Afrinvest Weekly Update | Domestic Equities and Fixed Income Round Up

An Extraction of the Afrinvest Weekly Economic & Market Report for February 23rd, 2024

Photo Credit: NGX

Domestic Equities Market: Bearish Outing on the Bourse… ASI down 3.4% w/w

The domestic equities market ended the week on a bearish note as the NGX-ASI declined 3.4% w/w to 102,088.07 points. Consequently, market capitalisation shed ₦1.9tn to ₦55.9tn, while YTD return declined to 36.5% (previously 41.4%). Activity level waned as average volume and value traded fell 11.7% and 13.5% w/w to 291.0m units and ₦6.0bn respectively. Top traded stocks by volume were TRANSCORP (100.7m units), FBNH (92.5m units), and UBA (72.8m units), while GEREGU (₦1.4bn), GTCO (₦2.7bn), and FBNH (₦2.6bn) led in terms of value.

Across the sectors within our coverage, performance was bearish as four indices closed negative, one gained, while the Oil & Gas index closed flat. The Insurance and Industrial Goods indices led the laggards, down 8.9% and 7.9% respectively, driven by price depreciation in NEM (-14.3%), MANSARD (-10.2%), DANGCEM (-10.0%), and BUACEMENT (-5.5%). Trailing, the AFR-ICT and Banking indices lost 4.1% and 2.1% w/w respectively, due to profit-taking in MTNN (-10.0%), OMATEK (13.6%), ACCESSCORP (-6.9%), and STANBIC (-8.3%). On the other hand, the Consumer Goods index was the sole gainer, up 2.0% w/w due to price uptick in BUAFOODS (+6.3%).

Investor sentiment, as measured by market breadth, weakened to -0.7x (previously -0.2x) as 14 stocks gained, 65 lost, while 73 remained unchanged. Top gainers for the week were JULI (+59.2%), SUNUASSU (+17.4%), and FBNH (+10.7%), while MORISON (-32.7%), CONHALLP (-19.4%), and STERLING (-18.7%) topped the losers’ chart. In the coming week, we expect bargain-hunting opportunities to boost market performance.

Foreign Exchange Market: Naira Woes Persist Despite Improvement in CBN Reserves

The price of benchmark Brent Crude declined 1.4% w/w to settle at $82.31/bbl after two consecutive weeks of gains, following the recent announcement by the US Fed, indicating that the anticipated interest rate cuts may be delayed for at least two months. However, oil demand has remained healthy, despite the high interest rates.

On the domestic front, the CBN’s 30-day moving average FX reserve balance appreciated 0.7% w/w to $33.4bn (as of 21/02/2024). Meanwhile, activity level in the NAFEM window decreased 33.4% w/w to $822.2m. In the currency market, the domestic currency depreciated against the USD at both the official and parallel windows. At the official window, the Naira shed 7.7% against the USD to close at ₦1,665.50/$1.00, while at the parallel market, the Naira closed at ₦1,830.00/$1.00, signaling an 11.2% decline in the value of the domestic currency. We anticipate continued pressure on the Naira across various trading sectors in the absence of substantial inflows to bolster FX liquidity.

Money Market: Strong Demand Across Tenors at PMA

This week, system liquidity closed at ₦1.4tn, 7.9x higher than the prior week's level following the CBN’s release of standing lending facility worth ₦1.4tn to commercial banks on Friday. Nonetheless, OPR and OVN rates rose 8.7ppts and 8.8ppts respectively to 24.9% and 25.8%.

At the T-bills PMA, the CBN issued 91-day (Offer: ₦11.9bn; Subscription: ₦368.0bn; Sale: ₦331.0bn), 182-day (Offer: ₦10.2bn; Subscription: ₦98.7bn; Sale: ₦66.2bn) and 364-day (Offer: ₦243.4bn; Subscription: ₦1.8tn; Sale: ₦1.2tn) instruments at stop rates of 17.0%, 17.5% and 19.0% respectively, compared to last auction’s rates of 17.2%, 18.0% and 19.0%. Demand was particularly strong with an average bid-to-offer ratio of 8.4x following an oversubscription of 30.8x, 9.7x, and 7.3x respectively on the short, medium, and long tenor instruments.

In the secondary T-bills market, there was an upward repricing of instruments as average yield rose 81bps w/w to 18.1%. This bearish outing was driven by sell pressure on the 91-day and 364-day instruments as yields advanced by 2.3ppts and 0.7ppts w/w to 15.3% and 21.3%, respectively. Elsewhere, buy interest dominated the belly of the curve as yield dipped 48bps w/w to 17.6%. Next week, we expect system liquidity to close lower on the back of liquidity squeeze by the CBN. Hence, we anticipate a sustained bearish outing in the secondary market.

Bonds Market: Fragile Fundamentals Accentuate Yield Re-pricing

The domestic bonds market (both the primary and secondary market segments) witnessed further upward yield repricing this week, as investors moved to curtail expansion in negative real yield amidst a three-decade-high inflation rate (January 2024 headline inflation rate: 29.9%).

At the primary market segment, the DMO on Tuesday re-opened the 7 and 10-year sovereign papers to raise ₦2.5tn in line with FG’s deficit financing plans for the 2024 budget (estimated budget deficit: ₦9.3tn, planned domestic borrowings: ₦6.1tn). However, demand fell short of offers on both tenors – 0.9x and 0.7x, respectively – as investors pre-empted DMO’s reluctance to raise yield to a more fundamentally reflective level. In the end, the DMO was only able to allot a total of ₦1.5tn (representing a 59.8% success rate), with yield clearing at 18.5% (7-year) and 19.0% (10-year) respectively as against a bid range of 18.0% - 30.0% for both tenors.

In the secondary market segment, trading activities closed negative on 4 of the 5 sessions as subsisting yield offers was unable lure new entrants. Consequently, average yield rose 53bps w/w to 16.7%, reflecting the broad-base selloff across the ends of the curve – yield on the short, mid, and long-end of the curve rose 79bps, 91bps, and 15bps sequentially to 16.8%, 16.9%, and 17.9%.

Shifting focus, the SSA Eurobonds market extended its bearish performance, as the average yield rose 128bps w/w to 30.8%. The bearish performance was mostly driven by selloffs on the ZAMBIA 2024 and GHANA 2025 instruments with yields climbing 22.8ppts and 9.3ppts w/w. Conversely, the SSA Corporate Eurobonds space closed the week bullish, as average yield fell 20bps w/w to 8.4%, owing to strong interest in ECOBANK 2024 and OFFICE CHERIFIEN DES PHO with w/w yield moderation of 210bps and 14bps, respectively.

Next week, we anticipate an extended sell pressure in the domestic secondary bonds market segment, as investors expand play on more attractive short-dated papers (notably, T-bills and CPs) in anticipation of better opportunities on long-dated instruments. In the SSA Eurobonds segment, we expect growing concern over the fragile macroeconomic fundamentals of major economies in the region – Nigeria (high inflation and FX volatility), South Africa (stagflation), and Zambia (stalled debt restructuring) – to continue to weigh on investors’ interest.