The Central Bank of Nigeria’s (CBN) tight monetary stance aimed at ensuring stability in the foreign exchange market and curbing inflation will continue to support attractive yields in the fixed income market, analysts at WSTC Financial Services Limited, have said.
Also, they expect the surging inflationary pressure and uptrend in inflation, and the ensuing effect of shrinking real returns to drive investors’ demand for higher returns on fixed income investments in second half of the year (H2).
Olutola Oni, and his team of analysts at WSTC, noted that bond yields were elevated in Q1 as yield on the 10-year government bond peaked at a record high of 17.3 percent in February, amid heightened political risk resulting from the postponement of the 2015 general elections and other related uncertainties.
In Q2, however, yields moderated relatively following the successful completion of the general elections and political transition.
“We believe market expectations on the likely removal of Nigeria from the JP Morgan Emerging Market Government Bond Index following the placement of the country on negative watch due to illiquidity in the foreign exchange market will keep rates high in the fixed income market, particularly as liquidity squeeze in the forex market exacerbates further as a result of low foreign exchange earnings and foreign portfolio reversals,” the analysts said in their H2 2015 report.
According to the report, the Nigerian equities market carried on with the lacklustre performance recorded in the preceding year on account of flagging macro-economic fundamentals. The NSE All Share Index (ASI) opened the year at 34,657.15 points and closed half-year at 33,456.83 points, with an unimpressive negative return of 3.46 percent during the period.
“We expect the weak macro-economic fundamentals characterised by weaker-than-expected economic growth, creeping inflation, low fiscal buffers, foreign exchange volatility and lingering insurgency to weigh on corporate earnings in H2 2015. That said, we believe the performance of the equities market will remain subdued in the near term,” according to the report.
On the FX market, the analysts noted that the H2 saw continued downward pressure in the Nigerian foreign exchange market as weak macro-economic fundamentals and political uncertainty took their toll on the value of the naira. The naira opened the year at N168/4 at the interbank market segment and depreciated by 17 percent to N196.95/$ as of June 30, 2015.
