February 2, 2021/Coronation Research

Last week the Monetary Policy Council of the Central Bank of Nigeria (CBN) concluded its two-day meeting by leaving its key policy rate unchanged at 11.50%.

After two cuts during 2020 that demonstrated the CBN’s resolve to deal with recession, last week’s announcement was not a surprise. And, as expected, the official communique had plenty to say about inflation which reached 15.75% year-on-year in December.

In our minds there is no doubt that inflation is damaging businesses and households: the key question is what is driving it and what can be done to alter its course over the coming months.

FX
Last week the exchange rate in the Investors and Exporters Window (I&E Window) strengthen by 0.06% to N393.45/US$1. In the parallel, or street market, the Naira depreciated by 0.63% to close last week at N480.00/US$1. The cash parallel market remains approximately 20% lower than the I&E Window and NAFEX rates. A recovery in crude prices to pre-pandemic levels could help the CBN keep its grip on the currency, in our view, but with the World Bank withholding a $1.5bn loan until the central bank moves ahead with currency reform, we think the current situation will persist for some time, with the currency likely to remain under pressure.

Bonds & T-bills
Last week, the secondary market yield for a Federal Government of Nigeria Naira-denominated bond with 10 years to maturity rose by 70 basis points (bps) to 9.08% and at 7 years rose by 74bps to 8.72%, while at 3 years the yield rose by 190bps to 6.25%. The annualised yield on a 272-day T-bill rose by 97bps to 1.77%, while the yield on a 270-day OMO bill rose by 93bps to 2.32%. These trends marked a continuation of the bearish trend which we have seen all year, though the market was calm towards the end of the week with demand evident for selected issues. While the coming week may be one of consolidation after such strong moves last week, we nevertheless think that the bearish trend is likely to persist this month.

Oil
The price of Brent crude remained steady last week, closing at US$55.88/bbl, a 7.88% increase year-to-date. The average price to year-to-date is US$55.31/bbl, 27.97% higher than the average of US$43.22/bbl in 2020.

A Reuters poll showed late on Friday that OPEC’s (the Organization of the Petroleum Exporting Countries) crude production increased by 160,000 bpd in January. This was a bullish result, given that in December OPEC+ (i.e. OPEC plus Russia) had decided to increase production by 500,000 bpd in January, of which 300,000bpd was due to come from OPEC itself.

News of vaccination programs getting underway in numerous counties (particularly in the developed world) has been countered by reports of the new Covid-19 variants, but the overall outlook for global industrial output recovering this year remains good.

There is likely to be no policy change following the modest increase in January production as OPEC+ has decided to keep output unchanged in February and March. Our view is that Brent is likely to trade in the US$45.00/bbl and US$60.00/bbl range for the first half of this year, and quite likely towards the top of this range.

Equities
The Nigerian Stock Exchange All-Share Index (NSE-ASI) rose by 3.44% last week with a gain of 5.32% year-to-date. Lafarge Africa(+15.36%), MRS (+9.82%), and Airtel Africa (+9.18%) closed positive last week while Cadbury Nigeria (-9.74%), Seplat (-9.26%) and International Breweries (- 8.95%) closed negative. The equities market was bullish during the week, we expect the market to sustain the momentum as investor sentiment remains positive, despite the rapid rise in market interest rates. The Model Equity Portfolio will be back next week.

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