April 21, 2021/Coronation Report

The Naira bond market is selling off, and we expect rates to continue to rise. Meanwhile, the rise in long-dated US dollar bond yields reversed last week, which confounded market expectations. 

FX

Last week the exchange rate in the Investors and Exporters Window (I&E Window) weakened by 0.49% to close at N411.00/US$1. In the parallel, or street market, the Naira appreciated by 0.62% to close at N482.00/US$1. Nigeria’s external reserves increased slightly to stand at US$35.23 billion at the end of the week. We now have a situation in which the reserves of the Central Bank of Nigeria (CBN) are trending upwards while the difference between the I&E Window rate and the parallel market rate remains, currently at 17%. The CBN has no immediate incentive to make a further small step move in the I&E Window and NAFEX rates (as it did at the end of February), but it appears difficult to bring the parallel rate in line. Our sense that pressure on FX will remain, even while FX reserves climb higher

Bonds & T-bills    

Last week, the secondary market yield for a Federal Government of Nigeria (FGN) Naira-denominated bond with 10 years to maturity rose by 66bps to 12.17% and at 7 years rose by 122bps to 12.17% while at 3 years the yield was also up by 273bps to 9.95%. In plain English, this was a big bond market sell-off. The overall average benchmark yields closed at 8.11%. Our sense is that yields will continue to trend higher.

The Debt Management Office (DMO) will offer for subscription the FGN monthly bond on 21 April 2021, reopening March 2027, March 2035, July 2045 issues.

The annualized yield on a 349-day T-bill rose by 9bps to 8.07%, while the yield on a 340-day OMO bill declined by 53bps to 9.14%. The Central Bank’s OMO auction of N20bn had stop rates unchanged as the 89-day, 187-day & 362-day notes were allotted at 7.00%, 8.50% & 10.10%, respectively. At the T-bill auction, a total of N247.4bn (US$603.41m) worth of notes were subscribed for against N69.56bn (US$169.66m) offered. The 182-day notes and 364-day notes were over-subscribed by +209.78% and +342.80% respectively, while the 91-day note was undersubscribed by -0.31%. Save for the long-tenor paper, rates were unchanged. The 91-day, 182-day & 364-day notes were allotted at 2.00%, 3.50%, & 9.00% stop rates, respectively. We expect money from unsuccessful bids to flow into the secondary market, creating a short-term liquidity surge. Given the steady upward movement in 1-year T-bill stop rates, we expect T-bill rates to climb past 10.0% by mid-year.

Oil

The price of Brent crude rose by 6.07% last week, closing at US$66.77/bbl, a 28.90% increase year-to-date. The average price to year-to-date is US$61.74/bbl, 42.87% higher than the average of US$43.22/bbl in 2020. Oil prices have experienced a significant uptick since mid-March, and this is attributed to the economic recovery in China and the United States. However, as has been the case recently, stalled vaccine rollouts worldwide and soaring COVID-19 cases in India and Brazil sown doubts among the bulls. The United States has imposed sanctions on Russia to punish it for alleged interference in the 2020 US election, cyber-hacking, bullying Ukraine and other ‘malign’ acts. Although this may not have a direct influence on oil prices, it could lead to higher financing costs and general uncertainty in trade with Russia. Our view is that oil prices are likely to remain above the US$60.00/bbl mark for several weeks, if not months.

Equities

The Nigerian Stock Exchange All-Share Index (NSE-ASI) fell by 0.15% last week with a loss of 3.63% year-to-date. Guinness Nigeria +7.24%, FBNH +4.83%, and Dangote Cement +2.33% closed positive last week, while FCMB Group -8.90%, PZ Cussons – 7.22%, and Access Bank -5.59% closed negative. Performance across sectors was broadly negative while the NSE-Industrial index was the highest gainer for the week with +0.95% and NSE-Insurance, recorded the highest loss for the week with -4.23%. Our view is that overall investor sentiment continues to be weak amid rises in bond yields. We have three weeks’ worth of catch-up in our model portfolio on the following pages. 

Naira Bonds Sell-Off, US Bonds Rise

At the start of this year there was a resumption of the relationship between inflation expectations and yields in the US bond market. Upbeat economic data suggested rising inflation which in turn pushed the yields for long-dated US Government bonds higher during the first quarter. Last week that dynamic broke down. Last week, the US 10-year government bond yield confounded observers as the yield which had risen to 1.66% the week before fell to 1.60%. However, yields came down and bond prices jumped, regardless of the positive economic data released last week showing the biggest monthly gain in retail sales in 10 years and increasing evidence that the labour market and economic activity are bouncing back.

Investors are now unusually unsure how the US government bond market will respond to any further positive economic news, particularly given that a recovery in the US economy is already reflected in bond prices. An explanation for this may lie in the reversal of short positions against long-dated US government bonds. Major US banks are reported to be taking advantage of low rates to replenish capital and to obtain advantageous funding and in a large part this depends on increased foreign demand.  

In the same week, the secondary market yield for a Federal Government of Nigeria (FGN) Naira-denominated bond with 10 years to maturity rose by 66bps to 12.17% and just like the now rising US 10-year government bond, we are in the midst of a bond market sell-off. Is there any correlation in the two markets? Not exactly. The strong sell-off of the FGN Nigerian bond market can be linked to the increase in yields as a result of the prevailing inflation in the country (18.17% y/y) priced into bond valuations in the form of expected interest rate increase. 

Model Equity Portfolio, Last Week

Last week the Model Equity Portfolio rose by 0.11% compared with a fall in the Nigerian Stock Exchange All-Share Index (NSE-ASI) of 0.15%, therefore outperforming it by 26 basis points. Year to date it has lost 2.59% against a loss in the NSE-ASI of 3.63%, outperforming it by 104bps.

Our tactics, which we wrote about before the Easter break, of raising our notional weights in MTN Nigeria and Dangote Cement to index-neutral positions, paid off. And we feel much more comfortable with a 15.6% notional cash position than with the 30.7% notional cash position which we held before the holiday.  

On the other hand, our overweight, 4.7%, position in Stanbic IBTC continued to cost us, though we continue to have a lot of conviction in this high-return-on-equity stock and therefore we will maintain our stance. Our next jobs are to re-balance our bank holdings and to look for value in some other sectors, including the insurance sector.