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NSR H1 2020 Excerpts -Fixed Income - Liquidity surfeit to keep yields subdued

• In this morning’s cut-out of our core strategy document – The Nigeria Strategy Report, we look at the major themes that dominated the fixed income space over H2 2019 and delineate our outlook over 2020. • Contrary to our expectations, average fixed income yields suffered massive compression over H2 19. While this was in part fueled by lower paper issuances—predominantly at the short end and less liquidity sterilization by the CBN, the straw that broke the camel’s back was CBN’s policy directive in October. This directive restricted local non-bank investors from participating in OMO auctions. Consequently, OMO redemptions which would previously have been reinvested in OMO bills had to chase FGN securities, thereby compressing local fixed income yields by 540bps to 7.72%. • In determining the yield curve trajectory over the medium term, we take a cue from CBN’s actions over the last four months where it increased its tolerance for naira liquidity emanating from OMO redemptions. For us, given that these monies have little propensity to hurt the naira we rule out a reversal in the directive over the near term. Our view is hinged on the apex bank’s decision to preserve the interest of foreign investors by granting access to participate in OMO sale and providing ease of exit from their OMO positions. More so, out of the 27.7% OMO bills held by non-bank corporates , we estimate PFA holdings of 17% (~N2 trillion). Given the strict PENCOM regulations that prevents PFAs from directly purchasing dollar with naira contributions, we see little room for these liquidities queuing behind dollars at the parallel market. Against this backdrop, most local institutional investors who hold OMOs are left with no choice than to combine or do either of the following 1.) channel their funds to primary and secondary treasury bills, 2.) invest in banks term deposits, 3.) increase appetite for corporate commercial papers or 4.) increase exposure to equities. That said, we envisage buy pressure to persist over the near term following expected liquidity surfeit in the system. Against this backdrop we see scope for lower fixed income yields over H1 2020.

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ARM Securities Limited
ARM Securities Limited

ARM Securities Limited is a full-service brokerage house that offers best-in-class brokerage services to local as well as foreign private and institutional investors. Formerly known as Hamilton Hammer, the Company commenced operation in 1994 and was acquired by ARM Investment Managers in 2008--an acquisition which has successfully re-positioned the company as a recognized brokerage firm in Nigeria. The Company is a dealing member of the Nigerian Stock Exchange (NSE) and is regulated by Securities and Exchange Commission (SEC). ARM Securities research team provides insightful commentaries on the Nigerian economy and its equity and debt markets using an approach which incorporates a thorough understanding of the fundamentals of the industries and companies under coverage. The research therefore adopts an integrated methodology of top-down analysis and bottom-up stock selection, which focuses on publicly quoted companies on the Nigerian Stock Exchange that are judged to offer the highest potential for earnings growth. In addition, its analysts provide periodic commentaries on a range of topical global and local issues which provide investing clients with a holistic view of the opportunities and risks in today’s financial market landscape. ​

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