As the Nigerian economy faces more volatility occasioned by risk factors from policy normalisation in the developed markets to the potential change of the Central Bank of Nigeria (CBN) governor, investors are expected to see this as opportunity to make more money in fixed income market, according to investment bank, Afrinvest.
“We expect more volatility that should allow investors position and ride the curve to boost income”, said Ike Chioke, group managing director and director of Afrinvest (West Africa).
Analysts at Afrinvest expect yields to maintain an uptrend going towards the presidential elections which will be held in February 2019, with average yields on bonds and Treasury Bills forecasted to top out at the 16.0 percent level.
Overall market yields on Treasury Bills and Bonds are anticipated to moderate by about 2.0 percent each to the range of 13.0-13.5 percent in 2018 with the yield curve transitioning back to steepness.
Inflationary pressure is considered as one of the risk factors that would drive yield going forward. Nigeria’s inflation rate increased to 11.44 percent in December 2018, from 11.28 percent in November 2018, according to the National Bureau of Statistics (NBS).
Inflation had moderated in 2018, allowing headroom for a downward revision to the policy rate, however, given the tight monetary stance the Monetary Policy Committee (MPC) decided to hold.
“While we expect a tight monetary policy stance through 2019, we view the possibility of upside pressure on price levels in the event of the removal of petrol subsidies and adjustment of electricity tariff as fair. Consequently, we expect the CBN to utilise policy levers to ensure positive real rate of return”, Chioke said.
The monetary policy stance of the CBN has remained unchanged since July 2016, when the committee voted by five to three for a 200 basis point- hike to 14 percent in a response to control inflation.
Analysts and economists across the Nigerian financial market expect no change in the Monetary Policy Rate (MPR) as the MPC takes a decision tomorrow (Tuesday) in a meeting, which commenced yesterday (Monday).
Uche Uwaleke, professor of finance and capital markets, chair, banking and finance department, Nasarawa State University Keffi, Nasarawa State, said, “regarding the forthcoming MPC meeting, I see members voting for a hold on the policy parameters. The reality is that in spite of the increase in last month’s inflation rate to 11.4 per cent, the MPC is not likely to further tighten monetary policy in order not to jeopardize the chances of the ruling party in the coming elections. So, in a way, political consideration will be a major factor. This appears to be the trend in many countries regardless of central banks’ independence. Recall that in the run up to the Presidential elections in US, the then Chairman of the US Fed Reserve was accused by Donald Trump of deliberately keeping the policy rate low to favour the Democratic party. The point here is that the MPC will be mindful of the current political uncertainties and so will go for maintaining the status quo. Of course, the usual justifications with respect to global and domestic factors will be used to support the hold-rates stance”.
Another risk factor that would drive yield is the short-term yield spike, which provides opportunity for investors.
“We expect short-term rates to continue an uptrend going towards the elections, before retracing through second half of 2019 (H2:2019) said Afrinvest analysts.
At current levels, yields on Treasury bills are still comparatively attractive, with the c.364-day instrument trading at a yield of 17.3 percent on the 31st of December 2018. This offers an opportunity to lock in attractive yield over the short-term and capital appreciation benefits as yields decline in H2:2018.
However, given re-investment risk inherent in that strategy, the analysts advise taking position and selling down before yields begin downtrend and investing in longterm bonds, which should still carry attractive yields, as short-term rates are expected to descend prior to yields on long tenor assets.
Other factors include yields on long-term instruments optimal for duration play, Eurobonds market to continue to hold trading value, Real Sector Support Facility (RSSF) will drive Corporate Issuances and equities market weakness in the first half of 2019.
In all, investors in the fixed income market need to be closer to the market, and follow the news that would enable them to take decision. According to Ayodeji Ebo, managing director, Afrinvest Securities limited, investors need to focus on value, embark on active trading strategy as well as timing the market entry.
HOPE MOSES-ASHIKE
