Factory activities in the U.S. expanded slowly in January 2021, after rising to a two-and-a-half-year high in December amid the continued surge in new COVID-19 infections. According to the Institute for Supply Management (ISM) PMI survey, manufacturing PMI moderated to 58.7 points in January (December: 60.5 points) driven by the decline in new orders index to 61.1 points (December: 67.5 points) and production index to 60.7 points (December: 64.7 points). We believe the weakness in the manufacturing sector is reflective of the impact of the rising number of COVID-19 infections, resulting in absenteeism and short-term shutdowns to sanitize facilities. Meanwhile, the employment index (52.6 points vs. December: 51.7 points) rose to the highest level since June 2019, indicating that companies are generally hiring rather than reducing their workforce. Looking ahead, we align with the views expressed by the Chairman of the ISM Manufacturing Business Survey Committee that until the rising number of COVID-19 infections abates, the labour market difficulties will continue to restrict the expansion in the manufacturing sector.

Preliminary flash estimates from the Eurostat showed that the GDP for the Euro Area contracted by 5.1% y/y in Q4-20 compared to a decline of 4.3% y/y recorded in Q3-20. This was due to the renewed surge in COVID-19 infections as well as the reeling impact of the containment measures on economic activities. Accordingly, economic activities fell by 6.8% in 2020FY (2019FY: +1.3%) – the worst contraction since the current series began in 1995. Compared to the previous quarter, we highlight that the economy declined by 0.7% (Q3-20: +12.4%) on a seasonally adjusted basis, as the lighter-introduction of COVID-19 containment measures during the period weighed on contact intensive sectors as well as household spending. We expect activities to remain dampened albeit at a slower pace in Q1-21, due to the continued uptrend in COVID-19 cases as well as the associated restrictions. Over the medium term, we expect recovery underpinned by (1) wide administration of vaccines, (2) gradual lifting of restrictions, and (3) ultra-loose monetary policy and fiscal stimulus amid improved external demand as the global economic activities normalises.

Global markets

Global stocks mounted a massive rebound from last week’s rout as investors’ sentiment were lifted by progress in vaccine distribution and the decision of U.S Democrats to commence the process of approving President Biden’s USD1.9 trillion coronavirus relief bill. Consequently, US (DJIA: +3.6%; S&P: +4.2%) stocks posted robust gains buoyed by expectations of fiscal stimulus and better-than-expected data on the job market.  In Europe, the STOXX Europe (+3.5%) and FTSE 100 (+1.5%) were on track for weekly gains, as improved vaccine rollouts lifted optimism about a stronger economic recovery. In Asia, the Nikkei 225: (+4.0%) and SSE: (+0.4%) were on course for weekly gains, as sentiments were bolstered by the rally on Wall street amidst rosy earnings announcements by Japanese companies. Emerging markets (MSCI EM: +4.4%) stocks were supported by gains in India (+9.7%) and Brazil (+3.6%) while Frontier (MSCI FM: +1.0%) market stocks were on track for their fifth consecutive weekly gains, buoyed by gains in Kenya (+1.8%).  

Nigeria

Economy

Based on the recent data released by NSE on Domestic & Foreign Portfolio participation for December, the total value of transactions traded at the local bourse declined by 15.3% m/m to NGN269.24 billion in December 2020 (November: NGN317.81 billion). This was largely driven by the reduction in the value of transactions executed by domestic investors (-20.4% m/m to N199.32 billion) which outweighed the marginal increase in the value of transactions executed by foreign investors (+3.1% m/m to N69.92 billion). This brings the total value of transactions executed at the Exchange to NGN2.17 trillion in 2020FY (2019FY: NGN1.93 trillion). On participation, we note that the domestic investors retained dominance of trading activities on the local bourse as their share of total transactions in 2020FY stood at 66.4% (2019FY: 51.1%). However, foreign investors’ share of total transactions declined to 33.6% (2019FY: 48.9%) or NGN729.20 billion – the lowest since 2016FY (NGN517.55) billion. In 2021, we expect domestic investors to continue to dictate the tempo of activities in the local bourse, given the dearth of investment outlets brought by the segregation of the OMO/T-bills market amid the depressed yield environment. We also expect the lull in FPI participation to persist until there is significant improvement in liquidity conditions in the FX market.  

The Federal Government recently announced that it is collaborating with the World Bank to commence the National Business Sample Survey (NBSS) with a view to (1) rebasing the Gross Domestic Product (GDP) to 2018/2019 from 2010 constant prices, (2) identifying viable sectors of the economy, and (3) determining the structure of the Nigerian economy. We highlight that the last rebasing exercise conducted in 2014 led to a c.90% increase in total GDP to c. NGN510.00 billion in 2013, due to the new sectors created (Telecoms, retail, etc.) which were previously not captured. For us, this is a positive development as rebasing of the GDP will provide a clear picture of the structural transformation that the economy has undergone over the past seven years. Additionally, it will also help the government widen the tax net given that the rebasing is expected to identify tax gaps in some viable sectors, thereby enabling the government to devise means of bridging the gaps. However, we do not expect a significant increase in GDP compared to the last rebasing exercise due to the relatively shorter period of coverage.

Capital markets

Equities

Bearish sentiments dominated the local bourse this week, as concerns about the uptick in yields in the FI market made investors sell down their portfolio. Notably, the local bourse recorded losses in all of the trading sessions of the week. Accordingly, the All-Share Index shed 1.7% w/w to close at 41,709.09 points. Consequently, the YTD return moderated to 3.6%. Activity levels were however strong, as trading volumes rose by 7.4% w/w while value traded rose by 6.4% w/w. Notably, sell offs in WAPCO (-11.2%), ZENITH (-4.4%), NESTLE (-3.7%) and DANGCEM (-2.5%) drove the weekly loss. Sectoral performance was broadly negative as all sectors closed in the red. The Insurance (-6.0%) index led the losers chart followed by Consumer Goods (-3.2%), Banking (-2.3%), Industrial Goods (-2.1%) and Oil and Gas (-0.2%) indices.     

With the moderation in the prices of bellwether stocks this week, we expect savvy investors to take advantage of this and make re-entry ahead of their FY 2020 earnings announcement. However, we note that the recent hike in OMO rates by the CBN will continue to stoke uncertainties on the direction of yields, keeping risk-averse investors on the side-lines. Thus, we expect a zig-zag market performance in the week ahead.  Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the unimpressive macro story remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate expanded by 700bps w/w to 18.0% as system liquidity (weekly average c. NGN224.52 billion) was squeezed by funding pressures for CRR debits, and the CBN’s weekly OMO (NGN71.66 billion) and FX auctions, amidst inflows from OMO maturities (NGN112.27 billion) and FX retail refunds.

We expect liquidity to remain tight in the coming week, as expected inflows from OMO maturities (NGN213.87 billion) may not be sufficient to offset the outflows from the system. Thus, we expect the OVN rate to remain elevated.

Treasury bills

The Treasury bills secondary market remained bearish, as the average yield across all instruments expanded by 16bps to 1.5%. The overall market was majorly dragged by the OMO segment (average yield expanded by 31bps to 2.0%), as the tight liquidity in the system forced local participants i.e., banks, to sell-off various positions to fund their cash obligations. Also, offshore investors added to the rout, as they continued sell auction bills, in anticipation of higher yields at the weekly auction. Interestingly, at this week’s OMO auction, the CBN increased stop rates on the offered bills by an average of 467bps across the three tenors – its highest level since May, 2020. In our view, the results of the auction suggests that the CBN is trying to attract and retain FPIs, and as such, ease pressure on the naira. Elsewhere, the NTB market was supported by wholesale demand for some mid and long dated instruments. Thus, the average yield in the segment eased by 1bp to 1.0%.

For next week, we maintain our expectation of a gradual uptick in secondary market yields amidst the persisting bearish sentiments in the T-bills market. At the NTB segment, we expect market focus to be shifted to the PMA on Wednesday, where the CBN is expected to roll over NGN169.78 billion worth of instruments.

Bonds

Proceedings in the Treasury bonds secondary market turned bullish, as investors took the double-digit yield level of some longer dated instruments, as a good re-entry point into the bond market. Consequently, average yield declined by 7bps to 8.0%. Across the benchmark curve, market interest piqued on mid (-21bps) and long (-23bps) dated instruments, with major buying interests witnessed on the NOV-2029 (-21bps), JUL-2030 (-21bps) and MAR-2050 (-51bps) bonds. Conversely, the average yield expanded at the short (+13bps) end, as investors sold-off on the JAN-2022 (+72bps).

As a result of the shock higher stop rates at this week’s OMO auction, we expect market participants to demand higher secondary market yields, especially for the longer dated instruments. In the longer term, we still expect yields in the bonds secondary market to temper, given the limited supply amidst significant inflows from CBN special bill maturities (c. NGN4.00 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 USD104.79 million w/w to USD36.20 billion (1st February 2021). Across the FX windows, the naira weakened against the US dollar by 0.5% to NGN396.17/USD at the I&E window but was flat at NGN480.00/USD in the parallel market. At the I&E window, total turnover (as at 4th February 2021) decreased by 23.4% WTD to USD200.42 million, with most trades consummated within the NGN388.00 – 416.95/USD band. In the Forwards market, the rate weakened across the 1-month (-1.4% to NGN405.62/USD) contract, 3-month (-2.1% to NGN416.27/USD), 6-month (-2.0% to NGN427.30/USD) and 1-year (-2.0% to NGN445.65/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.