ASIGMA Capital Market Report: Q3 2019
Summary
This report is a high-level discussion of equities, fixed-income and foreign exchange markets with a focus on the impact of major global macro-trends on regional and local performance — Uganda being of key interest. It is important to note that the information herein does not constitute investment advice.
Key Pointers:
- South Africa Gov't spending including the Eskom Bailout, downgraded credit rating and decelerated economic growth created risk off sentiment among SA investors.
- USE listed companies released half year financials. Locally listed companies had a “mixed bag” of earnings results. Majority of listed companies forewent interim dividend payouts.
- Stanbic posted 39.5% increase in net profits compared to half year ending 2018. UMEME’s year-on-year earnings remained consistent (0.3% increase in net profits) while Uganda Clays’ and Bank of Baroda’s earnings fell by 157% and 27% respectively.
- Nigerian equity markets continued the Q2 slump, falling by a further 6.7% in Q3.
- The yields on all the US Government securities fell in August after the US President announced further 10% tariffs on $300 billion worth of Chinese imports. The US bond market was rattled when the yield curve briefly inverted.
- African Sovereign Eurobonds saw increased demand in Q3, due to declining yields in advanced markets.
- With the significant reduction in inflation, short-term Government Treasury Yields in Uganda saw a reduction throughout Q3 2019.
- Fitch Ratings Agency’s maintenance of a B+ sovereign credit rating for Uganda and declining yields in advanced markets, gave local and foreign investors more confidence in the economy therefore increasing demand for long-term Government Treasury Yields.
- The US Dollar appreciated against the basket of world currencies despite two Fed rate cuts, worsening trade disputes with China and increasing worries of a global economic recession. This appreciation can be linked to the increase in demand for US Yields as investors anticipated lowering of rates by the European Central Bank over the third quarter due to sluggish growth and low inflation as evidenced in the fall of Germany’s inflation rates during the period.
- The South African Rand has been depreciating over the year due to increasing concerns about its economy as evidenced by the RMB/BER Business Confidence Index's plunge to a 20-year low of 21.
- Within East Africa, the Ugandan and Tanzanian Shilling had a stable quarter against USD whereas the Kenyan Shilling depreciated by 1.1% driven partly by high liquidity.
Equities
Global
Progressively weaker prospects for a breakthrough in the US-China trade talks and lowering of the Fed rate in July and September successively led to increased uncertainty among investors in the advanced markets. In response to growing concerns over slow growth throughout the global economy (the Hang Seng Index, a market cap index of the largest companies on the Hong Kong Stock Exchange, fell by 10.7%), Q3 saw the Federal Reserve decide on two rate cuts. This move was intended to make credit cheaper and increase money in the economy for US businesses and individuals. The S&P 500 reacted by gaining 4.6% over the following 60 days of Q3 as illustrated below.
In addition, European Central Bank lowered interest rates over Q3 in an attempt to stimulate Eurozone economies. There were growing signs of recession in Germany, the EZ powerhouse, whose Purchasing Managers Index (PMI) hit its lowest levels in 10 years indicating falling demand for its renowned manufacturing sector’s outputs.
Regional
South Africa
Among frontier and emerging markets, South Africa saw risk off sentiment among global investors due to concerns about the government’s bailout of Eskom (which announced losses of R20.7 Bn for the financial year 2018/19) and the country’s slow economic growth. Furthermore, a downgrade of its sovereign credit rating outlook from stable to negative by ratings agency, Fitch proved to be detrimental to investor attitude. The downgrade increased overall risk in the market making equity costs increase and therefore lowering share prices as the present value of future cash flows decreased.
Increased and unsustainable government expenditure despite a growing national budget deficit led the Rand to depreciate against the US Dollar. Furthermore, South African equities came under global pressures such as the escalating trade tensions between the US and China as well as uncertainty over Brexit negotiations.
Nigeria
The slump in equity markets in Q2 persisted into Q3 and saw the NSE All Share Index fall by a further 6.7%, reflective of weak investor sentiment. The downward trend was largely due to the Oil and Gas sector whose index fell by 5.9% during this period. This may be partly attributed to the escalating production costs. Despite the small proportion oil and gas takes up in the country’s GDP, it contributes majority of the government’s revenue and foreign exchange earnings.
National
In Uganda, companies listed on the USE announced their earnings for the half year ending June 2019. Year-on-year earnings over the period were mixed with just as many gainers as losers. Stanbic Bank was the biggest performer registering a 39.5% increase in net profits. Other notable earnings movements included a decline of 157% and 27% for Uganda Clays and Bank of Baroda respectively, while UMEME posted a negligible increase in earnings of 0.3%.
Banking Sector Analysis
During Q3, all the local based commercial banks released their half year ending 2019 interim financials. Stanbic Bank saw a 39.5% increase in net profits compared to the half year ending 2018 while DFCU and Bank of Baroda net profits fell by 14% and 27% respectively. All three banks, however, maintained their loan to deposit ratio (LDR) above the industry average of 63.4% indicating more confidence in lending to borrowers. This confidence is exemplified by Stanbic and BOBU growing their customer loan books by 21.6% and 6.4% respectively.
USE Price Gainers and Losers
Fixed Income
Global
Weak economic outlook and low inflation has resulted in an accommodative global monetary policy with several central banks in both developed and emerging markets cutting their rates including the US Federal Reserve, European Central Bank and Reserve Bank of Australia.
The yields on all the US government securities fell in August after the US president announced a further 10% tariffs on $300 billion worth of Chinese imports in August.
The yield spread on the 10-Year treasury note and 3-month treasury bill narrowed throughout the quarter. The 3-Month 10-Year spread is seen as being reflective of investor sentiment about the economy. Investor concerns over the short-term health of the economy increased demand for long term treasury securities, thus increasing their prices and causing the yields to decline more drastically than the short-term securities.
Notably, financial institutions have been short on day-to-day funding available from interbank lending market, which triggered a Fed’s Repo Market bailout from 17th to 24th September, 2019, worth USD 400 Billion. This increased the price of the long-term securities, reducing their yield and thus decreasing the yield spread.
The market was rattled at the end of August and the beginning of September when the yield curve was briefly inverted. The securities started to recover in the middle of September on the backdrop of a new announcement by China’s Ministry of Commerce that after weeks of stalled trade negotiations, a high-level delegation meeting was planned for another round of in-person trade discussions in Washington.
Regional
Regionally, African Sovereign Eurobonds saw increased demand in Q3, due to declining yields in advanced markets as a result of weak economic outlook and reduced central bank rates such as USA (Fed Reserve), Europe (ECB) and Australia (RBA), among other factors.
Notably, in Sub Saharan Africa, South Africa raised $5 billion in a Eurobond sale in order to meet the countries’ fiscal demands, partly driven by the bailout of Eskom. Credit Default Swaps (CDS) prices on Eskom debt rose due to increased demand as a result of sentiment that Eskom will not be able to meet its obligations. The yields on SA 10-year bonds increased along with Eskom CDS (insurance cost for Eskom debt), indicating investors’ need of a return matching the perceived risk generated by the SA gov’t being both a debt guarantor and shareholder in Eskom.
National
Uganda’s Central Bank policy rate in Q3 maintained at 10%. Notably, in October 2019, Bank of Uganda reduced the rate by 100 basis points (to 9%) in order to boost economic activity.
On June 28, 2019 Fitch Ratings Agency maintained B+ sovereign credit rating with a stable outlook for the Republic of Uganda, increasing both local and foreign investors’ confidence in the economy and consequently demand of long-term government securities. Coupled with the reduction in inflation over the period, the 3-month yields dropped and increased the spread between the 3-month and 2-year treasuries throughout the period.
The decline in inflation was in part driven by a relatively stronger shilling, moderation of domestic demand and lower food prices.
Currencies
Global
The US Dollar Index gained value over the quarter despite the Federal Reserve lowering its rates, from 2.5% to 2.25% in August and once again to 2% in September as well as increasing trade tensions with China. This appreciation can be linked to investor expectations of lower central bank rates in the Eurozone as the European Central Bank expressed concerns about the economy’s sluggish growth and persistent low inflation as evidenced by the fall in Germany’s inflation rates over the quarter. This led to an increase in demand for US yields by investors and thus, the US Dollar appreciated by 3% against the Euro over the quarter.
Regional
Regionally, the Zambian Kwacha continued to depreciate due to concerns about the Zambian Government’s ability to manage its debt whereas the Botswana Pula performance reflects the performance of the South African Rand against Special Drawing Rights (SDR).
South Africa’s Rand has been on a depreciating trend against the dollar over the year as worries about the country’s economic growth increased as evidenced by the fall of the South Africa Business Confidence Index to its lowest level in 20 years.
Ugandan and Tanzanian shillings have been relatively stable due to low demand for the dollar by Ugandan importers for the former and match up of Tanzania’s demand by supply for the latter. However, the Kenyan Shilling depreciated by 1.1% against the dollar over the quarter partly in response to increased liquidity in the money market.
USDUGX Prediction (Based on a GBM FX-Rate Model): Range between UGX 3600 to UGX 3750.