Monthly Economic and Financial Market Outlook: Time for Portfolio Realignment

Culled—Proshare

October 12, 2017/FSDH 

Executive Summary


Domestic Scene

  • The current positive macroeconomic developments in the country have reduced the risk inherent in the Nigerian economy. Consequently, the yields on fixed income securities are dropping.

    · The recent efforts of the DMO to restructure the country’s debts is also contributing to the declining yields.

    ·         The declining yields should prompt the realignment of investors’ portfolios in favour of equity market in search of higher returns

    ·         Investors with foreign exchange may also take advantage of the opportunities in some Euro Bonds in the market

    ·         A review of the latest Purchasing Managers’ Index (PMI) report that the Central Bank of Nigeria (CBN) published for the month of September 2017 shows that economic activities in the manufacturing and non-manufacturing sector continue to strengthen

    ·   The Composite Non-Manufacturing Index (CNMI) expanded to 55.3 points in September 2017, from 53.6 points in August 2017

    ·         The total capital imported into the Nigerian economy increased to US$1.79bn in Q2, 2017 from US$908mn in Q1, 2017 and US$1.04bn in Q2, 2016

    ·         We expect the inflation rate in Nigeria to drop marginally to 15.96% in September 2017 from 16.01% in August 2017

    ·         The external reserves is at the highest level since February 2015

    ·         The stability in the value of the Naira should attract additional foreign capital, which will increase the external reserves

    ·         We expect the positive Gross Domestic Product (GDP) growth rate and lower inflation rate to attract more investments to the fixed income securities. Consequently, yields should drop further

    ·         We expect the equity market to rally in Q4 2017 especially in December, in line with the historical trend.

International Scene

  • The Organization of the Petroleum Exporting Countries (OPEC) released a global growth forecast of 3.5% for 2017 in its monthly report for September 2017
    · OPEC highlighted that the challenges remain for the global economic growth outlook, mainly related to global political developments and upcoming monetary policy decisions, particularly in the US and the Euro-zone.

Global Developments
In the countries we monitored, the prices of government bonds recorded more decreases than increases in September 2017, compared with August 2017. The 8.80% September 2023 Turkey Government Bond recorded the highest month-on-month price decrease of 1.40% to 91.60. This was followed by the 1.75% May 2023 United States (U.S) Government Treasury Note with a decrease of 1.16% to 98.49.

The 17% April 2022 Egypt Government Bond recorded the highest month-on-month price increase of 5.58% to 106.50. This was followed by the 16.39% January 2022 Nigeria Government Bond, with a price increase of 1.94% to 101.63. The China, India, Kenya, Russia, South Africa, and U.S Bonds closed the month at positive real yields. Other bonds we monitored closed the month at negative real yields.

The Kenya Government Bond offered the most attractive real yield amongst the selected bonds in September 2017. The US economy grew by 3.1% in Q2 2017, from the final estimate released by the U.S Bureau of Economic Analysis (BEA). It is the strongest growth rate since Q1 2015. The BEA added that private inventory investment increased more than previously estimated, but the general picture of economic growth remains the same. Similarly, the inflation rate in the U.S increased to 1.9% year-on-year (Y-O-Y) in August 2017, from 1.7% in July 2017.

It is the highest reading in three months, due to rising shelter and gasoline cost as Hurricane Harvey shut down refineries in the Gulf coast. The United States Federal Reserve (U.S Fed) kept its Federal Funds Rate (Fed Rate) unchanged at 1%-1.25% at its September 2017 meeting. The Fed also indicated that it will begin to unwind its quantitative easing from October 2017.

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The Global GDP
The Organization of the Petroleum Exporting Countries (OPEC) reviewed upwards its global growth forecast to 3.5% for 2017 in its monthly report for September 2017, from 3.4% in its August 2017 monthly report. The growth forecast for 2018 is unchanged at 3.4%. OPEC indicated that the global economic growth momentum has gained traction lately and has become more balanced, with all major economies now showing positive growth in 2017.

The growth forecast is driven by improved economic activities in the Organisation for Economic Growth and Development (OECD) economies. The strong economic growth dynamics in the Euro-zone and the U.S economy are the main drivers of the economic growth expectation in the OECD. Additionally, the major emerging economies held up well, as China’s growth in HY1 2017 was better-than-expected.

Major structural reforms in India in HY1 2017 had negative impacts on its growth during the period. Russia and Brazil will also continue their recovery, though this also depends on developments in commodity prices and politics, as well as presidential elections in both countries in the coming year. . OPEC highlighted that the challenges remain for the global economic growth outlook, mainly related to global political developments and upcoming monetary policy decisions, particularly in the US and the Euro-zone.

It added that high valuations in equity and bond markets, with low volatility, pose a risk at a time when central banks have become more willing to reduce monetary stimulus measures. It is also of the opinion that debt levels remain high in some key economies, an issue that will probably require further attention if interest rates continue to rise gradually, particularly in the U.S.

Proshare Nigeria Pvt. Ltd.

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