Fixed Income Monthly Report

Transcription

1 Fixed Income Monthly Report Prepared by Lead Asset Management Limited 01/10/2018

2 CONTENTS GLOBAL DEVELOPMENTS Global Bond Yields Oil Prices MONTHLY ECONOMIC AND MARKET REVIEW June 2008 DOMESTIC UPDATES Economic Variables Domestic Fixed Income Market o FGN Bonds o FMDQ OTC trading Summary for August 2018 o Federal Government Savings Bond Outlook Recommended Strategy Flash Points 1

3 GLOBAL DEVELOPMENTS The Gross Domestic Product (GDP) in the United States expanded 2.80% in the second quarter of 2018 over the same quarter of the previous year. GDP Annual Growth Rate in the United States averaged 3.20% from 1948 until 2018, reaching an all-time high of 13.40% in the fourth quarter of 1950 and a record low of -3.90% in the second quarter of The Euro Area economy grew 2.1%t year-on-year in the second quarter of 2018, easing from a 2.5% expansion in the previous period. GDP Annual Growth Rate in the Euro Area averaged 1.70% from 1995 until 2018, reaching an all-time high of 5% in the first quarter of 1995 and a record low of -5.50% in the first quarter of The Chinese economy advanced 6.7% year-on-year in the second quarter of 2018, easing from a 6.8% growth in the previous period and matching market consensus. It was the weakest pace of expansion since the third quarter of 2016 amid intensifying tariff battle with the US and efforts to deleverage debt and financial risks. The Indian economy grew 8.2 percent year-on-year in the second quarter of 2018, above 7.7% in the previous three months and beating market expectations of 7.6%. It is the strongest growth rate since the first quarter of 2016 boosted by household spending, financial, real estate and manufacturing activities. Global Bond Yields 10-Year Government Bond Yields Country Yield (August 2018) Yield (September 2018) September Year United States 2.88% 3.23% Canada 2.22% 2.59% Brazil 12.34% 11.32% Mexico 7.90% 8.11% Germany 0.35% 0.57% United Kingdom 1.42% 1.72% France 0.70% 0.90% Greece 4.35% 4.45% Japan 0.11% 0.15% Hong Kong 2.10% 2.35% India 8.01% 8.04%

4 In the countries within our universe, the yield on government bonds appreciated in more countries for September 2018 than they depreciated. Canada recorded the highest appreciation with +37 basis points during the month while India recorded the highest depreciation of -2 basis points. Brazil recorded the biggest one year appreciation of basis points while Greece recorded the highest one year depreciation of -107 basis points. Oil Prices Oil prices are continuing on their upward trajectory in September, with the benchmark Brent crude rising 1.1% to $82.28 a barrel. West Texas Intermediate is up 1.27% at $ The US is poised to re-implement sanctions against Iran in November. At its peak this year, Iran exported around 3 million barrels per day of crude oil, equal to 3% of global consumption. Oil prices remain in the bulls domain amid concern that US sanctions on Iranian crude oil exports will result in much tighter physical market conditions once they take effect in November. The bulls are well and truly back in the oil market, with many analysts and traders predicting $100 oil by Christmas. But upon closer inspection, these claims appear to be driven fear and greed as opposed to fundamentals. DOMESTIC UPDATES Economic Variables After an impressive run by the Nigerian economic indices in the past few months, things appear to be slowing down. The economy grew by 1.5% year-on-year in the second quarter of 2018, slowing from a 1.9% expansion in the prior period. It was the weakest growth rate since the third quarter of last year, as oil output shrank while the non-oil sector continued to rise. On a quarterly basis, the economy advanced by 2.9 %, after contracting 13.4% in the previous quarter. Other economic indicators also depicted a slowdown in economic performance. The rate of inflation is showing signs of imminent increase while accretion to the external reserves seems to have slowed down in the last three months and it has now fallen below $45 bn. However, improved supply of forex by the CBN has continued giving a semblance of stability in the value of the Naira. The manufacturing PMI has remained above 50 points since April 2017, showing an indication of an improvement in manufacturing activities 3

5 In its MPC meeting in September 2018 the CBN voted to maintain the status quo adopted in July, citing concerns about rising inflation rate and a drop in external reserves. We also believe that the CBN might have anticipated upcoming spending activities ahead of the 2019 general elections. In summary, the MPC voted to Retain the MPR at 14.00% Retain the CRR at 22.5% Retain the Liquidity Ratio at 30.00% Retain the Asymmetric Window at +200 and basis points around the MPR We do not anticipate significant changes when the MPC meets at the end of November

6 Domestic Fixed Income Market FGN Bonds Yields on FGN Bonds appears to have improved in the last couple of months following months decline. Improvement in yields follow gradual increase in average coupon rates at the primary market. Also the bearish nature of the stock market may have attracted liquidity to the fixed income market. The Primary Market Total FGN Bond auction so far in September 2018 is N770.00bn compared with N1, bn issued by September Total bid in September 2018 is N1, bn compared with N1, bn issued by September Average coupon rate in September was 15.15% compared with 16.80% recorded for the corresponding period last year. Unlike in the month of July, bond auction for August and September were oversubscribed due to improvement in the average coupon rates. There is the need on the part of the government to fund the 2018 capital budget, which is over N2 billion. FGN Bond Auctions Issued (Nbn) Bid (Nbn) Subscription Level (%) Average Coupon Remarks Rates (%) Jan Oversubscription Feb Oversubscription Mar Oversubscription Apr Oversubscription May Oversubscription Jun Oversubscription Jul Undersubscription Aug Oversubscription Sept Oversubscription Total , FMDQ Summary for August 2018 According to FMDQ report for August 2018, transaction turnover in the Fixed Income and Currency (FIC) market for the month was N16.18trn ( 13.09trn in July), representing a 15% increase over the previous month. Month-on-month turnover largely increased across all segments of the FIC market, including the Repurchase Agreement/Buy-Backs market which recorded a 19% month-on-month increase in August. The Treasury bills (T-bills) and Foreign Exchange (FX) segments remained the major drivers of turnover in the FIC market, jointly accounting for 74.26% of total turnover in August. The T-bills market alone accounted for 33.82% of the total market compared with 40% in July. 5

7 August 2018 Market Turnover Product Category ( mm) ($ mm) % of Total Foreign Exchange 4,510,560 12, Foreign Exchange Derivatives 2,062,608 5, Treasury Bills 5,474,223 15, FGN Bonds 1,552,255 4, Other Bonds* 11, Eurobonds 8, Repurchase Agreements/Buy- Backs 2,495,707 6, Unsecured Placements/Takings 66, Money Market Derivatives - - Commercial Papers - - Total 16,182,119 44, July 2018 Market Turnover Product Category ( mm) ($ mm) % of Total Foreign Exchange 28, , Foreign Exchange Derivatives 1,605,100 4, Treasury Bills 5,264,940 14, FGN Bonds 894,508 2,472 7 Other Bonds* Eurobonds 3, Repurchase Agreements/Buy-Backs 2,442,075 6, Unsecured Placements/Takings 29, Money Market Derivatives 0 Commercial Papers - - Total 13,096,812 36, Federal Government Savings Bond The FGN savings Bond continues to lose steam given the decline in the number of subscription since November The Bond was launched in April 2017 to cater for the needs certain categories of investors. The results of the offer for September and August are tabulated below. Due to the reduced number of subscribers, we have noticed a gradual increase in coupon rates in the last three months probably to rekindle investors interest in the instrument. 6

8 10.668% FGNSB AUG % FGNSB AUG 2021 Offer Period August 6-10, 2018 August 6-10, 2018 Settlement Date August 15, 2018 August 15, 2018 Maturity Date August 15, 2020 August 15, 2021 Coupon % % Tenor 2 Years 3 Years Total Amount Allotted N Million N Million Total Number of Successful Subscriptions % FGNSB SEP % FGNSB SEP 2021 Offer Period September 3-7, 2018 September 3-7, 2018 Settlement Date September 12, 2018 September 12, 2018 Maturity Date September 12, 2020 September 12, 2021 Coupon % % Tenor 2 Years 3 Years Total Amount Allotted N Million N Million Total Number of Successful Subscriptions Outlook On the domestic front, the Nigerian economy is expected to continue its improvement this year riding on the back of improving oil price, stable exchange rate regime and declining inflation rate. However, the decline in GDP growth rate for the second quarter of 2018 leaves cause for concern. It points to slow economic activities despite improvement if government revenue. If we also factor in the recent political developments highlighted by a deluge of defections across the major parties, the anticipated recovery efforts could be marred by these developments. The polity appears to be overheated as the political actors display eagerness to win the forth coming elections at all cost. We expect headline inflation to continue to moderate due to positive base effect while the structural imbalance in forex supply and demand may begin to normalize as long as the CBN continues to provide forex liquidity into the system. In light of these, we expect interest rates to moderate as well. However then increase in inflation rate and the decrease in external reserves leaves a bit of room fro concern. The government decision to increase foreign borrowings at the expense of domestic borrowings has led to lower coupon rates and consequently lower returns on fixed interest instruments. This trend may reverse as more domestic borrowings may be required to fund projects ahead of the 2019 general elections. This has become 7

9 noticeable in the last 2 months. We are still uncertain about the continuity of this trend for now. This outlook also recognize the deplorable security situation in the country. The herdsmen and farmers clashes continued unabated and has led to polarization of the polity. This is likely to continue to discourage investments in the agro-allied and mining sectors. If this trend is not checked sooner than later, national output, in terms of production of agricultural produce may likely be put at risk. The following factors will influence yields on fixed income securities in September 2018: Increased supply of foreign exchange Improved confidence on the outlook of the Nigerian economy The stability in the macroeconomic environment Containment of worsening security situation in the middle belt and the north Performance of the equites market which appears at the moment bearish Recommended Strategy According to the OTC report a substantial percentage of market turnover consist of trading in forex. Interested investors should employ the services of a professional trader as forex trading is not for amateurs Investors should also maintain a balanced portfolio in other fixed income securities, particularly in bonds in order to minimize reinvestment risk Investors may sell down a fraction of their bond investment portfolio to buy back later when the yield increases. Flash Points Fund Managers should always keep an eye on the equity market even when it is not bullish. Any bullish trends in this market would always draw liquidity away from the fixed income market 8

10 Disclaimer This report is based upon information from various sources that we believe are reliable. However, no representation is made that is not accurate or complete. This report is not an offer to buy or sell, nor a solicitation to buy or sell the securities mentioned therein. This report is provided solely for the information of clients of Lead Asset Management Limited who are expected to make their own investment decisions without sole reliance on this report. Lead Asset Management accepts no liability for any direct or consequential loss arising from any use of this report or its contents. Investments can fluctuate in price and value and the investor may get back less than was originally invested. Past performance is not necessarily a guide to future performance. 9