The bearish performance in the local bourse extended to a third consecutive week, as the upward retracement in yields in the FI market continue to dampen investors’ sentiments. Accordingly, the All-Share Index shed 0.6% w/w to close at 40,186.70 points.
February 19, 2021/Cordros Report
Global economy
According to the Office for National Statistics (ONS), the inflation rate in the United Kingdom (U.K) rose by 0.7% y/y (December 2020: 0.6% y/y) in January, reflective of lower discounts on furniture and rising restaurants and hotel prices, which kept prices elevated in the month. However, clothing and footwear prices provided some respite for consumers. Furniture and household goods rose by 12.0% y/y (December: -0.7% y/y) while restaurants and hotels rose by 1.1% y/y (December: 0.1% y/y). Meanwhile, transport prices rose by 2.1% y/y (December: 1.9% y/y) due to higher energy prices. On the other hand, we note that clothing and footwear prices (-3.4% vs December: -1.8%) continued their descent as retailers slashed prices. On a month-on-month basis, the inflation rate declined by 0.2% (December: +0.3% m/m). Over the medium term, we maintain our expectation of a sustained rise in consumer prices due to (1) the expiration of the temporary VAT cut in March 2021, (2) higher energy prices, and (3) the lingering impact of Brexit on supply chains.
Overall business activities in the Eurozone fell in February, reflecting the negative impact of renewed COVID-19 related restrictions on businesses amidst faster growth in factory output. IHS Markit’s flash estimates showed that composite PMI for the region fell for a fourth consecutive month to 48.1 points in February (January: 47.8 points). Services PMI drove the decline, as it slumped to a 3-month low of 44.7 points (January: 45.4 points). Meanwhile, manufacturing PMI rose to 57.5 points (January: 54.6 points) despite increasingly widespread shortages of inputs, demand for which continued to outstrip supply in many cases. Although the February composite PMI points to a mild decline in economic activities in Q1-21, the continued growth in factory activities suggests that the downturn would be less severe than in the first quarter of the prior year.
Global markets
Global stocks posted mixed performances as investors’ sentiments were shaped by a slew of weak economic data, particularly in the U.S, hopes of additional fiscal stimulus from the Biden administration, and rising bond yields amid vaccination progress. Consequently, U.S (DJIA: +0.1%; S&P: -0.5%) stocks retraced from the highs attained in the prior week. In Europe, the STOXX Europe (-0.2%) and FTSE 100 (+0.3%) also lost momentum as weak U.K retail sales data dampened vaccine-induced optimism that has been supportive of bullish sentiments in the past two weeks. In Asia, the Nikkei 225: (+1.7%) and SSE: (+1.1%) held up gains accumulated earlier in the week despite sell-offs later in the week due to concerns about market overheating. Emerging markets (MSCI EM: +3.4%) stocks posted robust gains on the back of bullish sentiments in China (+1.1%), while Frontier (MSCI FM: 0.1%) market stocks recorded marginal gains, following losses in Nigeria (-0.6%).
Nigeria
Economy
Nigeria’s headline inflation maintained its uptrend in January 2021, rising to 16.47% y/y (December 2020: 15.75% y/y) – the highest level since April 2017. Asides from pre-existing supply chain challenges and structural constraints, we believe the low base from the prior year also contributed to the 71bps uptick in the headline index. While food inflation rose to a record high of 20.57% y/y (December: 19.56% y/y), the core inflation increased by 48bps in January to 11.85% y/y – the highest level since January 2018 (12.09% y/y). On a month-on-month basis, headline inflation moderated by 12bps to 1.49%. The moderation was primarily due to the dissipating impact of festive induced demand that stoked inflationary pressures in the prior month. For February, we expect the pressure on consumer prices to remain skewed to the upside and forecast m/m headline inflation of 1.38% with the effect of the low base from the prior year leading to a 68bps increase in y/y inflation to 17.15%.
Nigeria’s economic output improved remarkably in the fourth quarter of 2020 as the GDP grew by 0.11% y/y (Q3-20: -3.62%) – a marked deviation from the market’s expectation (Bloomberg’s median consensus forecast: -1.86% y/y). The positive, albeit marginal growth in Q4, was primarily driven by the non-oil sector, which reflected more robust gains associated with the reopening of the economy than in the two preceding quarters. Meanwhile, Nigeria’s continued compliance with the OPEC+ oil production cuts dampened growth in the oil sector as overall oil production in Q4-20 printed 1.56mb/d – the lowest since at least 2009. Consequently, the oil sector declined by 19.76% y/y (Q3-20: -13.89% y/y) while the non-oil sector grew by 1.69% y/y (Q3-20: -2.51% y/y). Given the better-than-expected outturn in Q4-20, we have revised our growth estimates for Q1-21 and 2021FY upwards to 0.94% y/y and 2.75% y/y, respectively.
Capital markets
Equities
The bearish performance in the local bourse extended to a third consecutive week, as the upward retracement in yields in the FI market continue to dampen investors’ sentiments. The bond auction results, wherein stop rates rose by an average of 254bps to 11.10% (from 8.56% at the last auction), further magnified the downbeat mood during the week. Accordingly, the All-Share Index shed 0.6% w/w to close at 40,186.70 points. Consequently, the YTD return swung into negative territory, settling at -0.2%. Activity levels were weak, as volume and value traded declined by 42.6% w/w and 22.9% w/w, respectively. Notably, sell-offs in STANBIC (-14.0%), BUACEMENT (-1.8%) and MTNN (-1.1%) drove the weekly loss. The sectoral performance was broadly negative. Save for the Oil and Gas (+4.6%) and Banking (+0.5%) indices that posted gains, the Insurance (-1.7%), Consumer Goods (-1.0%) and Industrial Goods (-0.7%) recorded losses.
We expect the deluge of corporate earnings accompanied by dividend declarations to temper bearish sentiments in the week ahead. However, we do not rule out the possibility of continued profit-taking activities due to growing concerns about yield elevation in the FI market. As a result, we think the local bourse will likely exhibit a zig-zag pattern. 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) expanded by 15.75ppts w/w, to 20.5%. The rate was depressed at the beginning and middle of the week, following inflows from OMO maturities (NGN207.84 billion) and FX retail refunds into the system. However, provisioning for CRR by banks, and FGN bond (NGN80.55 billion), OMO (NGN180.00 billion) and FX auction debits at the twilight of the week pressured system liquidity and drove the rate northwards.
In the coming week, inflows from OMO (NGN472.22 billion) and NTB (NGN128.22 billion) maturities, as well as FGN bond coupon payments (NGN49.89 billion), will hit the system. Consequently, we expect the overnight lending rate to contract.
Treasury bills
The Treasury bills secondary market turned bullish, as the average yield across all instruments declined by 28bps to 4.1%. As in prior weeks, activities in the OMO secondary market primarily drove proceedings in the broader market, as local banks reinvested excess liquidity from OMO maturities – especially at the long (-17bps) end of the curve. Thus, the average yield in the space contracted by 32bps to 6.4%. At this week’s OMO auction, the CBN maintained stop rates across the three tenors, selling NGN180.00 billion worth of bills to market participants. Elsewhere, trading in the NTB secondary market was relatively muted (average yield increased slightly by 2bps to 1.5%) as weak sentiments persisted.
For next week, we expect the yields on T-bills to maintain the same trajectory, following the ample liquidity expected in the system. Also, we expect quiet trading at the NTB market as participants position for next week’s PMA, where the CBN is expected to roll over NGN128.22 billion worth of maturities.
Bonds
The Treasury bonds secondary market remained bearish as (1) demand weakened following Wednesday’s bond auction; (2) investors continued to price in the higher rates at the T-bills market, and (3) the market reacted to another inflation uptick (January 2021 CPI: 16.47%). Thus, the average yield expanded by 37bps to 9.4%. Across the benchmark curve, the average yields at the short (+19bps), mid (+31bps), and long (+38bps) segments sustained their expansions, as investors sold off the JAN-2026 (+121bps), FEB-2028 (+45bps) and JUL-2045 (+130bps) bonds, respectively. At the primary auction, the DMO offered instruments worth NGN150.00 billion to investors through re-openings of the 16.2884% FGN MAR 2027 (Stop rate: 10.25%), 12.50% MAR 2035 (Stop rate: 11.25%) and 9.80% FGN JUL 2045 (Stop rate: 11.8%). We note that demand was weaker (subscription: NGN189.51 billion; bid-to-offer: 1.3x) compared to January (Subscription: NGN238.27 billion; Bid-to-offer: 1.6x). Due to investors’ demand for higher yields, the DMO allotted only NGN80.55 billion and opted to issue an additional NGN122.00 billion via non-competitive allotment, bringing the total sale NGN202.55 billion. Stop rates rose by an average of 254bps compared to the previous auction.
Considering the higher yields at various auctions across the fixed income market, we expect bond investors to continue to clamour for higher yields in the short-to-medium-term.
Foreign exchange
Nigeria’s FX reserves sustained its descent, as it dipped by USD177.39 million w/w to USD35.58 billion (16th February 2021). The naira weakened against the US dollar by 1.3% to NGN410.00/USD at the I&E window and by 1.1% to NGN478.00/USD in the parallel market. At the I&E window, total turnover (as of 18th February 2021) decreased by 51.3% WTD to USD162.14 million, with most trades consummated within the NGN390.00 – 424.15/USD band. In the Forwards market, the rate weakened across the 1-month (-1.5% to NGN413.96/USD), 3-month (-1.4% to NGN421.12/USD), 6-month (-1.0% to NGN429.29/USD) and 1-year (-0.3% to NGN443.14/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.
