By Nkiruka Nnorom
If analysts’ projections are anything to go by, activity and yields in the fixed income market would remain in fluctuation through 2019, though uptrend may be short lived.
This upward trajectory, according to analysts at Emerging Capital Africa Group, would depend largely on three prong influences of monetary, fiscal and external factors.
The fixed income market had benefited from the lull in the equities market in 2018, recording an outstanding 29 percent increase in turnover.
Specifically, activity in the segment of the capital market jumped by 28.74 percent during the 12 month period to December 31, 2018 .Turnover at the OTC fixed income and currency market recorded 28.74 percent increase, rising from the N142.03 trillion recorded in 2017 to in N182.86 trillion 2018.
Also in the secondary equities market, turnover in the fixed income market witnessed 22.34 percent growth, while market capitalisation in that segment of the market rose by 11.75 percent. The increase, according to the Nigerian Stock Exchange, NSE, was driven by search for an alternative asset class opposed to equities.
However, for most capital market operators, the sustenance or otherwise of the rally witnessed last year in the fixed income market would follow the outcome of Saturday (February 16) presidential election and the consequent impact on the equities market either negative or positive.
If the impact of the election on the equities market turns out positive, there would be re-allocation of fund from fixed income to equities and vice versa, some operators told Vanguard.
Emerging Capital Africa Group explained in its maiden Economic and Investment Outlook Report 2019, titled, “Cautious Optimism”, said that the confluence of the three factors – monetary, fiscal and external factors – would drive an uptrend in the short and long term yield over 2019.
“The projected outlook for the fixed income market would rely largely on influences of the monetary, fiscal and external fronts. On the monetary front, we expect a tight monetary signal from the apex bank informed by anticipated liquidity levels driven by fixed income instruments staged to mature over 2019. We thus expect to see ramp up in Open Market Operation (OMO) sales in the first and last quarter of the year where maturities in the fixed income market is at its zenith (maturities in the first quarter 2019: N5.4 trillion, and second quarter 2019: N5.9 trillion).
“On the fiscal side, given our expectation of higher fiscal deficit in 2019, we anticipate higher domestic borrowings to fund the budget which will drive higher rates at the bond auction. The confluence of the foregoing is expected to drive an uptrend in the short and long term yields over 2019 largely hinged on Central Bank of Nigeria, CBN’s monetary tightening as well as higher federal government paper supply over the year,” the report stated.
Upcoming election may predicate short-lived spikes in bond yields – United Capital
United Capital Plc, another investment banking firm, in a report titled, “Fixed Income Outlook: Are the risks systemic or idiosyncratic?”, the big question that predicates outlook for the fixed income market this year is whether the risk already priced in by market could derail an otherwise positive Nigerian economic environment (leading to increased upward pressure on yields) or “are the concerns mere idiosyncratic issues at work?”
“Hence, because these risks have been largely priced in by the market, our expectations on how they transcend from here on would be pivotal in guiding yield direction for the remainder of 2019,” the firm said.
Continuing, the report stated: “In terms of global risks, the two biggest themes that affected market confidence in 2018 were the double whammy of normalizing Fed policy and a stronger US dollar. However, the Fed’s recent dovish messaging should help check dollar strength and guide a re-pricing, as the market adjusts for a “pause” on rate hikes.
“In terms of domestic risks, the biggest one on the horizon relates to upcoming elections. Hence, while this risk does not have the capacity to derail Nigeria’s economic recovery, it may predicate short-lived spikes in bond yields if the election results are inconclusive or if other election-related agitations materialise. Nonetheless, we see this as a short-term risk that may not pressure yields beyond the election cycle.
“In terms of positioning, we recommend over-weighing short-term bills ahead of the general election as it offers an enticing trade-off between risk and reward, and a potential place for investors to play defense. As political risk premier peaks, we recommend rapidly building duration to lock in funds at high yields across longer maturities. In addition, the scenario for the post-election period would depend on the interplay of retracement in yields after the election and the unsettling condition in the global space.”