United Capital Research: Investment Views: MPC easing stance buoys Naira assets

The rob-off effect of monetary easing by the MPC supported by attractive valuation on stocks pushed allocation increase in equities last week, driving the local bourse marginally northwards as the market traded positive in 2 out of 3 trading sessions. The benchmark index clawed back 70bps, paring YTD loss to –11.8% as market capitalization settled at N10.5trn. Bargain hunting in top consumer, industrial and energy counters largely drove the market to the positive territory. Sentiment was however somewhat bearish with market breadth settling at 0.8x as 29 stocks appreciated against 36 decliners.

Similar to the trend in the equities space, sustained bargain hunting in fixed income instruments drove bond price higher and yields lower. The surge in demand can be attributed to the liquidity impact of the CRR reduction at the MPC meeting. Demand was further fuelled by FAAC postings and attractive risk adjusted returns for Nigerian FI assets compared to its peers. As a result, average yields declined by 68bps w/w.

Easing stance of the MPC is expected to bode well for banks’ earnings going into H2-15. Therefore, we will likely see a moderate re-pricing in banking stocks, especially the Tier 1 banks this week. However, we expect a tepid market as investors await the ministerial list by the presidency on Wednesday. On this note, we think the positives in the market will slightly offset expected profit booking. Thus, we look to see a marginally positive return for the week.

Global and Domestic Macro-Economic Updates

Divergent monetary policies across geographies set to extend, shaping market sentiments Despite some upturn at the start of the week, key US indices ended the week lower, as a sharp selloff in biotech and health-care stocks towards the week’s close spread to broader markets, weighing on overall sentiments. The brief momentum was driven by a slew of positive data, which showed the US economy grew at an annual 3.9% pace in the second quarter, 20bps above consensus, driven by higher consumer spending and somewhat stronger business investment.

The market had earlier benefited from a hawkish tone by the US Fed chairwoman, Janet Yellen as she announced the US economy is strengthening and an interest-rate hike is likely before the end of the year. She further added that signs of weak growth overseas won’t prove large enough to have a significant impact on policy

Bearish sentiments rocked Asian markets, driven by news that the preliminary reading of Chinese manufacturing activity fell to 47.0 in September, a six-and-a-half year low, from a final reading of 47.3 in August. The downbeat market was even more concerning, given the latest moves by Chinese regulators to prop up Chinese equities.

These moves were aimed at making margin lending more attractive in contrast to earlier policies, and involved lowering the ratio of borrowers’ total assets to margin loans as well as a reduction in fees on securities transactions by about a third to encourage more buying. The regulator also opened up margin trading to more investors, allowing those with less than 500,000 yuan ($80,600) in their investment accounts to engage in the practice. We note that China’s outstanding margin loans currently total around 2.1 trillion yuan ($338.68 billion), more than five times the level from a year ago.

European stocks however bucked trends in Asia and the US, closed sharply higher Friday erasing much of their losses for the week. Markets across the Atlantic were buoyed on comments by U.S. Federal Reserve Chairwoman which eased some of the concerns about lackluster global economic growth.

CRR reduction and net inflows suppresses rates

Money market rates eased last week driven by inflows from maturing T-Bills, OMO redemption, statutory FAAC allocations and reduction in the Cash Reserve Ratio to 25%. Consequently, The OBB and overnight rates closed the week at 11.9% (15.0%) and 11.5% (14.5%) accordingly. Inflows for the week stood at N493.3bn while outflow was at N197.9bn. Average NIBOR also dipped by 24bps to 15.8%. FAAC disbursement, OMO redemption of N197.9bn and the 6% drop in the CRR will keep system liquidity strong for the week; hence rates are likely to trend lower.

Importunate demand dunks FI yields

Sustained bargain hunting in fixed income instruments drove bond prices higher and yields lower. The persistent demand can be largely attributed to the liquidity impact of CRR reduction at the MPC meeting. Demand was further fuelled by FAAC postings and attractive risk adjusted returns for Nigerian FI assets compared to its peers. As a result, average yields declined by 68bps w/w.

The CBN auctioned treasury bills last week of N31.19bn (91-day), N10.61bn (182-day) and N59.08bn (364-day) with marginal rates of 10.5%, 13.2% and 13.8% respectively. Subscription level stood at N317.7bn driven by the boost in system liquidity.

This week, we expect yields to trend lower though marginally. Liquidity boost and relatively attractive yields will sustained buy bias towards FI instruments. On the other hand, some level of profit booking is expected as investors may thin out exposures to ‘overpriced’ instruments. Also, an aggressive mop-up by the CBN via OMO auction may reverse the strong buy bias.

Naira flat against the Greenback w/w 

Activities in the FX market remained relatively calm in the past week, even with the MPC’s decision to boost market liquidity. The naira traded flat on a w/w basis, closing the week at N199.0. We expect to see some pressure on the naira on foreign portfolio outflows as we enter into the JP Morgan phase out week. Although impact will likely be doused by ancillary dollar supply by the Apex bank.