as against US$2.5bn the prior week, with 8 of the 12 open contracts receiving increased subscription.
The soon to mature AUG 2017 contract remains the most subscribed instrument with total subscription at US$453.8m at a contract rate of N358.83/US$1.00 whilst the NGUS MAY 2018 instrument is the least subscribed with US$14.7m at a rate of N363.33/US$1.00.
In a related development, the CBN signaled its commitment towards harmonizing rates by allowing a large movement in interbank spot rate this week. FX traders were, for the first time since June 2016, allowed to freely quote interbank rate in line with market dynamics.
The FMDQ had, via a directive, instructed banks to submit I&E FX window quotes as interbank fixing, hence the 12.9% depreciation of interbank spot rate to N361.49/US$1.00 this week. Whilst we do not expect a full convergence in the near term due to unresolved fuel subsidy concerns, we believe the move suggests the CBN’s recent move towards FX market flexibility will be sustained in the near term.
Bond Market Review and Outlook
The soft trend which has been a characteristic of the domestic bonds market over the past months, continued this week as investors’ interest still remains majorly centered on the shorter tenored fixed income instruments (T-bills and OMO) as well as equities.
Consequently, average yield on the first trading day of the week settled at 16.7%, 4bps higher than the previous Friday, as selloffs in the AUG 2017 and other short tenored instruments pushed average yield northwards. The lacklustre performance was further buttressed on Tuesday and Wednesday as average yield stayed flat at 16.9% before declining by 1bp on Thursday.
Average yield rose 4bps on Friday, to close the week at 16.7%, up 8 bps W-o-W. In the coming week, we expect the current trend in market activity to be sustained as yields continue to move within a tight band.
Investors’ appetite for high yield bonds continues to wax stronger as yields fell across majority of the SSA Eurobonds within our coverage universe. Yield on all instruments, save for the KENYA 2024 (+3bps), GABON 2017 (+1bp) and SOUTH AFRICA 2041 (flat) declined W-o-W.
The Ghanaian instruments received the most buy interest during the week with yield on GHANA 2023, GHANA 2026 and GHANA 2017 declining 42bps, 33bps and 18bps W-o-W to 6.1%, 7.3% and 8.5% respectively.
Similarly, Nigeria’s 2018 and 2023 Eurobond yields fell 17bps apiece to 3.3% and 5.4% respectively. ZAMBIA 2024, NIGERIA 2023 and KENYA 2024 are the best performing in 2017 with YTD price gains of 8.5%, 8.1% and 7.4% respectively.
Performance of Nigerian corporate Eurobonds was largely mixed this week. Yields rose 35bps, 14bps and 4bps on the FIRST BANK 2021, FIDELITY 2018 and DIAMOND 2019 instruments respectively as Investors took profit following consecutive weeks of appreciation of these bonds.
On the flip side, ZENITH 2022 and ACCESS 2021 enjoyed positive sentiment as yields dropped 17bps and 11bps to 7.5% and 8.0 respectively. DIAMOND 2019 (+22.4%), FIRST BANK 2021 (+18.8%) and FIDELITY 2018 (+13.7%) are the best performing instruments for the year in the Corporate category.
1. Inflation Rate to Drop Further to 15.96% in July 2017 - FSDH
2. Nigeria PMI - Steady Expansion Continues In Third Quarter
3. Manufacturing PMI Stands at 54.1% in July 2017 from 52.9% in June 2017 - CBN
4. PMI Reading No 52: A Fifth Month Above Water
5. Finally, a Steep Rise in the FAAC Payout
6. Reflections on a Commission for the Diaspora
7. Current Account Comfortably in Surplus
8. FAAC Disburses N462.36bn in June 2017 - NBS
9. CBN Publishes May 2017 Economic Report
10. CBN Publishes Q1 2017 Economic Report
11. NBS Annual Abstract of Statistics 2016
12. Boosting Investments: Nigeria's path to growth
13. CPI Drops to 16.10% in June 2017, 0.15% Lower Than 16.25% May Rate
14. Headline Inflation in June 2017 to Decline to 16.1%
15. Nigerian Economy on a Recovery Path
16. An Alarming North-South Divide