United Capital Investment View: Equities undulate between gains and losses

Is a firm direction on the horizon?

The equities market sustained its winning ways in the past week, with positive performance driven by higher demand, tied to position taking by investors in anticipation of Q1-16 earnings releases. At the end of the week, the ASI was up 0.9% w/w, settling at 25,062.41 with YTD trimmed to -12.5%. The Oil and Gas index (-9.7%) led losses, followed by the Industrial goods (-2.0%) and Insurance (-0.3%) indices. the Consumer and Banking indices closed in the positive territory. Market activity as measured by average volume and value traded increased by 36.8% and 22.1% w/w, to close at 241.9m units and N1.4bn respectively.

System liquidity opened N164.6bn long at the start of the week although in contrast to the previous week, liquidity levels improved aided by FAAC inflows (c.N143.3bn) in line with our expectations. The pattern of FX refunds by the apex bank and subsequent debits for FX funding also repeated albeit with limited impact of rate gyrations as the market was mostly liquid. While maturities of c.N96.0bn further boosted system liquidity, the Apex bank announced and allotted three OMO auctions towards the end of the week (N56.0bn on Wednesday, N49.2bn on Thursday, and N46.5bn on Friday) which mopped a total of N151.7bn off the market, effectively trimming market liquidity.

While we expect a quiet start as investors return from a long weekend, we envisage demand for equities will pick-up in the course of the short week, as investors continue to take positions on Q1-16 earnings. We note that Q1 has thrown up some positive surprises in terms of earnings performance from counters such as Nestle and Access, and think further surprises may spur demand in the near term.

Global and Macro-economic market update

Equities bearish across global markets

Major equity indices in the US ended the week red owing to uncertainties around the     interest rate trajectory, disappointing earnings performance by some listed corporate as well as reactions to a raft disappointing economic numbers released. Specifically, weaker-than-expected earnings from bellwethers Apple  and Intel triggered a selloff in tech shares, while on the data front, Q1-16 GDP numbers came in at 0.5%, 20 bps behind consensus expectations. Also, The PCE price index, the Federal Reserve’s preferred       measure of inflation, showed price pressures abated in March, further confirming fears voiced by theUS FOMC at its recently concluded meeting that the rise in inflation at the beginning of the year might not endure.

European stocks suffered their worst session in two months in the past week, as investors tackled a sequence of mixed economic data and a fresh batch of corporate results. While according to a preliminary reading from Eurostat, Eurozone GDP grew 0.6% in the first quarter ahead of consensus; inflation in the currency bloc fell to -0.2% in April, missing expectations for a flat reading. The data highlight the challenge of stubbornly low inflation the European Central Bank has been battling against in recent times and casts further doubt on the effectiveness of on-going QE.

On the domestic scene, data released by the Nigerian stock exchange revealed Total transactions at the nation’s bourse decreased by 17.9% from N117.3bn recorded in February 2016 to N96.3 (about $0.49 billion) in March 2016 with domestic investors outperforming their foreign counterpart by 28.5% as total FPI transactions decreased from 36.5% to 35.8% over the same period.

The CBN released its Purchasing Managers’ Index, a monthly survey of purchasing and supply executives of manufacturing and non-manufacturing organizations. The Manufacturing PMI dropped to 43.7% in April 2016, compared to 45.9% in the preceding month. This implies that the manufacturing sector declined at a faster rate during the review period. The composite PMI for the non-manufacturing sector also recorded decline for the fourth consecutive month. The index dropped to 44.3 points from the 45.4 points registered in the preceding month.

Financial Markets Review and Outlook

Equities market extends gains for a second straight week, adds 85bps

The Equities market sustained its bullish trend in the past week, as position taking by investors for Q1-2016 results drove higher demand. At the end of the week, the ASI was up 0.9% w/w, settling at 25,062.41 with YTD pared to -12.5%.

On a sectorial level, equity performance was more mixed. The Oil and Gas index (-9.7%) led losses, followed by the Industrial goods (-2.0%) and Insurance (-0.3%) indices. Examples of major counters that drove price depreciation in these sectors include FORTE (-22.1%), WAPCO (-8.1%), MOBIL (-4.6%) and CUSTODYINS (-2.4%). On the flip side, it was gains in stocks such as UCAP (+11.5%), HONEYWELL (+11.4%), NB (+9.6%), TIGER BRANDED (+8.9%), FBNH (+8.4%), GUARANTY (+4.9%) and ZENITH (+4.5%) that ensured the Consumer and Banking indices closed in the positive territory. Market activity as measured by average volume and value traded increased by 36.8% and 22.1% w/w, to close at 241.9m units and N1.4bn respectively.

While we expect a quiet start as investors return from a long weekend, we envisage demand for equities will pick-up in the course of the short week, as investors continue to take positions on Q1-16 earnings. We note that Q1 has thrown up some positive surprises in terms of earnings performance from counters such as Nestle and Access, and think further surprises may spur demand in the near term.

Money market rates responds to FAAC inflow, trend lower w/w

System liquidity opened N164.6bn long at the start of the week although in contrast to the previous week, liquidity levels improved in the course of the week aided by FAAC inflows (c.N143.3bn) in line with our expectations. The pattern of FX refunds by the apex bank and subsequent debits for FX funding also repeated albeit with limited impact of rate gyrations as the market was mostly liquidity. While maturities of c.N96.0bn further boosted system liquidity, the Apex bank announced and allotted three OMO auctions towards the end of the week (N56.0bn on Wednesday, N49.2bn on Thursday, and N46.5bn on Friday) which mopped a total of N151.7bn off the market, effectively trimming market liquidity. Overall both Open Buy Back (OBB) and Overnight (O/N) closed 100bps and 150bps lower than the previous week at 3.0% and 4.0% respectively.

With the market likely to open relatively liquid this week, we expect to see more OMO calls by the Apex bank and if allotted, should see key money market rates hinge marginally higher from previous week’s close.

FI markets bearish as investors seek higher returns from OMO allotments

Sentiment in the T-bills market was mostly bearish in the past week, as market players looked to take advantage of attractive yields on the OMO issuances. At the end of the week, yields on the 91day, 182 day and 364 day bills closed at 7.7%, 9.3% and 11.5%, 60bps, 40bps, and 70 bps higher than the previous week accordingly.

The bond market was also bearish as yields continue to re-price higher in line with recent trends. Yields at the short, medium and long end of the maturity spectrum closed the week at 11.7%, 12.7% and 13.1%, 23bps, 20bps and 30bps higher than a week earlier.

This week we expect to see mixed trading patterns across the FI markets as profit taking from overbought notes, impact of possible OMO calls by the CBN and higher inflation expectations combine to drive sell-offs. However, this will likely be tempered by a possible re-entrance of  buy-side players seeking attractive yields.

Naira firms at the interbank, still stable at the parallel market

In line with recent pattern, the naira appreciated at the interbank in the past week, gaining 40bps from a week earlier to close at N198.5/US$. The currency however remained stable in the parallel market, closing the week at c.N319.00/US$.

With the FX policy framework still unclear, we believe the fundamental imbalance currently rocking the FX market will continue, and hence expect the wide gap between the official and parallel market will remain in the near term.