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Breakfast Report - 19 February, 2018

The Week Ahead                                                                            

The Debt Management Office (DMO) has disclosed that it is in talks with U.S. bank J.P. Morgan over the potential re-inclusion of Nigeria’s sovereign debt in the J.P. Morgan Emerging Market Bond Index (GBI-EM). We recall that Nigeria was expelled from the index in 2015 on account of the opacity and illiquidity of the foreign exchange (FX) market. But with the introduction of the “Investors & Exporters” FX window and the subsequent improvement in the structure and liquidity of the Nigerian FX market, it is unsurprising that J.P. Morgan would be considering re-including Nigeria in the index. We expect Nigeria’s eventual re-inclusion to stimulate strong demand for its sovereign debt and lead to further yield moderation – assisting the country in its efforts to lower its debt servicing costs.                                   

The Nigerian equity market rounded off last week on a largely mixed note, gaining 8bps at week close. Despite gains in the last three sessions of the week, the Nigerian bourse lost 113bps w/w, cutting ytd returns to 11.5%. Despite last week’s mildly positive close, choppy intraday trading and negative market breadth point to mixed sentiment on the Nigerian bourse. Nevertheless, we do not rule out investors swooping in to take advantage of beaten down prices as earnings season approaches.

Stock Watch: NB recently released its FY’17 results with topline and bottom line printing at ₦345 billion and ₦33 billion respectively, 10% and 16% above FY’16 figures. The stock currently trades at ₦131.00, below Vetiva’s target price of ₦149.36, and has declined 3% ytd.                                                                          

For the fixed income market, we believe the positive euphoria from the Eurobond pricing, which is generally seen as decent given current global rate environment, would support yield moderation this week. Meanwhile, system liquidity appears tight, partly underscored by the increase in Call rate to 18% (Previous: 7%) even as the CBN refrained from OMO auction at last week close. We expect this to cap potential demand particularly early in this week.