Bond market analysts are of the view that the market will remain stable as the Central Bank of Nigeria (CBN) continues with the current policy stance for the rest of the year.
This was disclosed by analysts at Dunn Loren Merrifield Asset Management & Research Company in their recent financial markets and outlook report. The report reviews the second-quarter (Q2) performance of Nigeria’s economy and suggests outlook for the coming months in 2014.
In a related development (on equities), the analysts said they expect performance of foreign markets, and the risk appetite of investors, including their political risk perception of Nigeria, to remain a major determinant of performance for the rest quarters of the year.
They also expect strong performance from the construction and industrial goods space, “especially from major players. This will usher in a positive stock price reaction.
“Market is expected to remain at the current levels as the CBN is likely to continue with the current policy stance for the rest of the year. We expect that FGN bonds worth N100bn (9.25 September 28, 2014) will mature during the next quarter. During 3Q2014, Kwara State bond worth N17.0bn with a coupon of 14.0 percent will mature. The DMO is expected to issue a new 20-year benchmark bond during the 3Q2014.”
On the equities space, these analysts said, “The direction of the monetary policy tools of the apex bank will determine portfolio allocation in the months ahead,” adding that there will be changes in the asset allocation formula of foreign portfolio managers.
They noted that total foreign outflow in H1 2014 – estimated at about N413bon – exceeded total foreign inflow – estimated at about N284bn – by about 46 percent. “On the other hand, domestic transaction – on our estimate – grew about 34 percent to N124bn in June 2014, from about N92bn in January 2014, yielding a total domestic transaction of about N 470bn in H1 2014,” they analysts added.
“This seems to suggest domestic investors are likely filling the void left by foreign investors, an indication that domestic investor confidence is gradually growing. Further buttressing this thesis is the increase in domestic participation versus foreign participation in the market,” the analysts said.
These analysts at Dunn Loren Merrifield Asset Management & Research Company said: “Average participation in Q2 2014 – skewed in favour of foreign participants at c.54 percent, versus c.45 percent for domestic participation.
“Meanwhile, foreign hold on the market reduced to about 54 percent in Q2 2014, from about 65 percent in Q1 2014, but domestic participation, at an average of 45 percent, improved on Q1 2014 average of 35 percent.
“Domestic participants are gradually accounting for increasing activity on the exchange. Are they occupying the void left by foreign players? The gap between foreign inflow and outflow also affected market performance in the period.
“When the difference between outflow and inflow was wide, in favour of outflow, the market under-performed more often than not. This suggests that the market is likely to under-perform if net foreign outflow is high and domestic participation is low.”
