Q2’18 in perspective: Rebound in investment grade stocks expected

EVENTS of last three weeks would appear depressing to most investors in Nigerian Stock Exchange, NSE, especially those at the retail end. But a chat with some market operators indicated that almost all stakeholders were taken unaware by the huge bear run that pervaded the market at the backdrop of an equally huge positives in corporate financial reports for the full year 2017 (FY’17).

However, for most stock dealers the first quarter 2018 (Q1’18) results would be the flip as much better financial results are being expected across the Morgan Stanley investment grade stocks and indeed most blue chips.

In deed the last trading day of the first quarter witnessed a flicker of light pointing to the end of the dark tunnel recording huge capital gains that wiped out all the losses incurred in first three consecutive trading days of the week.

Nigerian Stock Exchange Bullish tradings Most stockbrokers had alluded that the bear run on the heels of FY’17 impressive corporate results was because the impressive results were anticipated and fully priced into the bullish tradings that preceded the results. Consequently, same development is expected to happen in the next few days as Q2’18 results are expected to start rolling in by middle of this month.

The other consideration is the political environment which many stockbrokers believed was becoming tensed too early, a development which has the potential of scaring away Foreign Portfolio Investors (FPIs), the dominant drivers of bullish markets in the NSE.

But some other stockbrokers believe this is still at least six months away as they expect the downside effect to begin in the third or fourth quarter of this year. Finally the dealers have positive sentiment over the macro-economic, fiscal and monetary outlook for 2018. As they noted, the Federal Government has successfully contained the Niger Delta, leading to relative calm and recovery of oil output, which now hovers around 2.2mbpd of oil equivalent.

Following modest oil price recovery, stronger output and improving capital importation, the external reserve has grown to USD46 billion, the highest level in over four years. Increasing foreign currency inflow from oil receipts and FPIs/FDIs should strengthen the reserve further in the year, even before political risk that may lead to foreign portfolio reversals and lower oil production.

The Government successfully raised a total of USD4.3 billion in the Eurobond market in 2017 and has raised another USD2.5 billion in 2018. The Issues were significantly oversubscribed, reinforcing renewed investor appetite for Nigerian credit.

The Federal Government launched the execution platform for the Economic Recovery and Growth Plan, with optimistic targets on reflating the economy out of recession and achieving average GDP growth of 4.6% between 2017 and 2020, an audacious target, which requires broad reforms in critical growth poles of the economy.

Moreover, buoying the macro-economic outlook was that the National Assembly passed the Petroleum Industry Governance Bill, which is one of the four bills, expected to replace the prolonged PIB. The expansionary 2018 budget of N8.6 trillion is being considered by the National Assembly for passage later this month. Implementation should further stimulate economic recovery.

Despite, concerns on probable revenue shortfall and high deficit / Government borrowing remains the downside risk to capital expenditure implementation, the improving non-oil revenue generation is encouraging, with non-oil tax project to fund almost two-third of the 2018 budget , whilst oil sector will contribute around one-third of budgeted revenue.

Macro-economic timelines Having peaked at 18.7% in January 2017, headline inflation continues to ease, declining for thirteen consecutive months to 14.3% in February 2018. Food inflation is now easing, waning to 17.6% in February 2018. Reflecting the stable exchange rate environment and relatively tight liquidity, core inflation has been stable, printing at 11.7% in February 2018.

The outlook for headline inflation remains benign, with a projection of further ease to 13.5% by June 2018, as food and core inflation show prospect of moderation. The major downside risks to inflation is politics.

Being a pre-election year, there may be pressure on the Naira on the run-up to 2019 elections, in addition to direct inflationary pressures that may arise from election-related spending. After over five months of uncertainty, the Central Bank of Nigeria’s Monetary Policy Committee (MPC) is finally meeting tomorrow.

The CBN resorted to direct liquidity sterilization, through Open Market Operations and FX forward sales, thus tightening Naira liquidity at the interbank market, and resulting to elevation of the sovereign yield curve in 2017; albeit yields have tightened some 300bps since 2017Q3, following foreign portfolio inflows and refinancing of maturing obligations using proceeds of Eurobonds.

However, there is consensus expectation for a lower interest rate environment in 2018, as market looks forward to MPR cut at tomorrow’s MPC meetings. The introduction of the Investor and Exporters (I&E) Window has stimulated foreign currency inflows, and moderated the pressure on the Naira.

Whist the FX market remains fragmented, liquidity has improved and rates at the parallel market and I&E window have converged around N360/USD. Some USD17 billion transaction value at the I&E window within a year, complementing USD12 billion supply of the CBN through the formal windows within the same period.

Bankers expect the NAFEX Fixing to remain relatively stable at N360/USD as external reserve, oil output and price improve; albeit political risk remains a downside risk to Naira stability on the run-up to the 2019 elections.

Vanguard