The financial market performance so far in the year has yielded robust returns for investors with the equities market returning 17.34 percent YtD. In expectation of market performance for the month, every investor is willing to either maximise returns made or minimise possible losses on their returns.
Fixed income market expectation
Yields on fixed income instruments declined by c.200bps in the first two months of the year, owing largely to continued demand pressure. The softening of yields witnessed was in line with our expectation as stated in our “Outlook 2013.” Previewing the month, however, we highlight two indicators (interest rate and exchange rate), which are likely to shape the direction of yields for the remaining part of the first quarter in 2013.
The CBN’s monetary policy committee retained the benchmark interest rate at 12 percent at its first meeting of the year; expectation on the deliberation of the next meeting to be held March 18, suggests possible rate reduction considering the drop in inflation rate to 9 percent in January and the likelihood of a lower figure in February. The jury is out on if this trend will be sustained.
Yields will likely continue the current downward trend but will stay relatively attractive if the benchmark rate is sustained. This will sustain the flow of funds to FGN instruments as investors continue to take positions ahead of further decline in the year.
From a technical angle, the naira is about to break out of its current resistance level following the recent decline in naira to the dollar. While we believe the CBN will continue to actively manage FX volatility, the naira may trade within the band 157-158.5NGN/USD at the interbank market.
The stability of the naira is at the centre of investment decisions for foreign market participants. Though the naira may have appeared to be weakening towards the tail end of the previous month, this may not have lessened foreign inflow as the exchange rate risk remained fairly insignificant. The possibility of a weakened naira however may send signals towards reduced portfolio inflow into the fixed income market in the near term.
However, we expect the local currency to remain relatively stable within a band of N157-N158.5 per USD. Possible limited losses from exchange rate disparity may also contribute to further softening of yields in the month as inflows are sustained; though a drop in yield to 9 percent will still be relatively attractive. Hence, rising demand pressure and likely reduction in MPR may soften yields by about 100 – 150bps in the month.
The stock market in March
The past two months of 2013 has witnessed mixed performance as the bullish tempo that characterised January and early February gave way to profit taking that dragged the benchmark index from its 20.7 percent peak (on 22/02/2013) to 17.34 percent as of 04/03/2013. Looking ahead, what does the market hold in March? Should investors expect to see the retraction of the bearish trend?
Bulls likely to resurface
We forecast a positive market return for the month of March. This is premised on the fact that our market mood indicator still maintains a band that suggests positive sentiments and position taking. The current low price has expanded the forecast dividend yield, a major attraction to short-term investors. We see the ongoing profit taking as a temporary market response, as potentially investable funds remain by the side-walls of the Nigerian financial market. Looking at historical data, the Nigerian bourse has a higher probability of returning positive in March, unless a major shock (such as the meltdown of 2011) surfaces.
2012 corporate actions: A key catalyst
While a number of stocks currently trade close to or above their 2013 intrinsic value, the announcement of 2012 earnings and corporate actions remain the most obvious catalyst in the short term. We expect the dividend/bonus announcements to start coming in this month. This should push the index north, albeit marginally.
Expectations of FY results of banking stocks
We focus on the banking sector to preview the likely market reaction and price movement of each bank on the basis of the forthcoming release of 2012FY earnings. Just as investment sentiment remains positive for the market as a whole, the banking sector has recorded substantial gains in the nine weeks of trade in 2013. Presently, the NSEBNK10 had recorded 20.50 percent gain in 2013 with UBA, Diamond Bank and Skye Bank leading the pack.
Given the recorded gains, the industry’s price multiple –P/B- is trading at 27 percent premium to their 2012 year end price levels. The question remains, has the market fully priced the consensus earnings expectation or does the opportunity for potential capital gain still exist. On the basis of fundamental valuation FBNH, GTBank, Skye Bank, Sterling Bank, UBA, Zenith Bank (of our banking coverage) are currently trading with Hold recommendations, implying the market has largely priced expected earnings and likely corporate actions.
A determining factor that will shape price direction and momentum in the banking sector is the convergence of earning releases to consensus earnings expectation and dividend payout. We expect the banks to maintain the average earnings run rate of 90 percent recorded as of Q3:2012, to the full year result given the improved earnings quality in 2012 compared with the last two years; though the need to bring NPL below regulatory minimum may warrant additional write-offs by a few banks, which we do not expect to hamper earnings substantially.
