Headline inflation in the UK moderated to 0.3% y/y in November (October: 0.7% y/y) according to the Office for National Statistics (ONS). The drop was primarily driven by Clothing and Footwear (-3.6% y/y vs October: 0.2% y/y) which fell by the most since January 2010 due to increased discounting for Black Friday sales. We also highlight that the prices of Food and Non-Alcoholic beverages (-0.6% y/y vs October: 0.6% y/y) plummeted on the back of a decline in the prices of vegetables, meat and sugar confectionery. Compared to a month ago, domestic prices fell by 0.1% while core inflation also remained depressed, declining by 0.1% m/m. We expect that some of the drivers of inflation – particularly the Black Friday discounts – should reverse in the coming months. Consequently, inflation should begin to edge back up. However, price-conscious consumers, excess capacity, limited earnings and curtailed economic activity are likely to limit inflation in the near term at least.

US retail sales fell for the second consecutive month in November, owing to consumers pulling back on festive shopping due to (1) the new COVID-19 cases, and (2) a drop in disposable income. According to the U.S. Commerce Department, retail sales declined by 1.1% m/m (October: -0.1% m/m) – the biggest drop since April (-14.7% m/m). We highlight that sales declined the most at clothing stores (-6.8% m/m) and food services (-4.0% m/m). Similarly, sales at electronics and appliance stores fell by 3.5% m/m while gasoline stations and motor vehicles parts dealers declined by 2.4% m/m and 1.7% m/m, respectively. Compared to a year ago, we note that the retail sales rose at a slower pace of 4.1% (October: 5.5% y/y). The weak data provides a discouraging outlook for 2020 holiday sales as much earlier discounting this year failed to spur sales in the month meaningfully. While a slump in restaurant spending was not a surprise, given Covid-related restrictions, lacklustre online sales could be a bad omen for the remainder of the holiday shopping season.

Global markets

Global stocks remained upbeat in the week as investors were broadly optimistic about a favourable fiscal stimulus deal as well as vaccine developments. Consequently, US (DJIA: +0.9%; S&P: +1.6%) stocks were set to close the week higher. Likewise, in Europe, fresh optimism surrounding the impending Brexit deal, the EU’s plan to approve its first coronavirus vaccine before the yuletide, as well as the Eurozone’s impressive PMI numbers put the STOXX Europe (+1.8%) and FTSE 100 (+0.1%) on track for a weekly gain. Asian (Nikkei 225: +0.4%; SSE: +1.4%) markets ended the week higher mirroring the trend on Wall Street, while Emerging (MSCI EM: +1.2%) and Frontier (MSCI FM: +0.9%) market stocks were on track to close higher following gains in China (+1.4%) and Vietnam (+2.2%), respectively. 

Nigeria

Economy

According to the data released by the National Bureau of Statistics (NBS), capital importation into Nigeria in Q3-20 plummeted by 74.0% y/y to USD1.46 billion (Q2-20: USD1.29 billion), as foreign investors continue to move to limit their exposure to the country amid the low yield investment environment and FX liquidity constraints. Compared to a quarter ago, we note that capital importation increased by 12.9% (Q2-20: -77.9% q/q). We highlight that Foreign Portfolio Investment (FPI) declined by 86.5% y/y to USD407.25 million and we attribute this to the significant decline in fixed income yields, which has led to the increased risk aversion towards naira assets. Similarly, Other Investments (USD639.44 million) declined by 73.3% y/y, while Foreign Direct Investment (FDI) grew to a two-year high at NGN414.79 million despite the macroeconomic headwinds. Going forward, we believe the foreign investors will continue to stay on the sidelines until they see (1) more attractive fixed income yields vs peers, and (2) policy actions that increase their confidence in the stability and liquidity of the naira.   

Inflationary pressures in the domestic economy gathered momentum in November, as headline inflation rose by 66bps to 14.89% y/y (October: 14.23% y/y), representing a 34-month high. The headline index came in below our forecast of 14.94% y/y, due to a lower-than-expected increase in the core basket. On a m/m basis, headline inflation increased by 6bps to 1.60% – tracking significantly above the 2020 average of 1.19%. Meanwhile, food inflation surged by 92bps to 18.30% y/y, reflective of (1) the underwhelming harvest season, (2) the security challenges in the food-producing regions, and (3) the lingering impact of the border closure on the supply gap, which has continued to stoke pressure on consumer staples given weak domestic production capacity. Core inflation however tapered by 9bps despite upward pressures in the Health (+46bps y/y), Transport (+46bps y/y) and HWEGF (+24bps y/y) sub-components. We expect the pressure to persist on both the food and core baskets due to the sustained impact of the poor harvest season, festive induced demand, and energy reforms. Against this backdrop, we look for m/m headline inflation reading of 1.61% in December, translating to 85bps expansion in y/y headline inflation to 15.74%.

Capital Markets

Equities

In line with our expectations, the profit-taking activities were short-lived as the bulls returned strongly to the equities market. The All-Share Index increased by 7.5% w/w, the largest weekly gain in five weeks, and closed at 36,804.75 points, the highest level since 31 July 2018. Notably, foreign investor interest in AIRTELAFRI (+21.0%), and bargain hunting in DANGCEM (+14.5%) and MTNN (+3.2%), following recent selloffs, were the primary drivers of the strong performance. Accordingly, the Month-to-Date and Year-to-Date returns increased to 5.0% and 37.1%, respectively. Performance across sectors was positive with the Insurance (+13.4%) index topping the gainers, followed by the Industrial Goods (+7.7%), Banking (+5.1%), Consumer Goods (+3.1%) and Oil & Gas (+1.3%) indices.

In the short term, we still see scope for expansion in valuation multiples as the hunt for alpha-yielding opportunities, in the face of increasingly negative real returns in the fixed income market, remains positive for stocks. However, we advise investors to take positions in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate expanded by 362bps w/w, to 4.5%, as debits for the FGN Bond auction (NGN30.00billion), CRR, FX and OMO auctions (NGN60.00billion) neutralized the impact of the inflows from OMO maturities (NGN283.00billion) and FX retail refunds.

Next week, we expect the OVN to trend southwards, as inflows from OMO maturities (NGN250.51billion) boost liquidity.

Treasury bills

Trading activity in the Treasury bills secondary market was mixed, as average yield across all instruments was flat at 0.4%. The average yield expanded by 5bps to 0.5% at the OMO segment, as investors positioned for a renewed supply from the CBN at Thursday’s OMO auction. Conversely, the average yield contracted by 5bps to 0.4% at the NTB segment, as market participants covered for lost bids at Wednesday’s NTB PMA. At the PMA, the CBN offered bills worth NGN7.00 billion with allotments of NGN1.50 billion of the 91-day, NGN1.70 billion of the 182-day and NGN3.80 billion of the 364-day – at respective stop rates of 0.0480% (previously 0.01%), 0.5000% (previously 0.60%), and 1.1390% (previously 3.20%). 

We expect the Treasury bills secondary market to remain in a lull, as investors remain wary of the low yields on offer.

Bonds

The Treasury bonds secondary market remained bearish, as investors reacted to the November inflation figure (14.89%) and the higher marginal rates at the bond PMA. Consequently, average yield expanded by 61bps to 5.4%. We note that most of the activity in the bonds space this week occurred at the primary market, where the DMO hosted its last FGN bond auction of the year. At the PMA, the DMO offered instruments worth NGN60.00 billion to investors through re-openings of the 12.50% MAR 2035 (Bid-to-offer: 3.0x; Stop rate: 6.9450%) and 9.80% MAR 2050 (Bid-to-offer: 1.4x; Stop rate: 7.0000%). Total subscription amounted to NGN134.06 billion, with the DMO eventually allotted instruments worth NGN30.00 billion, resulting in a bid-cover ratio of 4.5x. Rates at the auction closed higher by 158bps on average compared to the previous auction.

We expect the Treasury bonds secondary market to continue to trade with bearish sentiments, as investors round up their investing activity for the year.

Foreign exchange 

Nigeria’s FX reserves decreased by USD132.06 million w/w to USD34.84 billion, as outflows for CBN’s interventions across the various FX windows outpaced inflows into the reserves. Across the windows, the naira remained flat against the US dollar at NGN394.00 In the I&E window (YTD: -7.5%), while it weakened by 0.4% to NGN477.00/USD in the parallel market (YTD: -24.1%). In the Forwards market, the naira strengthened in the 1-month (+0.1% to NGN397.81/USD) and 1-year (+0.3% to NGN434.22/USD) contracts, while it weakened in the 3-month (-0.1% to NGN404.99/USD) and 6-month (-0.1% to NGN415.16/USD) contracts. 

Given the expected pressure on the external reserves amid weak portfolio inflows, we expect the naira to depreciate closer to its fair value implied by long-run REER (NGN453.67) in the medium term. Our baseline expectation is that the CBN will depreciate the naira by 5.3% to NGN400/USD in the interbank market and 5.1% to NGN415/USD at the IEW.