Global economy

According to the Bureau of Economic Analysis (BEA), the U.S. economy grew by a record 33.1% on an annualised basis in Q3-20 (Q2-20: -31.4%), slightly better than the 32.0% consensus forecast.  This was primarily driven by consumer spending (+40.7% vs. Q2-20: -33.2%), which contributed 76.3% to the growth in real GDP during the review quarter following the government’s stimulus package (c. USD3 trillion) which supported the unemployed and many businesses during and post lockdown. Similarly, business equipment investment (+70.1%) and residential investment (+59.3%) also grew significantly as the low-interest environment boosted housing and supported business investment. Compared to the corresponding period of last year, we highlight that the U.S economy grew by 7.4% y/y in Q3-20 (Q2-20: -9.0% y/y). We note that the US economy is still 3.5% below the Q4-19 level. Amidst rising COVID-19 infections and diminishing fiscal support, the risks increasingly point to much slower growth Q4-20.

The European Central Bank (ECB), in its latest meeting, kept its key interest rate unchanged at 0.0% and reaffirmed the continuation of its EUR1.35 trillion bond-buying programme. This was done to continue supporting the rebound in economic activities and offset the downward impact of the pandemic on the projected path of inflation (Sep-20: -0.3% y/y). We highlight that the Bank expects the key interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below 2% within its projection horizon. We like that the bank hinted that it may take additional steps to support the economy at its December meeting when new macroeconomic projections will be made available. This is because the new rising number of COVID-19 infection cases have forced the two largest economies in the region to embark on fresh containment measures, thus stalling the recovery process.   

Global markets

Global stocks stumbled as investors were rattled by a new wave of COVID-19 lockdown measures which threatened a benign economic recovery, outweighing better-than-expected Q3-2020 earnings released during the week. In the US, the DJIA (-5.9%) and S&P (-4.5%) were on track for another weekly loss, as earnings-driven rebound on Thursday which waned on Friday failed to wipe off losses accumulated earlier in the week due to coronavirus fears and election uncertainty. In Europe, the STOXX Europe (-6.3%) and FTSE 100 (-5.4%) were on track to close the week in the red, as the tightening of restrictions on economic activities in Germany and France sparked sell-offs despite better than expected growth figures for the bloc economy in the third quarter. Asian (Nikkei 225: -2.3%; SSE: -1.6%) markets were poised to end the week in the negative territory as investor sentiment was laced with a tapestry of altering global economic outlooks and jitters over the U.S presidential election. Emerging market (MSCI EM: -2.7%) stocks were broadly bearish following losses in Brazil (-4.6%) due to COVID concerns while Frontier markets (MSCI FM: -0.5%) were down following losses in Vietnam (-3.7%).  

Nigeria

Economy

Nigeria’s PMI remained in the contractionary territory for the sixth consecutive month, as the economy continues to grapple with the lingering impact of the COVID-19 pandemic. The manufacturing PMI for October improved to 49.4 points (September: 46.9 points) while the non-manufacturing PMI rose to 46.8 points (September: 41.9 points). Business activity index which is an indicator of non-manufacturing business activities, remained in the contractionary region (48.7 points vs. September: 43.7 points) while new orders (+4.8 points to 51.2 points) leapt into the expansionary zone for the first time since March (52.3 points). We highlight that suppliers’ delivery time (-1.7 points to 51.8 points) was affected by the feedback effect arising from the nationwide #EndSARS protests. Elsewhere, employment level (+1.9 points to 46.0 points) and raw materials inventories (+3.2 points to 46.2 points) remained in the contractionary territory. Despite the improvement in readings in October, the sub-50 reading implies the sector is yet to return to pre-pandemic levels. With the lingering liquidity issues in the FX market coupled with elevated inflationary pressures, we expect the recovery in the manufacturing to be elongated. 

Based on the recent data released by NSE on Domestic & Foreign Portfolio participation for September, total value traded grew 42.9% m/m to NGN135.00 billion in September 2020 from NGN94.50 billion in August 2020. This was largely driven by transactions executed by domestic investors (+71.1% m/m to N94.90 billion) compared to foreign investors (+2.7% m/m to N40.10 billion), suggesting that gains in the month (+6.0%) were predominantly driven by domestic investors. Notably, domestic investors retained dominance of trading activities on the local bourse as their share of total transactions in September stood at 70.3% (YTD: 61.8%) while foreign investors’ share of total transactions was 29.7% (YTD; 38.2%). Though non-bank domestic investors received the last of their OMO maturities at the end of October, we expect them to continue to dictate the tempo of activities in the local bourse, as positioning for FY 2020 dividends will spur portfolio rebalancing activities amid the depressed yield environment.   

Capital markets

Equities

The bullish momentum in the local bourse switched into a higher gear as investors hunted for bargains following broadly positive corporate earnings released during the week. Activities recovered from the two-week slowdown, as the value and volume of trades grew 20.0% w/w and 26.8% w/w respectively. Accordingly, the All-Share Index broke through 30,000 psychological mark, a level last seen in June 2019, and closed at 30,530.69 points, the highest level in 15 months. Notably, investors’ interest in NESTLE (+21.0%), BUACEMENT (+11.3%), GUARANTY (+6.7%), DANGCEM (+5.9%) and STANBIC (+5.7%) drove the benchmark index 6.4% higher, its sixth-consecutive weekly gain. The MTD and YTD return for the index grew to 13.8% and 13.7%, respectively. Performance across sectors was an all-round positive, as the Consumer Goods (+12.2%) index topped the gainers’ chart trailed by the Banking (+8.0%), Industrial (+7.6%), Oil and Gas (+6.2%) and Insurance (+5.6%) indices.      

We expect the direction of market performance to be shaped by the ongoing Q3 earnings season as investors look for evidence that the relaxation of lockdown has provided a tailwind for corporate earnings. With yields on risk-free assets declining to sub 1% levels, we believe it is increasingly compelling for risk-averse investors to rotate their portfolio towards equities. Hence, we expect the bulls to maintain dominance in the week ahead.

Money market and fixed income

Money market

The overnight (OVN) rate ended the week lower, as it crashed by 8.50 ppts w/w, to 1.3%. The contraction was underpinned by inflows into the system from OMO maturities (NGN336.09 billion) and FGN bond coupon payments (NGN160.32 billion) which subdued outflows for CBN’s weekly OMO and FX auctions.

Next week, we expect the OVN rate to expand, as the NGN224.45 billion expected from OMO maturities may not be sufficient to offset funding pressure in the week.

Treasury bills

Just as we predicted last week, activities in the Treasury bills secondary market slowed due to the rock bottom yields in the market, and as market participants shifted their focus to the NTB PMA that held on Wednesday. Consequently, the average yield across all instruments expanded by 5bps to 0.5%. Across the segments, the average yield on instruments in the OMO market was flat at 0.5%, and expanded by 12bps to 0.5% at the NTB secondary market, as a result of the preceding factors. At Wednesday’s PMA, the CBN offered bills worth NGN154.38 billion with allotments of NGN7.50 billion of the 91-day, NGN6.00 billion of the 182-day and NGN140.87 billion of the 364-day – at respective stop rates of 0.34% (previously 1.00%), 0.50% (previously 1.00%), and 0.98% (previously 2.00%).

We expect investors to remain wary of T-bills at this level, thus we expect yields to remain rangebound, as demand for instruments in the space slows.

Bonds

The Treasury bonds secondary market remained bullish, as investors re-invested the excess liquidity from OMO maturities and FGN bond coupons. Liquidity in the market was thin as very few sellers were willing to take profit. Consequently, the average yield across instruments contracted by 16bps to 4.1%. Across the benchmark curve, most investors were keen on short (-31bps) tenor instruments, as they bought up the JAN-2022 (-78bps) and APR-2023 (-55bps) bonds. Further down the curve, average yield also declined at the mid (-6bps) and long (-13bps) segments, as buying interests were recorded on the FEB-2028 (-56bps) and MAR-2036 (-25bps) bonds, respectively.

We expect trading in the Treasury bonds secondary market to remain bullish, as FGN bonds represent the only preferable alternative for fixed income investing.

Foreign exchange

Nigeria’s FX reserves increased by USD16.36 million w/w to USD35.69 billion, as inflows into the reserves offset outflows for CBN’s interventions across the various FX windows. Across the windows, the naira closed flat against the US dollar at NGN386.00 at the I&E window (YTD: -5.6%), while it strengthened by 0.2% to NGN462.00/USD in the parallel market (YTD: -21.6%). In the Forwards market, the naira appreciated across the 1-month (+0.1% to NGN386.25/USD), 3-month (+0.2% to NGN386.69/USD), 6-month (+0.2% to NGN388.33/USD) and 1-year (+0.7% to NGN392.74/USD) contracts. 

Going forward, we expect CBN’s FX management strategies to continue supporting the naira at its current level at the official and I&E windows. However, we believe the parallel market rate will remain volatile and continue to trade above the CBN’s Relative Purchasing Power Parity (RPPP) of NGN433.64/USD and our REER fair value estimate of NGN453.67/USD at the current level of intervention in the FX market.