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The Market Today - 23 January 2019

CBN Governor defends multiple exchange rates

In the post-MPC (Monetary Policy Committee) address yesterday, CBN governor, Godwin Emefiele defended the bank’s multiple exchange rate system, saying a free float of the currency would cause capital flight and a massive devaluation. Furthermore, he stated that it had produced the most optimal results in comparison to other emerging markets suffering (Naira depreciated 1.16% in 2018 compared to 2.82% across emerging markets). Following the global oil price crash in 2014 and the resultant pressure on the naira, the apex bank opted to employ capital control measures to avoid a rapid depletion of foreign reserves. The policy proved unpopular with foreign investors, driving a reduction in Foreign portfolio investment and most notably leading to the eviction from the JP Morgan Emerging Markets Bond index. The creation of the I&E FX window (an autonomous window where investors buy and sell currency at market-determined rates) in April 2017 has however gone a long way to boosting investor confidence and the convergence of this window’s rate with parallel market rates has improved currency stability. That said, driven by expectations of increased currency pressure in 2019, we foresee a soft devaluation of the naira in 2019 to NGN390/USD, should current economic trends persist.

Market closes flat amid split sector performances                                    

The NSE ASI gained a mere 1bp yesterday after an even split between gaining and losing sectors. Notably, the Industrial Goods sector saw a reversal in performance, recording the highest losses on a tepid trading day. Market breadth turned positive with 26 advances and 9 declines. Following a flat trading session yesterday, we note the prevalence of mixed investor sentiment and anticipate a mixed session with a positive tilt, supported by continued bargain hunting.                                              

Stock Watch: Despite a 385bps loss in yesterday’s session, NEM has recorded a 45% rise in share price across six sessions to settle at ₦2.50. The stock has lost 7% ytd, underperforming the Insurance sector (-2% ytd). We highlight that NEM announced on 17 January, 2018 that the Advanced Financed and Investment Group had acquired in 29.9% of the company’s shares, becoming the largest shareholder.      

DMO delays bond calendar release, spurs buying activity                                    

Yesterday, the CBN held an OMO auction where it sold c.₦61 billion (₦200 offered) across the 93DTM, 191DTM and 345DTM bills at stop rates of 11.90%, 13.50% and 15.00% respectively (effective yields: 12.27%, 14.53% and 17.48%). In spite of the mop up, the Interbank Call rate declined 783bps to settle at 17.50%. With the release of the bond calendar postponed, we expect the bond auction to hold next week and foresee mild buy interest in the bond market today. Meanwhile, we foresee tepid trading in the T-Bills space as liquidity remains tight.