Factory activities in the U.S. expanded for the eighth consecutive month as the Manufacturing PMI rose to a two-and-a-half-year high despite the continued surge in new COVID-19 infections. According to the Institute for Supply Management (ISM) PMI survey, the manufacturing PMI printed 60.7 points in December (November: 57.5 points). Four of the five sub-indices contributed to the expansion in the broader index suggesting that the rekindling of restrictive measures to curb the second wave had little impact on the health of the manufacturing sector. Notably, improvements were seen in the production level (+4.0 points to 64.8 points), new orders (+10.4 points to 67.9 points) and employment (+3.1 points to 51.5 points) indices. Based on (1) the encouraging news on COVID-19 vaccines, (2) the recently passed stimulus package, and (3) relative political stability following Trump’s commitment to a smooth transition, we understand that there has been a high level of optimism among manufacturers. Based on the aforementioned, we expect a continued recovery in the U.S. economy.

In our Weekly Economic and Market Commentary (9th October 2020), we expressed that the level of spending in the Euro Area in August 2020 was unlikely to be sustained beyond a few months, given the uptrend in unemployment and consumer confidence at historic low levels. True to our prognosis, retail sales in the Euro Area declined by 2.9% y/y in November (October: +4.2% y/y) according to Eurostat. This was due to COVID-19 containment measures re-introduced by several countries in the region to limit the spread of the second wave of the pandemic. Compared to the previous month, the volume of retail trade fell by 6.1% (October: +1.4% m/m) – the biggest decline since April. By category, volume of retail trade declined across automotive fuels (-10.6% m/m), non-food products (-8.9% m/m) and food, drinks and tobacco (-1.7% m/m). We understand that countries in the region are contemplating stricter containment measures over fears that the new rising COVID-19 infections could overwhelm healthcare systems and unwind the gains accumulated since the partial re-opening of the economy in May 2020. Accordingly, we expect retail sales to remain weak in the near term until the administration of vaccine gains foothold.

Global markets

Global stocks kicked off the first trading week of 2021 on a positive note, as investor sentiment was buoyed by prospects of a smooth political agenda and additional stimulus by the incoming Biden administration. Consequently, US (DJIA: +1.4%; S&P: +1.3%) stocks were set to close the week in the green after crossing uncharted territories. In Europe, the STOXX Europe (+2.4%) and FTSE 100 (+6.1%) were on course for a strong start to the year, as growth-sensitive cyclical stocks rallied on hopes for stronger economic recovery. Asian (Nikkei 225: +2.5%; SSE: +2.8%) shares were on course to end the week with robust gains, as investors reacted to the news in U.S. Emerging markets (MSCI EM: +5.0%) stocks recorded robust gains driven largely by gains in China (+2.8%) while Frontier (MSCI FM: -0.2%) market stocks were on track to close lower following losses in Kuwait (-0.3%).

Nigeria

Economy   

Faced with the ravaging impact of COVID-19 on oil and non-oil revenue, the government has continued to grapple with a rising fiscal deficit in the face of increasing expenditure to limit the impact of the pandemic on the economy. Based on the latest data released by the Debt Management Office (DMO), Nigeria’s public debt stock grew by 3.91% q/q (+NGN1.21 trillion) to NGN32.22 trillion in Q3-20. This was 13.2% below our estimate of NGN32.71 trillion. Aside from the need to meet revenue shortfalls and respond to the COVID-19 pandemic, we note that the issuance of Promissory Notes by the FGN has also contributed to the growth in the public debt stock. We estimate that public debt stock would have increased by 2.6% q/q to c. NGN33.05 trillion as at the end of Q4-20 as the FGN and State Governments continued to prioritize spending amid the revenue shortfall. Considering that revenues are still reeling from the impact of the pandemic, we think there is the urgent need for government to implement fiscal consolidation measures to avoid further build-up of debt that will weaken debt sustainability metrics. 

In what could be regarded as a dire need on the part of the government for cheap sources of financing to plug the widening fiscal deficits, the recently signed Finance Act 2020 stipulates that the Federal Government (FG) can now borrow unclaimed dividends and dormant account balances of up to six years in the country. According to the Act, the funds will be transferred to the Unclaimed Funds Trust Fund and shall be a special debt owed by the FG to the shareholders; the DMO is saddled with the responsibility of managing the fund for payment of claims and the accompanying compensation for accrued interest. We understand that after 12 years, unclaimed dividends not claimed shall lapse to the FG and be transferred from the Unclaimed Dividends Trust Fund to the Federation Account in form of Federation revenue. This suggests that the owners of such unclaimed dividends and dormant balances will have no right on the funds which negates the provisions of the constitution.

Equities

The local bourse ended the first trading week of 2021 in the red, as losses recorded on the second and last trading days eroded gains from the other trading days of the week. Accordingly, the All-Share Index declined by 0.4% w/w to close at 40,120.22 points. Activity levels were mixed, as trading volumes surged by 87.9% w/w while value traded declined by 23.5% w/w. Notably, selloffs in DANGCEM (-8.1%), GUINNESS (-5.0%), UNILEVER (-5.0%), and MTNN (-2.8%) drove the weekly loss. Accordingly, the YTD return stood at -0.4%. The performances across the sectors were broadly positive, save for the Industrial Goods (-0.6%) index; the Oil and Gas (+13.2%), Insurance (+9.5%), Banking (+3.2%) and Consumer Goods (+2.6%) closed positive.

In the short term, we believe positioning for FY 2020 dividends will continue to support buying activity in the market amid negative real returns in the fixed income market even as we do not rule out intermittent profit-taking. 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 850bps w/w, to 9.3% as outflows for CRR debits (NGN600.00 billion) and CBN’s weekly OMO (NGN60.00 billion) and FX auctions offset inflows from OMO maturities (NGN438.74 billion).

In the coming week, inflows from OMO maturities (NGN211.25 billion) and FGN bond coupon payments (NGN40.68 billion) are expected to hit the system. Consequently, we expect the OVN rate to trend southwards.

Treasury bills

The first trading week of the year in the Treasury bills secondary market was bearish, as investors remained apprehensive on the direction of monetary policy and the interest rate environment. Thus, average yield across all instruments expanded by 13bps to 0.7%. Across the market segments, average yield expanded by 27bps to 0.6% at the OMO segment, as participants were more interested in the fresh supply from the primary market. At the OMO auction, the CBN offered instruments worth NGN60.00 billion with allotments of NGN10.00 billion of the 96-day, NGN10.00 billion of the 180-day and NGN40.00 billion of the 362-day – at respective stop rates of 1.51% (previously 1.56%), 4.34% (previously 4.39%), and 5.74% (previously 5.80%). Elsewhere, retail demand spurred sentiments at the NTB segment, as average yield declined by 4bps to 0.4%.

We expect reduced activity in the T-bills secondary market as current yields on offer remain unattractive, and as market participants anticipate higher yields at next week’s NTB PMA; the CBN is expected to offer NGN232.36 billion worth of instruments.

Bonds

The Treasury bonds secondary market opened the year with bearish trading, as the lack of clarity on the direction of yields in the short term weakened demand. Consequently, the average yield expanded by 32bps to 6.1%. Across the benchmark curve, most of the sell-offs occurred at the tail end of the curve, highlighting investors’ uncertainty in the market. Precisely, average yield at the long end expanded by 48bps, following major profit-taking on the MAR-2035 (+94bps) and APR-2037 (+79bps) bonds. Average yield also expanded at the short (+2bps) and mid (+35bps) segments as investors sold off the MAR-2024 (+13bps) and FEB-2028 (+85bps) instruments, respectively.

We expect FGN bond yields to sustain trading at current yield levels ahead of the publication of the FGN bond issuance calendar for Q1-21 by the DMO.

Foreign exchange
 
Nigeria’s FX reserves maintained its ascent, as it grew by USD341.74 million w/w to USD35.72 billion (5th January 2021). Across the FX windows, the naira strengthened against the US dollar by 4.3% w/w, to NGN393.50/USD at the I&E window, and weakened by 0.4% to NGN472.00/USD in the parallel market. In the Forwards market, the rates appreciated on the 1-month (+5.2% to NGN397.97/USD), 3-month (+6.2% to NGN403.33/USD), 6-month (+6.7% to NGN417.92/USD) and 1-year (+9.6% to NGN435.87/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.