After a sustained bearish trend that dominated the financial market since the beginning of the year, succour is gradually returning to both equities and fixed income markets. Yields have been trending somewhat downward in the past weeks, and equities have remained bullish, albeit calm.
Given the current trend in the market and our near-term expectations, we analyse the likely drivers/drags to market performance in Q2:2014, while focusing on both fundamental and technical analysis for equities market and X-raying likely factors that will dictate the direction of yields in the fixed income market.
Recent upbeat trend driven by mild tightening and positive earnings releases
The equities market witnessed a turbulent trading period in Q1:2014, due to series of information flow which negatively influenced investor sentiments. The market however settled for a positive mood despite the decision of the CBN’s MPC on March 25, to increase CRR on private sector deposits from 12 percent to 15 percent.
The Nigerian bourse has since returned 4.16 percent (bringing YtD to -4.91%) even as the gains have been further driven by impressive earnings releases and dividend declarations in the same period. We see the market sustaining the current positive trend even as companies release their Q1:2014 results.
Key events in the monetary space expected to shape the market
Capital market volatility has so far been amplified by monetary policy pronouncements and the suspension of the CBN governor. Looking forward, we highlight the key events in the monetary space expected to shape the performance of the market.
• May MPC meeting: We do not expect a major surprise from the outcome of the next MPC meeting. The factors that inform our expectation include, moderating volatility in the global economy, the fact that the incoming CBN governor will assume office few days after this MPC meeting and the seemingly soft stance of the MPC in the last meeting.
• New CBN governor: In his address before the Senate, the incoming CBN governor signalled his key economic view to the market; he noted that devaluation is not an option and highlighted development banking model, amongst others. We however anticipate that on resumption, the reality of the task before the incoming bank chief may provoke a key policy pronouncement that could drive the market, going by the antecedents of past CBN governors
The US Fed’s optimistic growth outlook for the year has been reinforced by the US retail sales jump. As a result, the US Fed may continue with the gradual unwinding of its bond-buying programme with the consequent funds outflow from EMEs almost certain. The impact on the Nigerian equities market is a possible mild depression of the market- especially if local demand is not strong enough to counter the associated sell off. For the fixed income market however, we do not envisage any significant rise in yields as local investors’ appetite for the asset class as an alternative investment is not expected to wane anytime soon.
Attractive equities prospect
Although it was expected that in anticipation of corporate actions equities would trade in the green zone in Q1:2014, weak investor confidence did not favour buy sentiments and thus further dragged market performance.
We believe there is a breather in the current trend of regulatory headwinds; hence, sentiments buoyed by attractive Q1:2014 numbers should favour equities in the near term. Despite sound fundamentals, stocks have depreciated considerably in the equities market, thus making these counters appear cheap at current prices. Relative pricing of Nigerian equities market further reveals that at the current P/E of 12.89x, it is still attractive compared to African, frontier and developed markets’ average of 24.35x, 15.94x and 18.21x in that order.
Technical trend suggests possible near-term profit-taking
The equities market in the past few weeks has assumed a calm trend after the breather experienced in domestic regulatory headwinds and funds exodus in Q1:2014. While security threats and heightening political tensions are still dominant factors shaping the current market mood, technical indicators are beginning to give clear leading signals. We analyse further, from the chartists’ view, our near-term expectation for the market and specific sectors.
Fixed Income Market
Higher yields expected in Q2
The second quarter of 2014 has brought higher demand as average yield on Treasury bill instruments declined by 93bps since the beginning of the quarter. The longer-term instruments enjoyed higher patronage as yields dropped markedly during the period (yields on 6M, 9M and 12M bills declined by 1.37%, 1.15% and 1.12%, respectively).
