Financial Market Overview in Q1 and Outlook for Q2 2021
Q1-2021 was broadly defined by an upward reversal in the yield environment. The equity market, despite starting on a positive note, became hesitant at the end of the quarter as sell pressures began to filter into the bourse in February.
Notably, a reversal in fixed income yields at primary auctions triggered an upward repricing of yields in the secondary market. Consequently, investors began to reduce their equity exposures as they began to book their profits to stay at the short end of the yield curve as cash became king.
An upward repricing of yields has driven some equity selloffs
5-year trend of the NSEASI vs 10-year FGN Bond yield
This reflected in the performance of the NSEASI which dipped 3.0% in Q1-2021, closing at 39,045.13 pts.
Conversely, Bond yields advanced across all tenors, averaging 9.8% (as of Mar-2021) from 6.1% at the start of the year. Similarly, the average yield in the NTB space surged to 4.1% from 0.5% within the same period.
Clearly, a rotation from risker assets back to less risky assets is in full swing in the light of the increasing attractiveness of risk-free assets.
The peak of the reversal appears to be distant, but this depends on the outcome of the May MPC meeting as well as macroeconomic data supporting the economic recovery.
The decision of the MPC to maintain the status quo despite the fragile nature of the economy already indicates an unwillingness to go full-time pro-growth in the face of elevated inflationary pressures and FX instability.
Give or take, a more hawkish monetary policy tone from the MPC in May-2021 is expected to amplify yield reversal. This may further dampen sentiment for stocks and reinvigorate appetite for Bills.