Market performance so far
Equities market review
Activities on the bourse at the beginning of the month stayed strong, consolidating the 13.44% NSEASI MtD return in January. The first 8 trading days saw investors’ bullish momentum peaking with the benchmark return settling at a YtD of +19.26%. The bears later took the centre stage as investors took profit on most stocks that have rallied significantly. Besides, a couple of insurance stocks became the toast of investors with most of the stocks appreciating even though the fundamentals and expectations of performance remain unchanged. Speculative activities dominated the bourse as investors reaped significant proportionate returns on penny stocks than the heavy caps.
Save for the appreciable positive daily returns of 1.44% and 1.16% recorded during the month of February, the NSEASI would have closed lower. The height of profit taking was experienced on the last trading day in February as the index lost the most in the year (-1.96%) and the YtD return declined to 17.79% from 20.15%. From the MtD perspective, equities market returned 3.84% vs. 13.44% in January.
In terms of the volume and value of transactions, 12.35bn units vs. 10.98bn and NGN96.38bn vs. NGN81.80bn in January, were respectively traded in February resulting in 12.5% and 17.8% increases. This, notwithstanding market wasn’t as attractive as what happened in January. DNMEYER and Forte Oil are the stocks with the highest gains and losses with respective 111% and 23% YtD. For the month of February, 68 stocks gained, 100 closed flat and 33 counters lost.
Fixed Income market review
A review of fixed income for February highlights an interesting month for the securities as they were featured quite frequently in terms of their movement throughout the month. Lagos State Government’s series 14.5% N80 billion bonds maturing 2019 was admitted by the Nigerian Stock Exchange (NSE) to the daily official list. FGN Bonds moved marginally throughout February with the short dated bonds closing the week at c.10.49%. It was learnt that following the inclusion into the JP Morgan bond index, Nigeria attracted over $2.4 billion in foreign capital.
Focusing on treasury bills, news emerged that towards the latter stages of the week, Nigeria’s Treasury bill yield fell to the lowest in 17 months, as the Central Bank of Nigeria (CBN) sold N135.65 billion at a yield of 9.416%, the lowest rate since September 2011.
There was mixed news on the Eurobond front last month as midway through the month, borrowing costs on Nigeria’s $500 million worth of Eurobonds fell for two consecutive days as yields on the dollar debt due January 2021 slipped to 4.3525 percent, whilst the country’s local currency debt maturing January 2022 slumped to a record low of 10.51 percent.
Market expectation for March
The financial market performance so far in the year has yielded robust returns for investors with the equities market returning 18.18% YtD. In expectation of market performance for the month, every investor is willing to either maximize returns made or minimize possible losses on their returns.
Fixed Income Market
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% at its first meeting of the year; expectation on the deliberation of the next meeting to be held March 18, suggest possible rate reduction considering the drop in inflation rate to 9% 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 center 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 NGN157-NGN158.5 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% will still be relatively attractive. Hence, rising demand pressure and likely reduction in MPR may soften yields by about 100 – 150 bps in the month.
The Stock Market in March
The past 2 months of 2013 has witnessed mixed performance as the bullish tempo that characterized January and early February gave way to profit taking that dragged the benchmark index from its 20.7% peak (on 22/02/2013) to 18.18% as at today. 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 investible 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 recent profit taking creates upsides and 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 9 weeks of trade in 2013. Presently the NSEBNK10 had recorded 20.50% gain in 2013 with UBA, DIAMONDBNK and SKYEBANK leading the pack.
Given the recorded gains, the industry’s price multiple -P/B- is trading at 27% 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, GUARANTY, SKYEBANK, STERLNBANK, UBA, ZENITHBANK [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% recorded as at Q3:2012 to the full year result given the improved earnings quality in 2012 compared to 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.
We are unmindful of the impact of liquidity on market return; average market turnover of NGN4.35bn as at February 2013 was 135% more than total turnover of similar period in 2012 and 99% higher than that of the last 2 months in 2012. Hence, while some of the banking stocks may have been trading close to their fair price levels, excess liquidity chasing these stocks may drive prices higher. We however, believe such gains will be transient as the positions will likely be traded before dividend closure date which will bring down the prices.
Equities Market This Week
We highlight below key outperformers for the week.