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Quarterly Market Outlook - Q4'18

Quarterly Market Review and Outlook                                                 

Equity: Following the sharp decline in the ASI performance in Q2’18 (-8%), the Nigerian equity market dipped a further 14% in Q3’18, worst performing quarter since Q4’14 (-16%), as pre-election jitters and a risk off sentiment on emerging market securities weighed on stock performance in the quarter. Notably, the selloff was ricocheted across other Frontier and Emerging bourses (MSCI FM: -13%, MSCI EM: -3%) as investors priced in additional risk from expected U.S. interest rate hikes and a brewing trade war between major global economies. At the start of Q4, the major political parties held Primary elections to select key candidates for the general elections. Post-primaries, we expect improved clarity to inspire a bit more investor activity, as some investors might get energized by the defined direction of both parties and begin to place bets on the market. However, we foresee a majority of investors choosing to remain cautious as they continue to monitor the political space. That said, we see a possibility of bargain hunting activity close to the election across severely beaten down stocks.                                                      

Fixed Income: Amidst heightened activity in the political environment and risk off sentiment on emerging market securities, trading sentiment remained weak in the FI secondary market in Q3, with yields rising 103bps across the yield curve in the period. Yields advanced 117bps q/q on benchmark bonds while staying relatively flat in the T-bills space (down a mere 4bps q/q). Apart from political uncertainty, the tepid sentiment in the Fixed Income market was partly due to a more hawkish rhetoric at recent Monetary Policy Committee (MPC) meetings – three members voted to raise the benchmark rate – whilst the T-bills market was less affected as a combination of decent liquidity and uncertainty surrounding the upcoming general elections kept investors at the shorter end of the curve.  We expect sentiment to remain weak in the Fixed Income market in Q4, with any changes likely to move yields further upwards. First, following the primaries, we expect political activity to intensify in the build-up to the elections, driving further uncertainty. Also, the U.S. Fed has so far stuck to the anticipated rate hike path, even as global trade continues to remain in limbo amidst a continued breakdown in talks between the U.S. and China.