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Quarterly Market Outlook - Q2 2018

Equity: The Nigerian equity market rallied 16% in the first month of the year, buoyed by strong recovery in oil prices (January 2018 average: $69.08/bbl vs 2017 average: $54.45/bbl), bullish expectations of the economy and company performances, and the feel-good factor of the Nigerian Stock Exchange All-Share Index (NSE-ASI) being the third-best performing market in 2017. But as a global market flash-crash hit Brent crude prices and filtered through to the NSE in February, sentiment turned bearish for the rest of the quarter, with the ASI shedding 228bps and 421bps in February and March respectively. Overall, the market rose 8.5% in the first quarter of the year, led by a 11.0% rise in the Industrials sector. All things considered, we anticipate further choppy trading (with a bearish tilt) on the exchange in the coming months with relatively positive Q1’18 earnings and steady economic progress unlikely to alter the risk-averse sentiment on the market.                                                            

Fixed Income: Lower supply was the primary driver of yield moderation during Q1’18, as investors reacted to reduced offers at Federal Government bond auctions. The Debt Management Office (DMO) offered ₦280 billion and eventually sold c.₦254 billion in Q1’18 (2017 quarterly average – offer: ₦373 billion and sale: ₦380 billion), including the issuance of new 7-year and 10-year bonds at respective yields of 13.50% and 13.98%. This reduction in supply is in line with overall Federal Government borrowing strategy of diversifying towards longer-term external debt as the fiscal authorities look to reduce the crowding out effect on domestic borrowers, a stance that has set the expectations of lower domestic debt issuance. Overall, we expect CBN liquidity mop ups and lower instrument supply to be the primary drivers of yield moderation in the near-term, even in the absence of a re-inclusion in the JP Morgan Emerging Market Government Bond Index.