Experts forecast FX outflow, say scarcity drives bargain hunting in fixed income market

The fixed income market continues to witness conservative trading pattern by investors as volumes of trades consummated at bonds and Treasury-Bills market moderated in the past week, Greenwich Trust Limited (GTL) said.

In its April review, WSTC Securities Limited forecasted an increase in outflow of capital, said bargain hunting recorded in the fixed income market was due to scarcity of dollar.

It said bargain hunting witnessed in the fixed income market in April was due to inability of foreign investors to exit the market due to scarcity of FX.

However, the firm believes that due to $3.4 billion Rapid Financing Instrument gotten from the International Monetary Fund, it expects to see an increased supply of dollars in the FX markets.

With dollar supply into the economy, the firm said it expects to see increased outflows of capital.

Meanwhile, the Governor of the Central Bank of Nigeria has assured that investors that want to exit the market would be provided an orderly exit.

FX repatriation: CBN Governor assures investors of orderly exit

In its recent note, WSTC stated that the fixed income market was relatively bullish in April 2020, as reflected in the decline in yields during the period.

Investment experts at the firm thus attributed the bullish trend to excess liquidity in the system.

According to the report, experts said they also think that the inability of foreign investors to get the greenback due to a lack of supply by the Central Bank of Nigeria (CBN), possibly resulted in short-term investments in the fixed income market.

Market charts show that yields on 1-year NTBs declined from an average of 5.84% in March 2020 to 4.51% in April 2020.

Meanwhile, the 1-year Nigerian Treasury-Bills (NTBs) opened at 7.76%.

WSTC stated that the Eurobonds yield curve also moderated in April 2020, attributed to increased buy interest due to the higher yields’ attraction in the market.

Specifically, the firm held that yields on 1-year Eurobond moderated by 28 basis points from 16.61% as of March 2020 to 16.30% as of April 2020.

Meanwhile, investment stated that the spread was wider on the 10-year FGN Eurobond from 12.71% as of March 2020 to 11.40% as of April 2020.

FX market

The foreign exchange market witnessed significant pressures in April 2020, especially in the parallel markets, the firm stated.

WSTC stated in the note that FX rates in the parallel markets rose to as high as N420/$1 in April due to inadequate supply, as market participants became net buyers during the period.

According to data from FMDQ OTC, it explained that there was no supply of dollars by the CBN in April 2020.

“We understand that this was partly due to CBN’s inability to operate fully due to the coronavirus lockdown.

“We also believe that the declining levels of the external reserves resulted in the constrained liquidity during the period”, the financial experts reckoned.

According to data from the CBN, The external reserves declined by 5% month-on-month, from an average of $35.19 billion in March 2020 to an average of $33.39 billion in April 2020.

Thus, the external reserves dropped to a 12- month low of $32.81 billion in April 2020.

Consequently, the exchange rate at the Importers and Exporters Window (I&E Window) increased from an average of N375/$1 to N383/$1.

“In our view, owing to current developments on the coronavirus pandemic, we believe that economic activities will continue to lower, resulting from the social distancing directives by the FG, and possibly another round lockdown.

“The exponential rise in the number of coronavirus cases gives an insight to the long tunnel towards an economic recovery.

“From our assessment, we think that the pandemic in Nigeria will extend across Q2’2020 and a greater part of Q3’2020.

“We maintain our position on a bearish outlook of the equities market”, WSTC stated.

It said although, the stock market rallied in April 2020.

WSTC posit that the rally is not sustainable owing to the major fundamental issues in the Nigerian economy.

The firm also expect to see a bearish trend in the fixed income market in subsequent periods.

“The rally witnessed in the fixed income market, in our view, was driven by bargain hunting by investors who were unable to exit their dollar positions due to inadequate supply of dollars.

“Meanwhile, resulting from the $3.4bn RFI gotten from the IMF, we expect to see an increased supply of dollars in the FX markets, and we posit to see increased outflows of capital as a result”, WSTC stated.

GTL expressed that participation in the bond market was lighter as investors participation remained moderate, with positive interest skewed towards short to medium end of the curve.

Experts forecast FX outflow, say scarcity drives bargain hunting in fixed income market


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