Markets upbeat as investors react to budget consent

Nigerian markets turned positive Friday in reaction to the signing of the delayed 2016 budget into law by President Muhammadu Buhari, which ended weeks of wrangling with Nigerian lawmakers.

The equities market which hitherto was awash with choppy deals, with more of sell-offs, suddenly rebounded with about N48billion value addition or 0.54 percent rise in the benchmark performance index.

The N6.06trillion budget is an attempt by Africa’s largest economy to stimulate growth hammered by the fall in crude oil prices. Nigeria’s reserves have declined steadily, on the back of continued decline in oil revenue; depletion of excess crude oil savings and decline in portfolio inflows.

In addition to equities that got support for a firm direction, in line with market expectations, interbank placement rates moderated marginally, with the call rate down 9 basis points (bps) to 4.08percent, following a mild improvement in liquidity to about N380billion (previous: N370 billion).

“Thankfully, the 2016 budget which is one of the factors dragging investor confidence and business activities was signed into law by the President and we believe rapid implementation of the capital component of the budget could generate enough impulse to effectively lift aggregate demand in the medium term”, said research analysts at Afrinvest (West Africa) Limited.

Trading in the T-Bills market was also upbeat as demand persisted across most maturities (supported by the healthy system liquidity) – yields moderated 17basis points (bps) on average.

The bears remained largely dominant in the bond market at week close, as broad selloff drove yields 12 basis points higher on average.

“We expect trading sentiment to remain upbeat in the T-bills market as investors continue to find solace around the short end, amidst possibilities of an upward shift in the yield curve. However, we believe the bond market will remain tepid at week open, as traders act cautiously ahead of the monthly bond auction scheduled for Wednesday”, analysts at Lagos-based Vetiva Capital said in their email note Friday.

“We expect the market to remain upbeat in the coming session as investors continue to react to news flow of the signing of the budget”, the analysts added.

Oil markets rose as much as 2 percent on Friday, but Brent crude remained on track to its biggest weekly loss in four months, after profit-taking in recent sessions. Brent futures were up 54 cents at $44.55 a barrel. West Texas Intermediate (WTI) futures traded at $44.77, up 46 cents day on day.

“We are of the view that Nigeria at this moment needs significant foreign direct investment (FDI) to engender sustainable inclusive growth as opposed to significant foreign portfolio investments (FPI) which is volatile. The substantial portfolio outflows experienced when foreign portfolio investors pull out investments often exacerbate economic problems during periods of economic difficulty which further highlights that growth driven by portfolio investment is largely unsustainable,” research analysts at Lagos-based investment house, Dunn Loren Merrifield, said in their recent financial market review and outlook for 2016.

“Data from the CBN show that gross official reserves declined by $780m in April on a 30-day moving average basis to $27.1bn. The average has been an outflow of $450m in the nine months since the one-off bonus of July 2015 when the CBN acquired the FX deposits of $2.5bn of government departments and agencies.

We do not see a sharp rebound in the oil price in the months ahead and so expect that the “backlog” in unmet demand will continue to grow. That demand has eased in recent weeks on the basis of the naira collateral the CBN returns to the banks for unsuccessful bids. Once we allow for the “froth” in the bids, however, a sizeable gap remains”, said the Gregory Kronsten led team of research analysts at FBNQuest.

Iheanyi Nwachukwu