SAT, OCT 17 2020-theG&BJournal-Activities in the local bourse declined from the levels seen in recent weeks with the value of trades falling 35.0% w/w. The market struggled to find direction, closing broadly flat in 4 of 5 sessions during the week. However, late gains on Friday drove the market to a fourth-consecutive weekly gain. Notably, investors’ interest in ZENITHBANK (+7.8%), WAPCO (+10.9%), and UBA (+5.9%) drove the benchmark index 0.9% higher, w/w, to 28,659.45 points. The MTD and YTD return for the index grew to 6.8%. The Banking (+2.9%) index topped the sectoral charts, followed by the Oil & Gas (+2.4%), Consumer Goods (+1.9%), and Industrial Goods (+0.2%) indices. The Insurance (-0.7%) index was the sole loser.
We expect the market to continue to benefit as domestic investors seek alpha-yielding opportunities in the face of increasingly negative real returns in the fixed income market. However, we advise investors to trade in only fundamentally justified stocks as the weak macro environment remains a significant headwind for listed companies.
The overnight (OVN) rate declined by 288bps w/w, to 2.0%, as system liquidity was supported by inflows from OMO maturities (NGN370.00 billion).
Barring any significant mopping-up activity by the CBN, we expect the OVN to remain depressed, as inflows worth a combined NGN328.70 billion come into the system from OMO maturities (NGN296.03 billion) and FGN bond coupon payments (NGN32.67 billion).
The Treasury bills secondary market ended the week on a bullish note as average yield across all instruments contracted by 23bps to 1.2%. The OMO segment remained bullish, as yields contracted by 19bps, on average, to 1.2% due to the ample liquidity in the system, and as investors looked to fill unmet demand from the PMA. In the same vein, the NTB segment was also bullish (average yield contracted by 29bps to 1.1%), as participants covered for lost bids at the PMA. At the auction, the CBN offered bills worth NGN124.89 billion with allotments of NGN12.76 billion of the 91-day, NGN4.50 billion of the 182-day and NGN107.62 billion of the 364-day – at respective stop rates of 1.00% (previously 1.10%), 1.00% (previously 1.55%), and 2.00% (previously 3.05%).
We retain our expectation for sluggish demand in the T-bills market, due to the unattractive yield in the space.
Activity in the Treasury bonds secondary market remained bullish, due to (1) the significant demand brought about by the excess liquidity in the system, and (2) market players reacting to the significantly reduced offering in the recently released DMO circular. Consequently, the average yield across instruments contracted by 125bps to 5.0%. Across the benchmark curve, yields declined at the short (-23bps), mid (-139bps) and long (-182bps) segments, as investors bought up the JAN-2022 (-56bps), JUL-2030 (-199bps) and JUL-2034 (-220bps) bonds, respectively.
Next week, we expect investors’ focus to shift to Wednesday’s PMA, as the DMO is set to offer instruments worth NGN30.00 billion (70.0% lower than the previous auction) through re-openings of the 12.50% MAR 2035 and 9.80% JUL 2045 bonds. Due to the limited supply from the DMO, we still expect sizeable demand at the secondary market, as investors seek investible options for liquidity, and cover for lost bids at the auction which is likely to be oversubscribed.
Nigeria’s FX reserves declined by USD42.61 million w/w to USD35.67 billion, as FX outflows outpaced inflows. Across the FX windows, the naira traded flat at NGN385.83/USD against the US dollar at the I&E window, while it weakened by 1.1% to NGN462.00/USD in the parallel market. In the Forwards market, the naira weakened across the 3-month (-0.1% to NGN388.19/USD), 6-month (-0.4% to NGN391.30/USD) and 1-year (-0.7% to NGN400.25/USD) contracts, while the 1-month (NGN386.50/USD) was flat.
Despite the CBN’s stronger commitment towards exchange rate unification, we still see legroom for the currency to depreciate further in the medium-to-long term, at least towards its REER derived fair value. Our prognosis is hinged on (1) the widening current account (CA) position, (2) currency mispricing, which could induce speculative attacks on the naira, and (3) the resumption of FX sales to the BDC segment of the market which should place an additional layer of pressure on the reserves.-With Cordros Research.