Coronotion Research, an arm of Coronation Merchant Bank, on Tuesday releases its report on how the Naira adjusted after President Muhammadu Buhari of the All Progressives Congress (APC) was declared winner of the February 23 presidential election.
The report said: “What we did not expect was the extent to which foreign portfolio investors would invest, driving down Naira-fixed income rates. One-year risk-free Naira fixed-income rates of between 15.00% and 16.00% may emerge as the new normal.
FX Last week, the NIFEX rate remained stable at NGN358.79/US$1. The NAFEX rate appreciated by 0.18% to NGN360.80/US$1. The US dollar in the NAFEX (inter-bank) market trades at a 0.56% premium to the NIFEX rate. In general, we are seeing the convergence of the various active exchange rates in Nigeria, excepting that applied to International Oil Companies (IOC).
Bonds & T-bills The yield on a Federal Government of Nigeria (FGN) Naira bond with 10 years to maturity fell by 81bps to 13.88%, and at 3 years fell by 16bps to 14.64%. The yield on a 364-day T-bill fell by 222bps to 15.02%. The yield on a T-bill with 3 months to maturity decreased by 129bps to 10.66%.
There was a significant rally in T-bills and bonds. In the weeks leading up to presidential and national legislature elections on 23 February there was a surge in foreign portfolio investment and the Central Bank of Nigeria (CBN) had slowed down the pace of its open market operations (OMO).
The result was pent-up demand for paper, forcing down rates. Liquidity in the system remains high, so we think these rates could persist for a while.
Oil The price of Brent fell by 3.05% last week to US$65.07/bbl. The average price, year-to-date, is US$62.30/bbl, 13.10% lower than the average of US$71.69/bbl in 2018, but 13.80% higher than the US$54.75/bbl average seen in 2017.
There are many reports of investors losing faith in the oil industry as a result of short-term challenges involving low oil prices which remain pressured by high supply of US shale, and long-term challenges centered around decreasing oil demand. We expect an average US$58.00/bbl this year.
Equities The Nigerian Stock Exchange (NSE) All-Share Index recorded a loss of 2.12% last week, taking the year-to-date return to positive 1.26%. Last week PZ Cussons (+9.00%), Guinness Nigeria (+3.00%) and Dangote Cement (+2.00%) closed positive, while Oando (-11.54%) and Unilever Nigeria (-10.00%) fell.
Last week’s trading sessions saw a reversal in the earlier trend of investors positioning for a possible post-elections rally. In view of the presidential election result we expect investors to maintain a cautious stance on equities, but also note that investors can take advantage of current valuations in high-quality names at historically low valuations.
Naira interest rate adjustment Last week’s T-bill and OMO auctions produced rates much lower than seen earlier. The 1-yr T-bill auction on 27 February was sold at 16.77% compared with 17.57% on 13 February. The OMO auction of 28 February produced a comparable annualised rate of 16.68%. Naira fixed income markets quickly adjusted to the new yields – in fact with even greater yield tightening which suggests the markets expects OMO rates to fall to around 15.00% annualised.
The question for us is whether this was a temporary blip, which might hold rates low for a month or so, or the beginning of a new long-term trend. On balance, we believe rates will adjust down, but not as far as the 13.00%-14.00% one-year risk-free rates we saw from April to August last year.
Last week’s auctions followed two exceptional months of inflows of foreign portfolio investment (FPI). As a direct consequence of this, the Central Bank of Nigeria (CBN) had little need to supply US dollars to the principal NGN/US$ market, the NAFEX market (which, incidentally, provides the data for the exchange rate quoted on Bloomberg).”
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