Fixed Income Monthly Report

Transcription

1 Fixed Income Monthly Report Prepared by Lead Asset Management Limited 01/03/2019

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 January 2019 o Corporate Bond Market Outlook Recommended Strategy Flash Points 1

3 GLOBAL DEVELOPMENTS The Gross Domestic Product (GDP) in the United States expanded 3.10% in the fourth 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 Gross Domestic Product (GDP) In the Euro Area expanded 1.20% in the fourth quarter of 2018 over the same quarter of the previous year. 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 6.4% year-on-year in the December quarter of 2018, after a 6.5% growth in the previous quarter and matching market expectations. It was the lowest growth rate since the global financial crisis, amid intense trade dispute with the US, weakening domestic demand and alarming off-balance-sheet borrowings by local governments. Considering full 2018, the economy expanded 6.6%, the weakest pace since The Indian economy advanced 6.6% year-on-year in the last three months of 2018, below a downwardly revised 7% expansion in the previous period and market expectations of 6.9%. It is the lowest growth rate in five quarters as weak consumer demand and government spending held back expansion. Global Bond Yields 10-Year Government Bond Yields Country Yield (January 2019) Yield (February 2019) February Year United States 2.70% 2.73% Canada 1.95% 1.89% Brazil 8.68% 9.03% Mexico 8.40% 8.16% Germany 0.16% 0.17% 0-47 United Kingdom 1.24% 1.27% France 0.57% 0.56% Greece 3.88% 3.64% Japan -0.02% -0.02% 0-3 Hong Kong 1.73% 1.73% India 7.39% 7.37%

4 In the countries within our universe, the yield on government bonds depreciated in more countries for February 2019 except for the United States, Brazil and United Kingdom. This was the same trend observed in December. Greece recorded the highest depreciation with -23 basis points during the month while Brazil recorded the highest appreciation of +24 basis points. Mexico recorded the highest one year appreciation of +56 basis points while Greece recorded the highest one year depreciation of -68 basis points. Oil Prices Oil prices bounced on towards the end of February from previous week's losses, boosted by reports that the United States and China could soon reach a formal agreement to end a tit-for-tat trade war that has limited global economic growth. U.S. West Texas Intermediate crude settled 79 cents higher at $56.59 per barrel, posting a 1.4-percent gain on the day. WTI earlier rose as high as $57. International benchmark Brent crude futures rose 60 cents at $65.67 a barrel, off a session high of $ The gains come after both benchmarks posted losses during a volatile trading period in the previous week. Brent fell more than 3 percent, while WTI dropped 2.5 percent on the week. OPEC and its partners, known as OPEC+, will likely decide on a new output policy in June instead of during the group's April meeting in Vienna, according to OPEC sources. OPEC and its allies are expected to extend its supply reduction pact at its June meeting, but much would depend on the extent of U.S. sanctions on OPEC members Iran and Venezuela. DOMESTIC UPDATES Economic Variables The Nigerian advanced 2.4% year-on-year in the last quarter of 2018, following a 1.8% expansion in the previous period and beating market expectations of a 2.1% gain. It was the highest growth rate since the third quarter of 2015, as the non-oil sector increased further and the oil sector contracted less. Other economic indicators depicts mixed performances. The rate of inflation dipped slightly in January while accretion to the external reserves have slowed down in the last six months and it has now fallen below $43bn since October. The quest by the CBN to continue to defend the Naira in the foreign exchange market has not only slow down the accretion to the eternal reserves but also depleted available reserves. This defense of the Naira has continued to give a semblance of stability in the foreign exchange market. We have also noticed a decrease in the manufacturing PMI which has now fallen to 57.1 points in February from 58.5 points in January The issue of petroleum subsidy remains a big elephant in the room as newly released figures put the total subsidy for 3

5 2018 at N3.9 trillion naira. Removal of the subsidy would likely unleash inflationary pressures and this may not happen until the second quarter. Until recently, the subsidy is not appropriated for in previous budgets, except for the yet to be passed 2019 Appropriation Bill. In its MPC meeting in January 2019 the CBN voted to maintain the status quo adopted in the last 2 years, 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 anticipate when the MPC meets at the end of March 2019 it may likely adopt a tighter monetary policy stance given the direction the economy is headed. 4

6 Domestic Fixed Income Market FGN Bonds Yields on FGN Bonds which appeared to have improved in the last couple of months dipped slightly in February. This in in tandem with the decrease in the average coupon rates at the primary market for the month of February. The Primary Market Total FGN Bond auction so far this year is N300.00bn compared with N210.00bn issued for the corresponding period of Total bid so far is N compared with N267.29bn issued for the same period last year. Average coupon rate for the year so far is 15% compared with 13.20% recorded in 2018 pointing towards the prospects of higher coupon rates in the coming months. FGN Bond Auctions Issued (Nbn) Bid (Nbn) Subscription Average Coupon Remarks Level (%) Rates (%) Jan Oversubscription Feb Oversubscription Total FMDQ Transaction Summary for January 2019 According to FMDQ report for January 2018 turnover in the Fixed Income and Currency (FIC) market for the month ended January 31, 2019 was 15.08trn, representing a 14.85% ( 2.63trn) MoM decrease on the turnover of 17.71trn recorded in December 2018, and a 28.78% ( 3.37trn) YoY increase The Treasury Bills (T. bills) and Foreign Exchange (FX) market segments remain the major drivers of turnover in the FIC market, jointly accounting for 78.69% of turnover in January and higher by 2.21 percentage points (ppts) from their contribution to turnover in December (76.48%). From the table below activities in the T-bills segment continued to dominate trading in the fixed income market. T-Bills yields continue to give superior returns to investors. This is followed by activities in the forex and forex derivatives market. Repurchase Agreements/Buy-Backs also continued 16.23% to market turnover while the secondary market for FGN bonds remain tepid at 4.65%. 5

7 January 2019 Market Turnover Product Category ( mm) ($ mm) % of Total Foreign Exchange 3,468,916 10, Foreign Exchange Derivatives 1, Treasury Bills 6,560,171 18, FGN Bonds 701,203 1, Other Bonds* Eurobonds 15, Repurchase Agreements/Buy-Backs 2,448,160 6, Unsecured Placements/Takings 49, Money Market Derivatives - - Commercial Papers - - Total 15,083,563 41, Corporate Bond Market The corporate bond market have been active in recent years. Below are a list of some current issues. Some Recent Corporate Bond Issues Company Issue Size (Nbn) Tenure (years) Coupon (%) C&I Leasing LAPO Microfinance Bank UPDC Flour Mills 70 3/5 15.5/16 Mixter Real Estate Forte Oil Outlook The Nigerian economy post-election may continue on the same path with the reelection of the incumbent President. The growth trajectory of the economy will depend on oil prices. If oil prices remain above $65pb we should expect some marginal growth in the economy. Conversely if oil prices remain below $65pb the economy could slide back into 6

8 recession. In the midst of all these, we expect an upswing in inflation rate as attempts would be made to address the present petrol subsidy issue which stood at N2.9 trillion in This could compromise any effort to grow the economy. Structural imbalance in forex supply and demand may continue to normalize as long as the CBN continues to provide forex liquidity into the system. If export revenue falls in line with fallen oil prices Naira exchange would become weaker. In light of these, we expect interest rates to rise in response to inflationary pressures. In conclusion, urgent steps should be taken to address the following areas: Diversification of the economy from oil and restructuring to unleased the economic potentials of citizens. Restructuring should also include the prospects of having the states to have a larger percentage of the tax revenue (Corporation Tax and VAT) when such taxes are generated by corporations within their respective states. This should also include excise duties. 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. Given recent developments with respect to gradual increase in coupon rates we anticipates an increase in yields on the FGN Bonds in the short term. The following factors will influence yields on fixed income securities for the rest of the year: The need to maintain stability in the Foreign Reserves The expected hike in rates in the global market, particularly the US The funding need of the Federal Government to finance the 2018 budget The slow growth rate in the economy. Recommended Strategy With anticipated volatility in the foreign exchange market resulting from probable naira depreciation, we would advise investors who are familiar with forex trading to begin to take advantage of this expected market volatility We would advise Investors to take advantage of investment opportunities in the bond market as the yield increases Investors should continue to take advantage of the current yields on one year Treasury Bills Investors should also maintain a balanced portfolio in other fixed income securities, particularly in bonds in order to minimize reinvestment risk 7

9 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 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. 8