Nigeria Capital Market: Week Ended 2nd April, 2015

Domestic Polity Stability Spurs Capital Market Resurgence
Following an extended period of political uncertainty and weakening macro-economic indicators which depressed investors’ confidence and beclouded the performance of Africa’s largest economy, the economy seems to be rebounding. The rear outcome of the presidential election which saw the unseating of the incumbent People’s Democratic Party’s Goodluck Jonathan and the historic victory of General Muhammadu Buhari is telling on the future of Nigeria as the African economic power house. 

The resolve of the people to seize its democratic power during the election, the independence and seeming transparency of the electoral commission, and the remarkable statesmanship of the incumbent President- Goodluck Jonathan who unpredictably conceded to defeat, all signal the likely emergence of democratic virtues. Although the new leadership is expected to inherit a weak economy given lower oil prices, poorly developed infrastructure, corrupt institution and a threat of insurgency, we envisage that the high expectation of the Nigerian masses and the resolve of the incoming government for change may spur the economy towards the full  attainment of its potential.

On the back of the peaceful transition in government, we expect the exchange rate to stabilize to an average of N200.00/US$1.00 at the interbank, we see the equities market stabilizing and responding to fundamentals even as yield on fixed income instrument is expected to moderate further.

Nigerian Stock Market Weekly Summary and Outlook
The Nigerian Equity Market was electrified by the exciting news flow in the political space, driven by renewed investors’ appetite. All Share Index (ASI) exploded 16.9% W-o-W following the successful outcome of the presidential election. It is telling to note that the Market posted the highest daily gain (+8.4%) in a single day on the day following the announcement of General Muhammodu Buhari as Nigeria’s President-elect. YTD return swung positive from -11.8% as last Friday to 3.1% at 2nd April 2015.

Market Capitalization also expanded by N1.8tn WTD to close at N12.1tn. Activity level measured by volume and value traded for the week averaged 632.0mn and N8.2bn W-o-W respectively. Guaranty Trust Bank, FBN Holdings and United Bank for Africa recorded the highest activity by volume traded whilst Guaranty Trust Bank, Zenith Bank and Dangote Cement recorded the most value traded. Meanwhile, the market was flooded with more 2014 full year corporate releases as the March 31st deadline elapsed during the week. Against the backdrop of the bullish market sentiment, all sector indices closed stronger W-o-W. The Banking Index was the best performer, advancing 24.0% W-o-W after investors hunted for bargain in Guaranty Trust Bank (+30.9.0%), Zenith Bank (+32.5%) and United Bank for Africa (+29.8%). The Oil & Gas (+16.4%), Consumer Goods (+15.1%), Industrial Goods (+13.6%) and Insurance sector (+3.5%) indices all drove north W-o-W.

The Advancer/Decliner ratio-a measure of market breadth in the Equity Market surged significantly by 28.3x for the week compared 2.3x recorded the previous week, indicating a revived bullish sentiments for equities. Fidelity Bank (+38.9%), NAHCO (+33.9%) and Zenith Bank (+32.5%) led the bullish chart whilst Pharma Deko (-4.9%), Vono (-4.3%), Red Star Express (-4.0%) and Okomu Oil (-0.5%) recorded the only losses for the week. We expect the momentum in the equity market to strengthen given that the earlier tensed political situation in the economy has seemingly eased. Nevertheless, we anticipate slight profit taking in the coming week.

Money Market Review and Outlook
The money market remained liquid at the beginning of this week with Opening Balance of Banks and Discount Houses pegging at N167.8bn on Monday — traceable to the OMO repayment of N104.9bn which matured last week. Rates remained unchanged on Monday relative to last week close with the Overnight and Open Buy Back (OBB) rates closing at 12.7% and 13.2% on Monday, while NIBOR instruments rose slightly on average to 15.9%. The market remained liquid mid-week, hence rates were stable. The OBB fluctuated within the range of 12.6% and 13.5% while the O/N rates gyrated between 13.1% and 13.9% between Tuesday and Thursday. The Overnight and OBB rates however eased to 10.2% and 9.5% respectively on Friday, a 3.3% and 3.0% decline relative to last week close. We expect liquidity level to remain robust next week and also anticipate that the CBN will conduct OMO issuances to mop-up liquidity, hence rates may inch slightly higher. T-bills totalling N183.64bn will mature next week, although there will be a re-issuance of the same amount.

Foreign Exchange Market Review and Outlook
The naira at the interbank closed flat W-o-W at N199.10/US$1 (same as that of the previous week), having opened the week at N199.11/US$1 and was sold at N197.00/US$1 by CBN. The pressure on the naira moderated this week as the economy stabilized following the announcement of the presidential elections results evident in the 1 kobo appreciation of the naira to N199.10/US$1 on Tuesday. The sale of dollars by the Central Bank to defend the naira has led to the decline of the foreign exchange reserves to US$29.8bn bringing YTD and W-o-W losses to 13.6% and 0.2% respectively. Corporate customers who had earlier amassed dollars before the presidential election in order to hedge against anticipated political unrest have reduced their demands for the Greenback and chosen to convert to the local unit. We anticipate that the value of the Naira would appreciate gradually with time, although saddled with fetters of plunging oil prices.

Bond Market Review and Outlook
The bond market for the week sustained a generally upbeat mood following the successful completion of Nigeria’s 2015 general elections which got investors excited. The high country risk premium which has sustained yields at a pre-election average of 15.4% is noticeably moderating given the performance of bonds in the week. Average yields for bond instruments in the week systematically moderated in all the trading days of the week as it settled at 14.3% from 15.0% in the previous week.

At the close of market, FMDQ’s total market bond index shows a Week on Week (W-o-W) gain of 5.1% – the highest W-o-W return so far in the year. In turn, the sovereign bond yield curve showed a significant moderation as the curve gradually shifts from the realm of partial inversion to the region of normality. Investors’ apprehension about possible outbreak of violence post-elections has been doused with confidence returning to the bond market space. 

There are indications that foreign investors may be set to return to the market even as local investors garner the requisite confidence to continue to overweight on bonds given its relative safe haven. Yields have assumed a downward trend post-election announcement; whilst this trend is expected to persist, we advise investors to lock into short or medium term-to-maturity bond instruments trading at reasonable discount to par value.

Source: Afrinvest (West Africa) Limited Research Team.