Traders’ Voice…All Shades of Red

It is still the month of love. We hope you had a fantastic Valentine’s Day, besides the crazy traffic that usually comes with it. While most of us know Valentine’s day to be a day of showing love to your significant other or family members, we at Comercio Partners would like to encourage you to take it a step further and show love to everyone around you.

After all, with everything going on around the world, I think it is safe to say we all need love. Lest I forget, it is Black History Month, and we would like to commend all the fallen heroes and everyone fighting for racial equality and justice.

We truly appreciate you and stand with you. Speaking of Black excellence and gender equality, we would like to congratulate our very own Ngozi Iweala for becoming the first female leader of the WTO.

Nevertheless, while so many of us wore the usual Valentine uniform, a touch of red, to church, on our dates or family gatherings, the Nigerian Bourse which was the best performing stock market index last year, was also in all shades of red last week (is it just me or did the song “blood on the dance floor” by the great Michael Jackson just come to mind?)

Bulls or Bears? – You Decide

Although illegal in several parts of the world, allow me to crave your indulgence in an animal fight between two terrestrial mammals – a bull and a bear. Now keep this strictly within your realm of imagination and place your imaginary bets on the likely victor.

Hold that thought for a second and let us discuss an identical sport that is being played in a real market, which is the equities market. Most players in this market had envisaged a scenario where the bulls maintained dominance in the earlier part of the year, after which we see the bears get a hold of the bourse following the earnings season.

The premise behind this was that dividend plays will dominate the year’s start, after which we would see yields in the fixed income market retrace as we moved into the year, which would not bode well for equities given the history of a strong inverse correlation between fixed-income yields and equity market performance.

So, the oracles were half right; yields are retracing as we move into the year, but at a much faster pace than envisaged. Hence, the market bulls are losing control of the local bourse during an earnings season that should be somewhat positive.

NGSE ASI

Over the past two weeks, the benchmark index for the local bourse lost -4.65%, erasing most of the gains recorded in January 2021, where the market ticked up by 5.32% by the month’s end.

As at the close of the market last Friday, the year-to-date return stood at 0.42%, following a second consecutive weekly decline of -3.04%. While profit-taking activities could bear some of the blame for the downtrend, the major driver behind the selloff was the increase in yields in the fixed income market.

The major signal of a retracement in yields was seen two weeks ago after the OMO auctions, and the nail to the coffin came from last week’s treasury bill auction.  

PMA RESULT 

Before we posit our expectations for the equities market, it is imperative that we briefly note three key points. First, at current prices, the market is still performing at a discount when compared to its emerging peers, and there are still several attractive stocks in terms of both fundamentals and dividend yields.

Secondly, the current tone of the fiscal authorities implies that given their plans for increased domestic borrowings, they are still looking to keep rates low, but the levels achieved last year might prove difficult to achieve; and lastly, a review of the equity market performance from 2005 till date, shows that what succeeds a yearly gain that is above 40% is a bearish year for equities.

The keyword for an approach to the equities market is caution. While the pockets of bargain hunters are expected to continually hunt for fundamentally attractive stocks after every market correction, the underlying theme of the market appears to be bearish.

Hence, while several factors that would determine the market performance by year-end could still change, the current facts and historical precedence point to a bearish close. So, taking you back to our earlier imaginary fight between a bull and a bear, I wonder which animal your bet is on.

As for us, our take on the animal fight is the same as our view on the equities market – when all is said and done, the omnivore wins. 

New Eurobond issuance: ECOTRA 26s 

Ecobank Nigeria successfully issued the first Eurobond out of Nigeria in 2021, with a total outstanding of US$300m for 5-year paper and a 7.125% coupon. The paper was highly sought after with a 3x oversubscription despite the current macroeconomic headwinds and covid-19 induced disruption. Which begets the question “is this the best time for Nigeria to issue a sovereign bond?”

We expect to see sustained interest in coming weeks given as ECOTRA 26s remains the most attractive Nigerian bank Eurobond paper in terms of yield. We see it settling at around 6%.