Quaterly outlook : Equity and Fixed Income Market   

Politics, emerging market sell-offs send NSE ASI tumbling 

11 October 2018 : Following the sharp decline in the ASI performance in Q2’18 (-8%), the Nigerian equity market dipped a further 14% in Q3’18, worst performing quarter since Q4’14 (-16%), as pre-election jitters and a risk off sentiment on emerging market securities weighed on stock performance in the quarter. Notably, the selloff was ricocheted across other Frontier and Emerging bourses (MSCI FM: -13%, MSCI EM: -3%) as investors priced in additional risk from expected U.S. interest rate hikes and a brewing trade war between major global economies. 

Driven by investor apathy, market participation dwindled, with average daily turnover falling 38% q/q to N3.1 billion in Q3. Foreign participation also took a hit, coming in at N71 billion in August, from N102 billion in June. Interestingly, the release of largely positive H1’18 results failed to inspire a market renaissance, perhaps depicting the overshadowing effect of the upcoming elections. 

Expect politics to remain belle of the ball 

Beginning earlier than initially anticipated albeit coming in line with analyst's expectations, political jitters have been the overarching theme of the Nigerian equity market since the January rally. After hitting a high of c.18% on January 19, the stock market had retreated 27% at the end of September, with the decline increasing in intensity with each quarter and closing at a ytd loss of 14% at the close of Q3’18. Q3’18 was a particularly turbulent period for the market as political activity began in earnest, kicking off with an active political transfer window, which saw several key figures switch political parties, an unusual ministerial resignation and rounded off with a contentious gubernatorial election. At the start of Q4, the major political parties held Primary elections to select key candidates for the general elections. 

Post-primaries, analysts expect improved clarity to inspire a bit more investor activity, as some investors might get energized by the defined direction of both parties and begin to place bets on the market. However, analysts foresee a majority of investors choosing to remain cautious as they continue to monitor the political space. That said, analysts see a possibility of bargain hunting activity close to the election across severely beaten down stocks. 

Equities is still a long-term play. Place your bets now!!! 

Despite the current investor apathy, analysts reiterate their views that the equity market is a long-term investment play, which given the positive (albeit slightly dampened) macro story, is expected to record strong returns for investors in the long run. At a 42% return, the ASI was the second best performing index in 2017, driven by an improved macro environment, and analysts believe that, ex the pre-election effect and emerging market sandstorm, the market would have continued its upward trend. 

The Nigerian equity market is also significantly undervalued when compared to Sub-Saharan and Emerging market peers, currently trading at a P/E of 9.3x versus South African (17.7x), Ghanaian (25.8x), Kenyan (12.9x) and MSCI Frontier Markets (13.4x) ratios. Given that the current trading sentiment is majorly tied to uncertainty in the build-up to the 2019 elections, analysts expect to see a recovery in the market post-election and expect investors to begin taking positions on depressed stock prices just before elections. That said, analysts note that if rates in advanced economies continue on the current trajectory, it could temper the pace of the market recovery. 

Looking Back 

• Notore Chemical Industries Plc was listed by introduction on the 2nd of August 2018 at a price of N62.50 per share. The company is a fertilizer manufacturing and distribution company, primarily located on the Onne Sea Port in Bayelsa. 

• On the 21st of September, the Central Bank of Nigeria revoked the operating license of SKYE Bank Plc and created a Bridge bank called “Polaris” to take over its assets. Subsequently, the stock was suspended from trading on the NSE. 

• Implementation of the new Retirement Savings Account Multi-Fund Structure officially kicked off in July. The new fund structure is split into four groups (Fund I to IV) and clients are assigned to the funds based on their risk profiles, which factor in age and nearness to retirement. 

• At the end of September, it was announced that President Buhari has assented to the NSE demutualization bill. The act allows the conversion of the NSE from a company limited by guarantee to a public company limited by shares. No timeline has been given for the actual listing. 

Looking Forward 

• Skyway Aviation Handling Company Limited (SAHCOL) and Indorama Eleme Petrochemicals Limited have announced intentions to list soon, with the former mulling a 2018 IPO. 

• Also, Ellah Lakes Plc is seeking shareholder approval to carry out a follow-on share offering on the exchange. The company has struggled under the weight of recent losses and is looking to inject fresh capital into the business. 

• In July, the National Insurance Commission introduced a Tier-based Minimum Capital Solvency Requirement for Insurance companies. Under this, insurers would be classified into three tiers (Tier I to III) according to their capital bases, with the different tiers authorized to offer certain products. The initial deadline for implementation was October 1 but has been extended to allow players shore up their capital base. So far, Sovereign Trust Insurance and Lasaco Assurance have announced plans to raise equity capital in the short term. Whilst no new deadline has been announced, analysts expect more Insurance companies to take advantage of the extension to raise more equity capital to shore up the capital base. 

• May and Baker Nigeria Plc has applied to the Nigerian Stock Exchange (NSE) to raise N2.450 billion fresh capital from existing shareholders. Also, Lafarge Africa recently received approval from shareholders to raise N90 billion via a Rights Issue Q4’18. 

Fixed Income Market 

Secondary market shrinks while investors raid primary market 

Amidst heightened activity in the political environment and risk off sentiment on emerging market securities, trading sentiment remained weak in the FI secondary market in Q3, with yields rising 103bps across the yield curve in the period. Yields advanced 117bps q/q on benchmark bonds while staying relatively flat in the T-bills space (down a mere 4bps q/q). Apart from political uncertainty, the tepid sentiment in the Fixed Income market was partly due to a more hawkish rhetoric at recent Monetary Policy Committee (MPC) meetings – three members voted to raise the benchmark rate – whilst the T-bills market was less affected as a combination of decent liquidity and uncertainty surrounding the upcoming general elections kept investors at the shorter end of the curve. 

Furthermore, following the movement of yields in the bonds and T-bills market, the yield curve became steeper in the quarter as the yield curve continued its path to normalization. Meanwhile, sale of T-bills at both OMO and Primary market auctions also fell significantly, from N5.7 trillion in Q2 to N3.9 trillion in Q3, despite persistent increases in rates on the longer dated bills. On the other hand, both the supply and sale of bonds in the primary market were higher in the quarter, with the DMO offering N270 billion (Q2’18: N220 billion) and selling N203 billion (Q2’18: N172 billion). 

No short-term reprieve for the market 

Analysts expect sentiment to remain weak in the Fixed Income market in Q4, with any changes likely to move yields further upwards. First, following the primaries, analysts expect political activity to intensify in the build-up to the elections, driving further uncertainty. Also, the U.S. Fed has so far stuck to the anticipated rate hike path, even as global trade continues to remain in limbo amidst a continued breakdown in talks between the U.S. and China. The MPC is also forecast to retain its HOLD stance for the rest of the year, in spite of upwards-trending inflation (2018 average forecast: 12.2% y/y). 

Meanwhile, bond supply should stay flattish, with the DMO planning to offer between N270 billion and N330 billion (Q2 offer: N270 billion). Analysts recall that per the 2018 budget, the FG had planned to borrow c.N1.7 trillion, with about 50% (N850 billion) coming from the domestic market. So far, the DMO has raised N629 billion this year, leaving a shortfall of N221 billion from the initial target and increasing the likelihood that the DMO would stick to the lower bound of the offer range. 

However, since the budget was passed in June, little to no traction has been gained on the external borrowing front, making it possible for bond supply to increase in the quarter as the DMO looks to substitute external borrowing plans with domestic borrowings. That said, analysts expect demand to be strong at these auctions as the DMO has recently shown a willingness to match investor appetite by raising rates in recent auctions. 

Conservatively, analysts see yields rising 50bps on average in Q4, with less pressure in the T-bills market as investors remain wary of taking long term positions before the general elections. Analysts however do not rule out the possibility of yields returning to the mid-16s, driven by a change in the monetary stance of the CBN or the rhetoric of the MPC. 

MPC’S Corporate Bonds program could boost securities supply 

At its meeting in July, the Monetary Policy Committee of the Central Bank of Nigeria put forward a credit support proposal, with the intent to improve credit supply for greenfield projects and expansions as well as boost supply to traditionally high employment generating sectors. The proposal, tagged the Real Sector Support Facility (RSSF), was split into two separate programs namely i) The differentiated CRR program which allows lenders to tap into their otherwise sterilized cash reserve with the CBN to provide loans to high employment generating sectors at single digit rates and ii) a Corporate Bond program which encourages large corporates to raise debt capital for greenfield and brownfield projects which the CBN may then invest in alongside other retail and institutional investors. 

Analysts believe that the Corporate Bond program has the potential to significantly improve corporate securities supply in the FI market but do not expect to see any major traction from retail and institutional investors given that the anticipated single digit rates currently falls well below current market levels and even FGN security levels. That said, analysts expect the CBN’s resolve to be instrumental in driving adoption further out.

Reporting for EasyKobo on Thursday ,  11 October 2018 in Lagos, Nigeria

Source: Joshua Odebisi  and Onyeka Ijeoma from Vetiva Capital Management Limited

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