Coming into 2014, the equities market already appeared exhausted (as stated in our Nigeria 2014 Outlook: Economy and Market; Beyond the Rhetoric) hence, expectations were very conservative. Notwithstanding, somewhere lied the belief that the bourse will still post a positive return, anyhow, in January, to move the trend that started in 2010 to five years in a row.
In reviewing market drivers for the month of February, there appear to be more factors that may lead to the downside rather than upside performance.
Fixed income
The T-Bill market got an early January boost from the liquidity surge in the system stemming from the redemption of N1 trillion worth of AMCON bonds on the December 31, 2013, the inflow of about N290 billion from FAAC (we have discounted the 50% CRR from the gross sum), and a maturity of a significant amount of OMO bills.
However, the rally came to a halt as contagion emanating from worries about the investment case for emerging markets filtered into the Nigerian fixed-income market. Implementation of 75 percent CRR, slowdown in foreign inflows, and OMO sales should push T-Bill yields higher in February.
The bond market largely followed the trend seen in the T-Bill market, initially benefiting from the high level of liquidity in the system but also coming under pressure later in the month as offshore investors withdraw capital and sort the dollar.
Our outlook for the bond market is less bearish. Although we expect the average yield to move higher in February, we see more resilience in this market giving the fact that it has better immunity to the CBN’s main high frequency liquidity management tool (OMO sales).
No respite for the naira in January
For the exchange rate, a combination of elevated demand (for physical transaction purposes), the early close of the official window (on December 18, 2013), and the tapering of QE weighed on the naira (it lost against the US dollar (-1.29%) and pound (-0.97%) but strengthened against the Euro (+0.87%)).
We expect a continuation of naira weakness in February as improving economic data from the US and the tapering of QE sustain outflows seen in recent times.
