BusinessDay

Fixed income market to thrive better than equities – BRIU

The fixed income market would thrive better than the equities market in the next few months as the impact of corporate earnings wanes, according to a report by the BusinessDay Research & Intelligence Unit (BRIU).

Despite the escalating geopolitical tension, the performance of the Nigerian financial market remained bullish in both the equity and fixed income space in February.

The equities market recorded gains last month as investors reacted positively to the generally impressive full year results of some listed companies but this sentiment is most likely to wane without any market catalyst, the report stated.

According to the report, the Nigerian Equity Market closed February at 47,624.67 points, 1.7 percent higher on a monthly basis, while YTD return improved to 11 percent.

The bullish performance was driven by gains in Seplat (8.8 percent), Total (9.9 percent) and BUAfoods (53.5 percent).

The Oil and Gas index was up 7.8 percent, the best performing index compared to Banking (2.8 percent), Industrial (2.8 percent), Insurance (2.5 percent) and Consumer goods (2.3 percent).

According to the report, the rising commodity prices, especially crude oil, which rose above $100/bbl., last month implies higher subsidy payments for the Nigerian government as well as cost of doing business in the economy.

“The passthrough effect of the subsidy combined with the on-going fuel crisis could dampen investors’ confidence in the real economy as inflationary pressures build leading to a more cautious stance in the equities market in favour of fixed income securities,” BRIU stated.

However, investor subscription has been rising in the treasury bills market.

In February, the Central Bank of Nigeria (CBN) conducted two rounds of treasury bills (T-Bills) auctions worth a total of N472.3bn relative to the expected N213.3bn across the 91-day, 182-day, and 364-day bills.

Investors’ interest was particularly seen on the 364-day T-Bill. CBN initially offered N180.5bn, but received total subscription of about N1.0tn across the two rounds, implying a subscription level of around 5.6x. In total, CBN eventually sold about N452.8bn worth of 364-day T-Bill.

The 91-day T-Bill also received high investor subscription in the last auction of the month. Subscription level edged up to 6.5x (23/02/2022) compared to 0.5x in the previous round (09/02/2022).

There was also strong interest in the domestic bonds market as investors searched for high yielding instruments.

In the primary market, the Debt Management Office (DMO) conducted bond auctions across two instruments (re-opening) which witnessed strong buying interest (subscription level: 3.7x). In total, N150.0bn was offered by DMO, against N557.7bn in subscription by investors. However, DMO eventually made an allotment of N122.9bn, 18.1 percent shortfall from the amount offered.

Read also: CBN introduces cash collection centers, fixes deposit, withdrawal limit

In particular, the 2026 bond was oversubscribed by 4.3x while the 2042 bond was oversubscribed by 3.1x. The stop rates on the bonds trended lower by 55bps for the 2026 instrument to 11.5 percent while the rate on the 2042 instrument closed unchanged in comparison to the previous auction.

However, the bearish sentiment persisted in the Eurobonds market.

Sell pressure in the Eurobonds market drove average yields up by 92bps to 8.1 percent in February compared to the marginal increase of 1bp in January.

BRIU attributed the sell pressure on Eurobonds to the ongoing geopolitical tensions concerning the Russia-Ukraine conflict. “We expect the sell-offs in the Eurobonds market to persist as the global financial market continues to react to developments in the Russia-Ukraine conflict.”

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