Global Markets: The US and European Markets were generally mixed this week, as US house prices reached a 3+ year high fuelled low mortgage rates and improved job growth. The Asian market fell slightly, due to disappointing manufacturing data from China as a report showed manufacturing contracted for the first time in seven months, making investors cautious.
Domestic Economy: Nigeria’s Monetary Policy Committee (MPC) met, and voted on the Monetary Policy Rate (MPR) and just as we anticipated, the policy rate was unaltered from 12% (the committee has maintained an unchanged stance since October 2011). The Committee expressed concerns about a potential increase in government expenditure, and its consequent risks to exchange rate and inflation (please see the Focus for the Week section for details). In another development, the Asset Management Corporation of Nigeria (AMCON) provided details regarding the refinancing of its NGN5.7trn zero coupon bonds with maturity dates between December 31st 2013 and November 2014. These bonds were issued at a principal amount of NGN3.9 trillion with a face value of NGN5.7trn for 3 years. AMCON will retire a portion of this money (NGN2 trillion) this year through 2014, through cash and by issuing T-bills in order to properly manage the macroeconomic implications. This bond redemption is expected to be completed by October 2014, after which the CBN will become the sole creditor to AMCON.
Equities: The Nigerian Bourse opened the week on a negative note, losing 24bps pressured by profit-taking in DANGCEM (which had rallied c.4% the previous week). By Wednesday, market sentiments turned positive, as the index closed in the green with gains in the Industrial Goods sector (adding 61bps) after a disappointing session on Monday. By Thursday, the market heavyweight DANGCEM pared all its gains closing the day 8% lower, dragging the ASI lower by 211bps, with the Industrial Goods and Conglomerates losing 690bps and 59bps respectively. Although the Financial Services closed green, it was not strong enough to sustain the upbeat in the market. By the end of the week, the Index garnered a WoW return of 1.20%, bringing the YtD gain to 33.02%. Nonetheless, volume and value traded fell by a substantial 15% and 27% to 364 million and NGN3.8 billion respectively.
Fixed Income: The T-Bills market was predominantly bullish following liquidity inflows from statutory allocation (FAAC) and OMO maturities later on in the week. The Central Bank was relatively accommodative in allowing liquidity build-up, conducting an OMO auction totaling NGN122 billion in 182-Day and 196-Day maturities at respective stop rates of 12.3% and 12.35%. Yields closed marginally higher at the primary market auction (with strong demand on the 182-Day and 364-Day maturities), with the Central Bank selling a total of NGN157 billion in 91-Day, 182-Day and 364-Day bills at respective stop rates of 10.99%, 11.77% and 11.97% relative to 10.3%, 11.59% and 11.68% at the 09 May auction. The secondary T-Bills market subsequently turned bearish as negative sentiments following the surprise increase in the benchmark T-bills rates at the primary auction pushed yields higher. With the yield curve inverted, and premium rates obtainable at the primary market OMO auction, interest in the bond market has been lackluster, despite the impressive single digit inflation print (April: 9.1%YoY). The bonds market traded relatively flat during the week as demand for the sovereigns remained muted.
What will shape markets in the coming week?
Despite the absence of a strong catalyst and our calls for cautious trading, market sentiments have remained strong, though investor demand appears to be waning judging from the weakness in volume and value traded. However, the renewed interest in the Financial Services sector, and cement giant, DANGCEM points to some upside in the week ahead.
With the economic data releases behind us, the Fixed income market will likely be influenced by the CBN’s Open Market Operations, which points to some volatility in the T-Bills market. Rates at the current 11%-12% range however provide positive interest rate differentials and good re-entry points for investors. The next trigger for the bond market is the June auction, which is still a few weeks away. As such, we anticipate the market will continue to trade sideways, with some interest in the short tenor instruments, even as investors continue to shorten duration.
Focus for the week: MPC REVIEW |MAY 2013
MPR unchanged at 12%; no surprises
Monetary Policy Committee (MPC) voted 7-3 to keep the benchmark interest rate (MPR) unchanged at 12%, with the Standing Deposit Facility (SDF) and Standing Lending Facility (SLF) at -/+ 200bps; with the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) also unchanged at 12% and 30% respectively. Whilst the committee noted with satisfaction the relative stability in prices, concerns around a potential increase in fiscal expenditure remained the focal point. In our view, the risk of fiscal expansion is only likely to increase ahead of the 2015 elections in which case, it may be prudent to expect interest rates will remain at current levels for an extended period, with the OMOs as a preferred tool to managing liquidity conditions.
Output growth at risk
Agriculture, Telecommunication and Distributive trade sectors (cumulatively 65.9% of GDP) came up as weak points in the Q1’13 growth numbers (6.58%), thanks in part to slowing private consumption growth. With the economy evidently still recovering from these shocks, and the lackluster performance of the oil sector in view, real GDP is set to underperform our 2013 estimate of 7.2%. The committee notes further risks to the economy as emanating from the recent state of emergency declared in Adamawa, Borno and Yobe states; which could potentially affect Agricultural production, food prices and consumer demand. While this risk could be considered minimal considering the entire North-East accounts for c.11% of National Consumption expenditure (lowest regional contribution), the spread of civil insecurity to the North Central/West region (c.33% of National consumption expenditure) portends a higher risk to economic stability.
Government Revenues to underperform, expenditure to increase; implication for yields?
With oil production volumes down c.3% YoY in Q1’13, government revenues have underperformed in the first quarter. This was quite evident even as monthly borrowing through the Debt Management Office (DMO) ramped up considerably from an average NGN70 billion in 2012 to NGN100 billion in the first five months of 2013 (attaining c.87% of the FG’s 2013 borrowing target of NGN577 billion through the bond market). With our expectations that oil revenue shortfalls will continue to hamper the treasury’s capacity to fund the budget fully, coupled with increased expenditure to accommodate contingency spending, we estimate domestic borrowing could overshoot by almost 40% by year-end. Noting that in recent times, yields have moved in isolation to macro data, a potential increase in bond supply casts doubts on our erstwhile thesis of a significant downtrend in yelds in spite of projections of a benign inflation print.