In line with market expectations, the U.S. Federal Open Market Committee (FOMC) elected to leave the key interest rate unchanged at near-zero (0%-0.25%) level. The Committee also decided to maintain its Asset Purchase Programme at USD120.00 billion per month until (1) the labour market conditions reach the maximum employment level, and (2) long term inflation converges around the Fed’s target of 2.0%. Meanwhile, the FOMC now expects the growth trajectory to be dependent on the pattern of virus cases and the progress in vaccinations. The dovish tone expressed by the Committee signals worries about the slowdown in the pace of economic recovery given the second wave of the pandemic. However, it expressed optimism that vaccines have reduced the medium-term risks to the outlook. Although inflation is expected to rise above 2.0% in the near term given the low base from 2020, we think it would be temporal. Consequently, we do not envisage a change in monetary policy decisions of the FOMC in 2021.

Reflective of the impact of rising cases of COVID-19 on consumer spending, the U.S. economy grew slower by 4.0% on an annualized basis in Q4-20 (Q3-20: 33.4%) according to the Bureau of Economic Analysis (BEA). This was primarily driven by relatively modest increases in residential investment (33.5% q/q vs. Q3-20: 63.0% q/q), business investment (13.8% q/q vs. Q3-20: 22.9% q/q) and personal consumption expenditure (2.5% q/q vs. Q3-20: 41.0% q/q) – all of which partly offset the decline in government expenditure (-1.2% q/q vs. Q3-20: -4.8% q/q). On a year-on-year basis, the economy contracted by 2.5% y/y in Q4-20 (Q3-20: -2.9% y/y). Accordingly, 2020FY GDP declined by 3.5% (2019FY: +2.2%) – the worst performance since at least the end of World War II. Following the continued surge in COVID-19 cases, we expect the weak growth to persist in the short term given the additional restrictions on activities. We, however, expect growth to rebound over the medium term as vaccine distribution gains foothold in addition to the additional stimulus packages rolled out by the Biden administration.

Global markets

Global stocks tumbled as lower-than-expected earnings from tech stocks and concerns about stretched valuations due to a retail trading frenzy that gripped Wall Street dampened appetite for risky assets. Consequently, US (DJIA: -1.3%; S&P: -1.4%) stocks retreated from the highs attained in the prior week. In Europe, the STOXX Europe (-2.4%) and FTSE 100 (-3.6%) were on track for their worst week since October 2020, as subdued progress on vaccination and worries over the potential impact of lockdown measures led to selloffs among investors. In Asia, the Nikkei 225 (-3.4%) and SSE (-3.4%) were on course for weekly losses, as sentiments were dampened by the rout on Wall Street. Emerging markets (MSCI EM: -5.5%) stocks were dragged by losses in China (-3.4%) while Frontier (MSCI FM: +0.8%) market stocks diverged from the bearish trend across global markets and were on track for their fourth consecutive weekly gain, buoyed by robust gains in Kuwait (+1.3%) and Nigeria (+3.4%).  

Nigeria

Economy

In line with market expectations, the Monetary Policy Committee (MPC) of the CBN voted unanimously voted to hold the MPR at 11.5%, alongside other monetary policy variables, with no material changes to the Committee’s November narrative. The MPC now expects the economy to recover from the recession in Q1-21 but did not provide a timeline on when it expects inflation to moderate. The tone of the Committee was more dovish than we expected suggesting monetary policy will remain broadly accommodative in the near term. In our view, the second wave of the pandemic, at a time when the economy is still in a recession, was the key driver behind the dovish theme that characterised the outcome of the meeting. However, we expect the Committee’s continued lack of clear-cut guidance on the large spread between the parallel market and NAFEX exchange rates to continue to dampen activities in the manufacturing sector. 

According to the National Bureau of Statistics (NBS), the total amount of VAT generated increased by 47.4% y/y to NGN454.69 billion in Q4-20 (Q4-19: NGN308.48 billion). Accordingly, the VAT generated in 2020FY totalled NGN1.53 trillion – a 29.3% y/y increase. In our view, the strong y/y growth was largely due to the hike in the VAT rate to 7.5% in February 2020. Reflective of the impact of festive induced spending, VAT generated increased by 7.1% q/q in Q4-20. When compared to the 2020FY budget, we note that the actual VAT generated was 24.6% below the collection target of NGN2.03 trillion – reflective of the dual impact of elevated inflationary pressure and the impact of the pandemic on consumer spending. Looking ahead, we expect the persistent inflationary pressure and weak output growth to limit consumption expenditure, thereby dampening VAT collections.

Capital markets

Equities

In line with our expectation, positive sentiments returned to the local bourse this week, as the gradual release of corporate earnings bolstered buying interests in dividend-paying stocks. This was further strengthened by the outcome of the MPC meeting which reinforced the theme of “lower for longer” yields in the FI market. Accordingly, the All-Share Index jumped by 3.4% w/w to close at 42,412.66 points – the highest level since March 2018. Consequently, the YTD return improved to 5.3%. Activity levels were mixed, as trading volumes declined by 29.1% w/w while value traded rose by 9.0% w/w. Notably, buying interest in WAPCO (+15.4%), AIRTELAFRI (+9.2%) and MTNN (+6.5%) drove the weekly gain. Sectoral performances were broadly positive. Save for the Oil and Gas (-7.2%) index that declined, the Banking (+3.3%), Insurance (+1.7%), Industrial Goods (+1.4%) and Consumer Goods (+1.3%) indices posted gains.     

With the outcome of the MPC meeting aligning with market expectations amid negative real returns in the fixed income market, we expect risk-averse investors to recalibrate their portfolio towards fundamentally sound stocks with attractive dividend yields. However, we advise investors to take positions in only fundamentally justified stocks as the fragility of the macroeconomic environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate expanded by 50bps w/w, to 11.0%, as outflows for the FG’s statutory remittances (c. NGN200.00 billion) and CBN’s weekly FX and OMO (NGN145.00 billion) auction debits outweighed inflows from OMO maturities (NGN190.15 billion) and FGN bond coupon payments (NGN87.29 billion).

We expect the OVN to return to single-digit territory in the coming week, following inflows from OMO maturities (NGN190.15 billion).

Treasury bills

In line with our expectation, bearish sentiments pervaded the Treasury bills secondary market as average yield across all instruments expanded by 63bps to 1.4%. The market was pressured by the tight liquidity in the system, as participants sold off on positions to fund their cash obligations. Furthermore, trading bias was tilted to the negative following a couple of mismatched trades from traders who remained firmly offered on shorter-dated bills against the longest dated instruments that buyers preferred. At the OMO segment, offshore investors continued to sell off bills in anticipation of higher yields at the primary market. Thus, the average yield in the segment expanded by 74bps to 1.7%. In the same vein, average yield at the NTB segment expanded by 53bps to 1.1%, as the market reacted to the outcome of the NTB auction on Wednesday. At the auction, the CBN offered bills worth NGN187.29 billion with allotments of NGN11.39 billion of the 91-day, NGN47.48 billion of the 182-day and NGN123.11 billion of the 364-day – at respective stop rates of 0.55% (previously 0.50%), 1.30% (previously 1.00%), and 2.00% (previously 1.50%).

Amidst the persisting bearish sentiments, we expect the gradual uptick in secondary market yields to continue as investors clamour for higher yields in the space.

Bonds

Activities in the Treasury bonds secondary market were bearish, as investors (1) traded cautiously in keen expectation of the MPC’s decision and (2) became wary of an anticipated rise in yields due to the higher stop rates at the NTB auction. Consequently, average yield expanded by 97bps to 8.1%. Across the benchmark curve, there were major selloffs in the APR-2023 (+241bps), FEB-2028 (+74bps) and MAR-2050 (+171bps) bonds, which caused expansions in the average yield across the short (+100bps), mid (+63bps) and long (+131bps) segments.

In the coming week, we expect the strong profit-taking witnessed since the start of the year to subside, following the MPC’s dovish bias. In the longer term, we still expect yields in the bonds secondary market to temper at least through the first quarter of the year, given the limited supply amidst significant inflows from OMO maturities (c. NGN2.34 trillion) and FGN bond coupon payments (c. NGN500.00 billion).

Foreign exchange

Nigeria’s FX reserves recorded its first weekly decline of the year, as it dipped by USD113.39 million w/w to USD36.40 billion (27th January 2021). Across the FX windows, the naira was flat against the US dollar at NGN394.13/USD at the I&E window but weakened by 0.6% to NGN480.00/USD in the parallel market. At the I&E window, total turnover (as at 28th January 2021) decreased by 9.5% WTD to USD237.42 million, with most trades consummated within the NGN385.00 – 396.00/USD band. In the Forwards market, the rate weakened across the 1-month (-0.4% to NGN399.85/USD) contract, 3-month (-0.4% to NGN407.41/USD), 6-month (-0.6% to NGN418.73/USD) and 1-year (-0.3% to NGN436.65/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 the 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.