What shaped the past week?
Global Markets: Global markets traded bearish this week amid further corporate earnings releases and sustained fears over slowing economic growth, meanwhile the optimism over China-U.S. trade relations from last week cooled as reports from the U.S. indicated a stalemate in negotiations. Wall Street was closed on Monday for Martin Luther King Jr. day, while European markets closed lower thanks to weaker than expected financial results from UBS. In what was likely a delayed reaction in Asia, markets were generally positive despite China reporting the slowest economic growth in 28 years. When trading resumed on Wall Street on Tuesday, markets fell following the Chinese data, and lower growth estimates from the International Monetary Fund renewed fears of a global economic slowdown. European and Asian markets also declined in reaction to these economic news. By midweek, markets turned mixed with the Dow Jones industrial average inching up on the back of strong earnings from tech stocks, while major indices in European and Chinese markets closed mostly lower amidst ongoing concerns over U.S.-China trade. By week close, markets began to recover amid anticipation of strong results from tech companies in Europe, even though fears over Sino-American trade lingered in U.S and Asian markets.
Domestic Economy: The CBN has divulged plans to introduce new capital rules for the banking sector in the second quarter of the year. In a mail correspondence with Bloomberg, the apex bank stated that the new requirements will have stricter definitions of capital and will introduce capital conservation and counter-cyclical buffers, in line with the Basel III global accords. We believe the implementation of this new regulations could lead to banks raising fresh capital to prevent falling short of the required capital level. We recall that the CBN migrated banks to the new IFRS 9 accounting standard last year to improve disclosures by adding provisions for existing loan losses as well as future losses. Nigerian banks have struggled with Non-performing loans (NPL) with average NPL as of H1’18 equal to 12.4% of total credit, an improvement from 2017, when the average NPL ratio was close to 15%, according to the CBN. We believe the risk guidelines and stronger capital standards will help shape more sustainable growth in the banking sector and reduce the risk of a financial crisis.
Equities: Despite posting a negative close on Monday, driven by a decline in the Oil & Gas sector, the ASI recorded a 136bps w/w gain this week after recording green closes in four consecutive sessions. Overall, the Banking sector (+715bps w/w) was the big winner, thanks to investor interest across most Tier I bank – ACCESS (+16.07% w/w), GUARANTY (+798bps), ZENITHBANK (+698bps w/w) and UBA (+548bps w/w). Meanwhile, the Industrial Goods (-202bps w/w) and Oil & Gas (-132bps) sectors closed the week in negative territory despite positive closes of +49bps and +168bps respectively on Friday as a result of losses in CCNN (-438bps w/w), WAPCO (-234bps w/w), SEPLAT (-625bps w/w) and MOBIL (-426bps). Finally, the Consumer Goods sector (-41bps w/w) also recorded moderate losses following declines in PZ (-464bps w/w), NB (-136bps w/w) and UNILEVER (-122bps w/w).
Fixed Income: The CBN continued to keep a tight hold on system liquidity, conducting OMO auctions in all five sessions and selling N787 billion (Net Outflow: N402 billion) in the process with rates on the on short, mid and long dated bills on offer maintained at 11.90%, 13.50% and 15.00% respectively. Despite tightened liquidity, trading activities in the Treasury Bills market remained tilted towards the buyside for most of the week. As such, T-bill yields declined 52% w/w on average. Trading sentiment in the bond market was also positive from week open till mid-week as investor’s focused on the Monetary Policy Committee meeting (where all policy levers were left unchanged) and also awaited the release of the monthly bond auction calendar. Notably, the DMO released the long-awaited January Bond Auction Circular by Wednesday indicating an offer of N150 billion across the 5-year, 7-year and 10-year maturities at next week’s auction. Following this, investor sentiment cooled off in the second half of the week with yields advancing marginally. As such, average yields on benchmark bonds stayed flat for the week.
Currency: The Naira appreciated N0.33 w/w at the I&E FX Window to settle at N362.46 against the dollar and depreciated N2.00 w/w to settle at N362.50 in the parallel market.
What will shape markets in the coming week?
Equity market: While the strong gains from this week create a high chance for bargain hunting across select stocks, we believe trading activities will remain tilted towards buying as more investors begin to take positions in beaten down stocks in anticipation of a dispersion in political clouds post-elections.
Fixed Income market: Whilst we anticipate tepid trading in the T-bills space due to liquidity constraints, we foresee modest sell-offs in the bond space as investors prepare to partake in the bond auction scheduled for Wednesday.
Currency: We expect the naira to remain largely stable across the various windows of the currency space as the CBN maintains interventions in the FX market.
Focus for the week
NIGERIA MONETARY POLICY COMMITTEE – MPC holds rates as political vote comes into focus
At its first meeting of the year, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted unanimously to HOLD all policy rates at previous levels, in line with Consensus expectation. The decision comes ahead of next month’s general elections and amid continued marginal movements in inflation figures, with the Governor highlighting the positive m/m trend in inflation. The committee also highlighted some of the external economic factors which affected the Nigerian economy in 2018, from volatility in the global financial market, to the ongoing trade war between the U.S. and China, Brexit and the hiking of monetary rates by western economies.
Internal and external factors key in 2019
Highlighting some of the major internal factors that have affected Nigeria, the CBN Governor Godwin Emefiele warned that the late passage and implementation of the 2018 budget, along with softer oil prices had negatively impacted the economy towards the end of 2018. He added that the rise in inflation from 11.3% in November to 11.4% in December were indications of economic headwinds which would continue to extend into 2019. However, the committee noted that an increase in Monetary Policy Rate (MPR) at this juncture amid these growth- inhibiting factors and a general election would be ill-advised. Notably, the committee highlighted the recent downward revision to Nigeria’s GDP growth forecast by the IMF to 2.0% (from 2.3%), below the CBN’s forecast GDP growth of 2.28% y/y in the year (Vetiva: 2.7% y/y). Furthermore, security challenges, political risks associated with the upcoming elections and weaker food production were mentioned as potential headwinds to be faced in 2019. Meanwhile, on the external front, the persisting Sino-American trade-war, uncertainty over Brexit and monetary tightening from the European Central Bank (ECB) & U.S Federal Reserve were highlighted as major growth dampeners in 2019.
We consider this early decision by the MPC to be prudent given that pricing pressure appears slightly under control, even as near-term fiscal activity supporting growth remain thin, as policymakers focus on the upcoming political vote. Nonetheless, we maintain our view of a policy rate hike at a later meeting this year given expected pressure on both inflation and the exchange rate. While the apex bank has been able to maintain exchange rate stability so far, the prospect of rising rates from the U.S. Federal Reserve as well as monetary tightening from the ECB could spark a more hawkish bias later in the year.
Whilst reasonable care has been taken in preparing this document to ensure the accuracy of facts stated herein and that the ratings, forecasts, estimates and opinions also contained herein are objective, reasonable and fair, no responsibility or liability is accepted either by Vetiva Capital Management Limited or any of its employees for any error of fact or opinion expressed herein.