Falling GDP, MPC meeting’ll strain market – Analysts

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Investors in the country’s capital market are likely going to exhibit negative sentiments following the drop in Nigeria’s Gross Domestic Product in the first quarter of 2016 and fears over the possible outcome of the Monetary Policy Committee meeting, analysts have said.

The National Bureau of Statistics had, on Friday, released the 2016 first quarter real GDP report, which showed a 0.36 per cent year-on-year contraction in output.

The result came on the back of a 0.81 per cent slowdown in the non-oil sector (previous: +5.59 per cent) following declines in manufacturing, financial institutions and real estate activities.

The upcoming MPC meeting, scheduled to hold on Monday and Tuesday in Abuja, is coming ahead of the downbeat economic data and the recent news flows of the spiraling April inflation rate of 13.7 per cent (versus 9.6 per cent in January 2016), and the 67.63 per cent increase in fuel prices to N145.

In the GDP report, the oil and gas sector recorded a 1.89 per cent slowdown but showed an improvement when compared to the corresponding period in 2015 (-8.15 per cent).

To this end, analysts at Vetiva Capital Management Limited said, “The overall growth – the lowest in 12 years – comes as no surprise as we note the myriad of challenges facing the Nigerian economy since the start of the oil price decline. We expect the output decline to deepen in Q2 as these challenges have been amplified over the quarter. We forecast 2016 GDP to decline by 1.65 per cent.

“We expect the positive momentum recorded this week to ease significantly in the coming sessions as investors react to the recently published Q1 2016 GDP figure which showed a contraction in economic activities.

“Whilst we anticipate a cautious trading pattern in the fixed income market as participants await the MPC decision, we foresee a bearish bias as the negative GDP figure weighs on market sentiment.”

The Nigerian equity market continued to move higher last week, officially entering a bull market on Thursday (effectively returning to 20 per cent since its last trough on January 19) as investors maintained interest across key sectors. Overall, the NSE All-Share Index climbed 260 basis points week-on-week putting year-to-date return at -5.28 per cent.

At the fixed income segment, the Treasury bills market was largely bearish last week as investors continued to react to the higher-than-expected April inflation figure and also speculated a possible rate hike in the next MPC meeting, although modest demand resurfaced on towards week close.

Notwithstanding, yields rose by 71bps on average across all maturities. Similarly the bond market traded mostly in the negative territory with modest demand surfacing towards week close. Overall, yields advanced by 24bps week-on-week on the average across maturities.

Analysts at Meristem Securities Limited, in its weekly report, said the positive momentum observed last week might be related to renewed bargain hunting activities by investors following the signing of the 2016 appropriation bill, and the anticipation of a subsequent increase in government spending.

Consequently, the volume of transactions for the week increased by 33.95 per cent, while value traded declined slightly by 9.14 per cent from the previous week.

Market breadth for the week, however, indicated relatively stronger sell sentiments, as it showed 43 losers against 35 gainers.

“The MPC is convening at a time when macroeconomic pressures are mounting, amid persistent badgering from the international community regarding the country’s exchange rate policy.

“It is quite apparent that there are several risks on the horizon — pressured naira (nine per cent decline in one week after months of stability at N320/dollar) unanchored inflation expectations, slowing growth, rising unemployment, slow credit growth — which pose monetary policy dilemmas,” the Meristem analysts stressed.

They added, “In this light, we expect the MPC to make the following decisions: Increase the MPR given the replay of the factors that warranted the latest rate hike and statements by the CBN governor regarding the possibility of same. Although the MPC expressed concerns that the ‘policy rate had become negative in real terms’, we believe the focus was actually on the yield environment on domestic instruments.