February 7, 2020/Cordros Report
This week, the Chinese government announced plans to halve tariffs on c.USD75.00 billion worth US imports as part of its trade truce with Washington, as officials look to calm a market unnerved by the deadly Coronavirus outbreak. The adjustment will take effect from 14 February, with the US also expected to roll back some tariffs on Chinese goods. Specifically, duties on US crude will be reduced by 250bps to 2.5%, while the tariff on other goods (mostly agricultural products) will also be reduced by 2.5%. In our view, this reflects a goodwill gesture and shows a commitment towards de-escalating trade tensions, which may lead to improved global growth in 2020.
In the U.S this week, manufacturing and industrial activities data was released, and indicated improvement in operating conditions in January, as manufacturing PMI expanded by 3.1 points to 50.9 – the first expansion in 6-month. The improved reading was supported by strong demand witnessed locally and internationally, as new orders and export orders increased by 4.4 points and 6.0 points respectively, driving production levels higher by +10.0 points. Overall, sentiment this month is moderately positive, portending possible growth upside and prospect in the near-term.
Global market
Global stocks were set to record the best weekly performance since June 2019 after U.S. President Donald Trump was acquitted in his impeachment trial, and China cut tariffs on U.S. imports and provided aid to businesses reeling from a virus outbreak. Consequently, US (DJIA: +4.0%; S&P: +3.7%) and European (Euro Stoxx: +4.1%; FTSE 100: +2.3%) shares rose week-on-week. Asian markets were mixed as Japanese (Nikkei 225: +2.7%) stocks rose on the tariff news, however, Chinese (CSI 300: -2.6%) stocks recorded their worst weekly loss in nine months after a heavy selloff on Monday on concerns about the economic impact of the coronavirus. Emerging markets (MSCI EM: +3.8%) were boosted by a positive showing in South Korea (+4.4%) while frontier markets (MSCI FM: -0.5%) were down following losses in Morocco (-3.0%) and Kuwait (-0.7%).
Nigeria
Economy
In line with our expectations, economic activities in Nigeria retraced slightly in January 2020, relative to the festive-induced demand acceleration witnessed in December 2019. Precisely, while the composite PMI remained resolute in the expansionary region (59.4 points), it grew at a slower pace (-2.1 points) when compared to the prior month. The moderation stemmed from both the manufacturing PMI (-1.6 points to 59.2) and non-manufacturing PMI (-2.5 points to 59.6). With the moderation in the new orders (-1.8 points) and employment levels (-0.7 points), we were not surprised that production (-2.2 points) and inventory (-1.7 points) levels grew at slower rates. For us, the institution of the new VAT regime (+50.0% to 7.5%), together with persistent upward inflationary pressure (December: 11.98% y/y) are key economic headwinds going forward. Nonetheless, the combination of low-interest-rate environment and higher minimum wage should limit the impact, thus, leaving the composite PMI in the expansionary territory.
The wave of capital repatriation by foreign investors and the resultant drawdown on Nigeria’s foreign reserves has been sustained into early 2020. However, relative to December 2019, the downtrend has been far less steep. That said, our currency stability concerns have shifted from the sell-offs of naira assets to crude oil prices. The recent outbreak of the deadly coronavirus continues to send panic through global markets, as the Brent price slumped by 20.2% YTD to USD54.93pb (6 February 2019). For us, an extended period and/or a worsening of the virus outbreak should force the CBN to rethink its FX management strategy. Thus, we adopted the worst-case scenario of USD50 per barrel. Based on this, FX reserves would decline to USD30.36 billion by H1-20. Farther out, the blend of tighter cash inflows, faster pace of capital repatriation, and possible resurgence of speculative attacks on the naira will force the CBN to throw in the towel in our opinion.
Capital markets
Equities
In line with our expectations, sentiments remained weak in the Nigerian equities market as profit-taking activities dominated. Consequently, the All-Share Index declined by 2.7%, equaling last week’s loss, to settle the YTD and MTD returns at +4.6% and -1.6%, respectively. This was precipitated by selloffs in market heavyweights DANGCEM (-5.5%), BUACEMENT (-4.3%), and MTNN (-2.2%). Analysing by sectors, the Industrial Goods (-2.2%), Oil & Gas (-3.0%), Consumer Goods (-2.2%), and Banking (-1.5%) indices all declined, while the Insurance (+0.2%) index was the sole gainer.
In our view, the trend witnessed this week is likely to persist, as the dual impacts of the weakening sentiment and mixed earnings performances during earnings season are expected to pressure market returns. Nonetheless, we advise investors to take positions in fundamentally justified stocks.
Money market and fixed income
Money market
The overnight (OVN) rate declined by 9.0ppts, w/w, to 6.33%. The rate was pressured upwards at the start of the week following outflows for the FX auction and CRR debits (c.NGN309.00 billion). However, inflows from OMO maturities (NGN349.02 billion) towards the end of the week boosted system liquidity and drove the rate southwards.
In the coming week, inflows from NTB (NGN58.43 billion), OMO (NGN440.90 billion) maturities, FGN bond maturities (NGN606.43 billion) and coupon payments (NGN47.14 billion) will hit the system on the 13th of February. Consequently, we expect the overnight lending rate to contract in the coming week due to the higher liquidity position.
Treasury bills
The Treasury bills market was bearish as investors remained unimpressed by the unattractive NTB yields. Consequently, the apathy led to the average yield in the NTB segment of the market expanding by 12bps to 3.86% as market players looked towards higher yielding corporate issuances and promissory notes. Similarly, the average yield in the OMO segment of the market expanded by 33bps to 13.53%. This led to the average yield across instruments in both markets expanding by 33bps to 10.47%. Also, there was an OMO auction held during the week, during which the CBN fully allotted instruments worth NGN128.20 billion – NGN20.40 billion of the 180DTM, and NGN107.80 billion of the 362DTM instruments at respective stop rates of 11.60% and 13.05%. However, ‘no sale’ was recorded on the 82-day bill.
We expect reduced activity in this market as investors anticipate higher yields from the NTB primary market auction in the coming week, with NGN154.38 billion worth of instruments on offer across all tenors of the market.
Bonds
The FGN bond secondary market halted its two-week bullish run as the impact of the CRR debits early in the week offset late liquidity driven demand. Consequently, the average yield across instruments expanded by 19bps to close at 9.8%. Yields across the short (+38bps) and long (+11bps) segments of the curve all expanded due to sell-offs of the FEB-2020 (+185bps) and JUL-2034 (+18bps) bonds, respectively while the mid (-17bps) segment contracted due to buying interests in the MAR-2027 (-14bps) bond.
We expect an uptick in demand next week as market players look to invest incoming maturities from OMO bills and the FEB-2020 bond.
Foreign exchange
Nigeria’s FX reserves declined by USD155.21 million WTD to USD37.09 billion (2nd Feb 2019) as the CBN maintained its support for the currency via its weekly FX interventions, through which USD210.00 million was sold across the different segments of the FX market – USD100.00 million to the Wholesale segment, USD55.00 million to the SMEs segment, and USD55.00 million to the Invisibles segment. Despite this, the naira weakened by 0.1% w/w at the I&E window to NGN364.37/USD but closed flat in the parallel market. Also, in the forwards market, the naira weakened across the 1-month (-0.1% to NGN366.72/USD) and 1- year (0.2% to NGN396.14/USD) contracts, while the rates on the 3-month (+0.1% to NGN370.83/USD) and 6-month (+1.0% to NGN374.14/USD) contracts appreciated.
With the outbreak of coronavirus exerting downward pressure on crude oil prices, possible weakened oil inflows and higher repatriation of capital have heightened fears regarding the possibility of a currency devaluation. However, our estimate suggests that the CBN will be able to sustain its naira defense through H1-20, at least.