Weekly Review for Investors: Liquid Black Gold, Time to Shut the Tap?

By: Afrinvest

The lingering oversupply in the crude oil market which led to a more than 50.0% plunge in global crude oil prices (from over US$100/b in July 2014 to less than US$50/b in 2016) and worsened fiscal and external sector profiles of major oil exporters finally forced some actions from members of the Organization of Petroleum Exporting Countries (OPEC) this week. This episode of lower oil prices stemmed from the unrelenting struggle for market share between OPEC members and Shale oil producers (in North America) which drove excess supply to an estimated 2.1mb/d in 2015 and 1.2mb/d in Q2:2016 according to data from OPEC.

Despite the obvious socio-economic impact of the glut on oil exporting countries, OPEC members who typically play a balancing role in the market, have been unable to reach a consensus as regards capping production levels. This is partly due to the geopolitical tussle between Iran and Saudi Arabia who have remained at loggerheads, given Iran’s drive to ramp up production volumes to pre-sanction levels in order to regain lost market share whilst Saudi Arabia maintained that Iran put a cap on production. As a result, various meetings held by OPEC (including a non-OPEC country: Russia) within the last two years, have been majorly centred on the possibility of a cap in production volumes and these ended in stalemates until the most recently held meeting this week (on 28th September, 2016).

At its 170th (Extraordinary) meeting held in Algeria during the week, OPEC members assessed the current headwinds facing the oil sector, particularly lower oil prices and depressed oil revenues which have significantly strained fiscal position and economic growth of member countries. The Conference also considered weaker level of investments in the sector over the period which raises a potential risk of an imbalance in the future in which demand far outweighs supply. To this end, OPEC has reached out to non-OPEC oil producing countries, in a bid to restore stability to the market and mitigate any future shocks. Consequently, the Conference elected for an OPEC-14 production target which ranges from 32.5mb/d to 33.0mb/d, a reduction of about 700mb/d in production volumes from August level. This production outline if implemented, will signal the first production cut in the last 8 years and this is expected to have a positive impact on oil prices which already increased 5.3% to US$48.7/b following the announcement. According to statements credited to the Saudi Arabian Energy Minister, Nigeria, Libya and Iran will be excluded from the proposed production cut and thus may be allowed to produce “at maximum levels that make sense”. Nevertheless, the actual production quotas for each member country is to be determined at the next OPEC meeting in November with the possibility of a proposed production cut for non-members as well.

The proposed production cut is a welcome development for the Nigerian economy, given the significant proportion of government revenue and FX earnings attributable to oil revenues which have suffered a massive dip over the last one year. It is also positive for indigenous oil producers as well the domestic banking sector which has a significant exposure to Oil & Gas assets. In the interim, all focus will be turned towards the November OPEC meeting as more clarity on the modus operandi of the proposed cut in production will be brought to light. Nonetheless, we maintain a cautious tone given that OPEC members have historically struggled to abide by production quotas, while higher oil prices will likely buoy output from non-OPEC producers and create another imbalance in the medium term.

Global Market Review and Outlook

Global equities indices closed the week bearish despite Organization of Petroleum Exporting Countries’ (OPEC) proposal to cut production volumes during the week. Oil prices jumped 5.5% W-o-W even as energy stocks rallied across markets within our coverage. Meanwhile, World Bank in its latest report on Africa, projected growth in the Sub-Saharan Africa to drop to 1.6% this year. This is on the back of a decline in commodity prices – oil and mineral – coupled with macroeconomic concerns in the largest economies – South Africa and Nigeria – in the region.

All indices in the Euro-Asian region closed lower with the German XETRA DAX and Hong Kong HANG SENG tumbling 2.4% and 1.6% W-o-W as fresh worries surrounding Germany’s biggest bank –Deutsche Bank- depressed performance of financial stocks. Similarly, the France CAC and the Japan Nikkei lost 2.4% and 1.6% W-o-W respectively on the back of concerns surrounding banking stocks. Indices in the US and UK markets were not left out as the S&P and NASDAQ closed 0.6% and 0.7% lower W-o-W respectively, while the UK FTSE lost 0.8% on Deutsche Bank concerns.

Performance in the BRICS markets was mixed. The Indian BSE Sens declined the most down 2.8% W-o-W. The China SHANGHAI COMPOSITE and the Brazilian IBOVESPA lost 1.0% W-o-W apiece. Contrarily, the Russian RTS rose 2.1% W-o-W, likewise the South African FTSE/JSE , up 0.6% W-o-W after SABMiller investors approved a 95% takeover by Anheuser-Busch InBev NV in a US$103.0bn deal.

The African markets reversed bearish momentum observed in the prior week as all indices in the region closed higher save for the Egypt EGX 30 which slid 0.4% W-o-W amid uncertainties surrounding the currency market in the country. The Nigerian All Share Index appreciated for the 4th consecutive week, gaining 0.3% W-o-W while the Ghanaian GSE and the Kenyan NSE advanced 0.1% and 1.2% W-o-W respectively.

Equities Market Review and Outlook
Performance of the equities market closed upbeat in the month of September as interest in Oil & Gas stocks strengthened during the month. This was mainly on the back of impressive FY: 2015 result submitted by CONOIL as well as positive developments in the global oil market following OPEC’s decision to cut supply. Accordingly, the All Share Index (ASI) improved 2.7% M-o-M as CONOIL, TOTAL, SEPLAT and MOBIL appreciated 83.3%, 21.3%, 14.3% and 14.2% M-o-M respectively.

Performance for the week was positive as the ASI recorded marginal gains on 3 of 5 trading sessions during the week, up 0.3% W-o-W to close at 28,335.40 points. The uptrend observed was on account of mid-week price appreciation in Oil & Gas stocks following OPEC’s decision to put a cap production volumes. In line with market performance, market capitalization advanced by N30.3bn to settle at N9.7tn while YTD loss closed at -1.1%. Aggregate activity level was mixed as average volume rose 0.5%to settle at 141.3m units while average value traded fell 25.2% to settle at N1.1bn W-o-W.

Performance by sector was also mixed in the month of September as the Oil & Gas (+9.8%), Consumer Goods (+5.4%) and Insurance (+0.2%) indices all closed higher M-o-M while the Banking (-2.8%) and Industrial Goods indices (-0.4%) closed lower M-o-M. In the week under review, the Consumer Goods index advanced the most, up 2.5% W-o-W on account ofFLOURMILL (+9.4%) and DANGFLOUR (+9.1%). Likewise, the Oil & Gas index added 1.4% due to gains in MOBIL (+6.8%) and SEPLAT (+6.3%) while gains in LAWUNION (+32.7%) and CONTINSURE (+9.4%) ensured the Insurance index (+0.9%) closed the week higher. On the flip side, the Banking and Industrial Goods indices lost 2.3% and 0.8% following losses in GUARANTY (-4.3), ZENITH (-2.5%) and WAPCO (-2.1%).

Investor sentiment weakened albeit positive as market breadth -advancers/decliners ratio – stood at 1.1x (against a previous 1.3x) on account of 33 stocks that advanced while 29 stocks declined. The best performing stocks for the week were CUTIX (+19.6%), CADBURY(+16.1%), and FLOURMILL (+15.2%) while CAVERTON (-28.1%), BETAGLAS (-18.5%) and NEIMETH (-13.0%) declined the most. In the coming month market direction will be mainly dependent on Q3:2016 earnings reports as well as macro-economic indicators.

Money Market Review and Outlook
The financial system remained relatively liquid this week with the market opening with excess liquidity on all trading days. On Monday, with aggregate liquidity level at N113.2bn, Open Buy Back (OBB) and Over Night (O/N) rates eased 3.5% points and 3.9% points to close the first trading session of the week at 10.0% and 11.3% respectively. However, despite system liquidity level in excess of N149.0bn at market open on Tuesday, OBB and O/N rates rose 5.2% points and 4.7% points to close at 15.2% and 16.0% on the back of a N135.4bn OMO mop-up by the CBN. OBB and O/N lending rates moderated by 0.5% points apiece to settle at 14.7% and 15.5% by midweek. On Thursday, OBB and O/N rates further moderated by 0.4% points and 0.3% points to close at 14.3% and 15.3% respectively. The OBB closed the week at 14.3%, up 83bps W-o-W while the O/N rate was down 8bps W-o-W to 15.2%.

Sentiment in the Treasury Bills market was mixed this week but largely bearish as average T-bills rate across tenors trended northwards on most trading sessions. On Monday, average T-bills rate dipped 8bps to close at 17.4% but rose 16bps to 17.5% on Tuesday as investors sold off due to an OMO auction by the CBN. This sentiment persisted on Wednesday as rates further rose 16bps on average across tenors to settle at 17.7%. However, sentiment improved on longer dated T-bills on last two trading days of the week resulting in a 14bps drop in average rate to close at 17.6% on Friday, implying a 9bps W-o-W drop in rate.

In the week ahead, we expect money market rates to trend northwards as the CBN maintains its tightening stance by mopping up excess liquidity. There is also a T-bills auction of N135.7bnnext Wednesday but its impact on liquidity levels is expected to be neutralized by maturity of the same amount.

Foreign Exchange Review and Outlook
The Naira remained pressured this week as a result of illiquidity in virtually all segments of the FX market as the Naira/Dollar exchange rate at the parallel market crashed to an all-time low of N490.00/US$1.00 on Friday compared to N440.00/US$1.00 on Monday. The Apex Bank’s attempt to centralize the inflow of FX to official channels (through registered international money transfer operators and the interbank by suspending unregistered IMTOs while threatening to sanction individuals operating as international money transfer agents) continues to constrain supply of FX to the parallel market. However, the exchange rate at the interbank has remained broadly stable as a result of frequent interventions by the Apex Bank. The Naira/Dollar spot rate opened the week at N308.50/US$1.00 on Monday but depreciated to N312.99/US$1.00 by midweek before appreciating to N305.31/US$1.00 by Thursday as the CBN intervened with dollar supply. The interbank spot rate closed the week at N311.62/US$1.00.

In the futures market, investors continue to take advantage of the OTC FX Futures to hedge exposures to the Nigerian market in a bid to limit currency movement risk. Accordingly, the total value of open OTC FX Futures contracts rose by US$614.1m M-o-M at the end of September. The Apex Bank issued US$1.0bn of the September 20 2017 instrument at N243.50/US$1.00 to replace the September 28 2016 instrument which matured during the week.

In the interim, we expect that the exchange rate will remain pressured in the parallel market as activities seem to have a speculative form, whilst the CBN continues to exclude 41 items from access to the official FX market. Accordingly, we expect the Apex Bank to continue daily interventions at the interbank.

Bond Market Review and Outlook
Investor sentiment in the local bonds market was largely bearish this week as selloffs were recorded across board, particularly at the longer end of the curve. Average yield across benchmark bonds rose 12bps on Monday to close at 14.9% as investors sold off JAN 2026 and MAR 2036 instruments. Activity level however eased on Tuesday as average yield remained flat at 14.9% but rose 5bps to settle at 14.9% by midweek as selloffs continued. On Thursday, average yield across benchmark bonds inched 3bps higher to close at 14.9%, eventually settling at 15.0% on Friday, up 28bps W-o-W.

Similarly, investor sentiment in the Sub Saharan Africa Eurobond market was bearish this week as yields rose across sovereign Eurobonds instruments save for few South African bonds which enjoyed positive sentiment. Yields on the Nigerian 2018 and 2021 sovereign Eurobonds rose 0.3% apiece whilst the yield on the Nigerian 2023 sovereign inched 0.2% higher W-o-W. Comparing returns YTD, the Zambian 2024 sovereign Eurobond currently commands the highest return at +23.4%. Performance in the Nigerian corporate Eurobonds market was however mixed as offer yields rose on the ACCESS 2017 (+0.5%), FIDELITY 2018 (+1.0%), GUARANTY 2018 (+0.1%) and DIAMOND 2019 (+0.5%) whilst buying interest in the ZENITH 2019 and FBN 2020 and 2021 drove yields 0.5%, 3.5% and 1.8% lower respectively.

We expect yields in the local bonds market to inch higher in the week ahead as investors continue to price in expectation of tighter monetary policy against the backdrop of weaker exchange rate and likely pass-through on prices. We also expect investors to concentrate more on the shorter end of the yield curve on the back of scheduled T-bills auction.

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