Traders’ Voice… A Happy Ending

NGX Eurobond Market November Review and Outlook
Afolabi Sotunde Illustration Naira

A horror movie with a happy ending. Strange right? That was the financial markets this year. Financial markets wore distinct faces in 2020, which sometimes makes it difficult to believe that all these activities panned out in just eleven months. Like every good horror flick, the market started off quite normal, as market participants paraded different asset classes, with a fine blend of strategy and risk appetite.

For equities, it was taking positions in anticipation of dividend announcements in the first quarter. While for local Bonds, it was the limited investment options following the ban on local investors from participating in the OMO market coupled with the anticipated liquidity inflows. We also witnessed some buying in our Eurobond market as the market rallied on the positive news of US-China trade tensions.

This normalcy was however short-lived, as the equities market became an unwilling host to the Covid-19 pandemic and its ensuing impact. We had a perfect storm, and like a disgruntled kid, the market gave a knee-jerk reaction to the displeasing circumstance, with massive sell reactions witnessed.

There was a 30.43 per cent ASI decline between January 20, the pre-pandemic high, and April 6, the Covid-19 induced 5-year low. This was no storm in a teacup, but there was a hyperbolical undertone to the market response, as the market priced in its apocalyptic expectations on equities.

Sure, the economy was shrivelling, but some sectors were spared from the headwinds. The equities market however punished most stocks in attendance, irrespective of their fundamentals.

The Eurobond market was not spared with yields across board hitting historically high levels on the back of the sharp decline in oil prices (Just in case you forgot, crude was the same price as a dollar meal at Mcdonalds). This created the first financial anomaly of 2020. “Return on Eurobonds was higher than the return on Local Bonds” (Can you just imagine?)

The first half of the year flew by swiftly, following the somewhat unpopular saying, “time flies when you are losing money”. Nevertheless, we saw a quick turnaround as markets began to pick up towards the end of the first half of 2020, following the gradual economic reopening efforts.

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Liquidity led recovery

Local players increased their participation, filling the vacuum left by international participants. Domestic participation in equity trading increased from 50.65 percent as of January 31, 2020, to 61.81 percent by the end of September. Currently, the ASI year-to-date returns stand at 30.63 percent, while the index has also gained 18.02 percent in excess of its pre-pandemic high value in January.

In addition, the sectoral year-to-date performance is currently broadly bullish, with gains recorded in the Industrial (50.57%), Insurance (26.05%) and Banking (8.57%) sectors, while the Oil and Gas (-15.95%) and Consumer Goods (-5.02%) sectors remain in the red.

This improved performance was driven in part by the attractive entry prices created by the Covid-19 induced plunge, but mostly by the unfavourable yields in the fixed income alternatives. With inflation soaring and fixed income yields printing at historical lows, investors were forced to go back to the same equities that they so desperately ran from.


Traders' Voice… A Happy Ending

The recovery in the Eurobond market started with OPEC+’s historical production cut (agreement to cut production by 9.7 million barrels per day) which boosted oil prices and renewed buying interest across the board. The recovery was fueled further by easing of lockdown restriction Global monetary dovish stance and positive development on the covid-19 vaccine. Now yields are lower than pre covid levels.

Traders' Voice… A Happy Ending

The financial market is poised to end the year on a positive note, which is a somewhat ironic end to a turbulent year. Apparently, in our financial market, even a stormy year can have an impressive close. So maybe this year could be described as that horror movie that had a happy ending.

In all, we at Comercio Partners Limited would like to express our deep gratitude to all our readers, clients, critics and prospects. We appreciate your continued support and contributions to the growth of our business. Happy holidays from Comercio Partners Team.