In line with our expectation, consumer prices in the United Kingdom (U.K) ticked higher in March as retailers rolled back pandemic-induced discounts on prices amid the reopening of the economy. According to the Office for National Statistics (ONS), the U.K’s inflation rate increased by 0.3% m/m in March (February: 0.1% m/m). The increase was due to higher (1) clothing prices (+1.6% m/m vs. February: -1.5% m/m) consequent to the higher prices charged by retailers, and (2) motor fuels (+3.5% m/m vs. February: +3.2% m/m) in line with the increase in global oil prices. On a year-on-year basis, the inflation rate rose by 0.7% (February: 0.4% y/y). In the coming months, we expect the pressure on consumer prices to be sustained due to (1) pass-through impact of strong energy prices, (2) low base effect from the prior year, and (3) the lingering impact of Brexit on supply chains amid the reopening of the economy.

The European Central Bank (ECB) elected to keep policy rates steady to continue to lay the foundation for a substantial economic recovery. Pertinently, the ECB kept the interest rate on the main financing operations unchanged at 0.00%. The bank also affirmed to continue to conduct net asset purchases under the Pandemic Emergency Purchase Programme (PEPP) with a total envelope of EUR1.85 trillion until at least the end of March 2022 – to address rising bond yields in the Eurozone. Meanwhile, given the (1) joint assessment of financing conditions and (2) inflation outlook carried out at the March monetary policy meeting, the Committee expects purchases under the PEPP over the current quarter to be conducted at a significantly higher pace than during the first months of the year. For us, the decision to increase the pace of net asset purchases cements the Committee’s stance to tame borrowing costs to support the quick recovery of the bloc’s economy amid a return to COVID-19 containment measures after the pandemic’s third wave hit the economy.

Global markets

Negative sentiments resurfaced across global markets after two weeks of gains. Investors were rattled by Biden’s plans to almost double capital gains tax and the growing number of COVID-19 cases globally, which softened hopes of a strong rebound in the global economy from the trough reached in 2020. In the U.S, the DJIA (-1.1%) and S&P (-1.2%) retreated from the highs attained in the prior week as the news on President Biden’s tax plans overshadowed the wave of solid corporate earnings released in the week. In Europe, the STOXX Europe (-0.9%) and FTSE 100 (-1.4%) slipped as the strengthening of the pound weighed on export-oriented companies amid fresh concerns on the global economy’s health. In Asia, the Nikkei 225 (-2.2%) was on course for a negative close as negative sentiments on Wall Street fed into the market. In comparison, SSE (+1.4%) rallied due to strong corporate earnings that bolstered buying interest from mainland Chinese investors. Emerging markets (MSCI EM: -0.5%) mirrored the bearish trend in global equities, consequent to losses in South Korea (-0.4%) and India (-1.6%), while Frontier (MSCI FM: +0.2%) market stocks posted marginal gains, primarily driven by robust gains in Nigeria (+1.3%).       

Nigeria

Economy

According to the January 2021 economic report of the Central Bank of Nigeria (CBN), the retained revenue of the FGN declined by 12.4% y/y to NGN285.26 billion in January, primarily due to the non-realization of revenues from special account and levies during the period. However, aggregate expenditure increased by 31.3% y/y to NGN770.77 billion during the same period owing to the rollover and release of outstanding capital allocations to the MDAs in the 2020 budget. Overall, the FGN’s operations led to an 85.7% increase in fiscal deficit to NGN485.51 billion in January 2021 (December 2020: NGN435.39 billion). Although the rally in oil prices and increase in crude oil production bodes well for oil revenue, we believe the economy’s fragile state will continue to hamper non-oil revenue, thereby straining overall revenue. Thus, we expect a widening in fiscal deficits over the medium term as the government sustains its expansionary fiscal stance, which would require an increased level of borrowings.

According to the data released by the National Bureau of Statistics (NBS), States Internally Generated Revenue (IGR) declined by 3.2% y/y to NGN335.25 billion in Q4-20, bringing the total IGR for 2020FY at NGN1.31 trillion (2019FY: NGN1.33 trillion). The marginal decline (-1.5% y/y) in States IGR was due to the declines across Other Taxes (-24.4% y/y to NGN170.49 billion), Direct Assessment (-22.3% y/y to NGN37.06 billion), and Road Taxes (-6.2% y/y to NGN30.27 billion) which offset the 5.2% y/y growth recorded in revenue from PAYE (NGN851.73 billion). On a quarter-on-quarter basis, we highlight that the IGR increased by 1.0% q/q in Q4-20, reflecting the impact of increased economic activities compared to Q3-20. Although we expect the gloomy outlook on the labour market to weigh on PAYE, we still see scope for increased IGR in 2021FY compared to 2020, given the continued normalisation of activities in the informal sector supported by the full reopening of the economy.

Capital markets

Equities

Bargain hunting in banking stocks was the overarching theme during the week as investors flocked into banking names ahead of Q1-21 corporate earnings releases. Based on the preceding, the All-Share Index advanced by 1.3% w/w to close at 39,301.82 points. As a result, the YTD loss moderated to -2.4%. Activity levels were stronger than the prior week, as trading volumes and value rose significantly by 26.2% w/w and 290.6% w/w, respectively. Notably, bargain hunting in large-cap stocks; WAPCO (+8.8%), STANBIC (+8.7%), UBA (+7.9%), GUARANTY (+7.0%), and ZENITH (+3.7%) drove the weekly gain. Sectoral performance was broadly positive as all sectors recorded gains. The Banking (+4.8%) index led the gainers’ chart followed by Consumer Goods (+1.0%), Industrial Goods (+0.5%), Insurance (+0.4%) and, Oil and Gas (+0.3%) indices.         

In the week ahead, we expect NSE’s floor to be flooded with results as the Q1-2021 earnings season commences in full swing. We believe investors will be looking for clues on how corporate earnings will evolve in 2021, given the expected improvement in macroeconomic conditions. The local bourse is likely to close positive next week as we expect decent earnings releases across the board to temper selling activities stoked by the rising yields in the FI market. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the weak macro story remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate ended the week lower (contracted by 11.58 ppts w/w to 16.8%) but remained elevated due to the reduced level of inflows from OMO maturities (NGN10.00 billion) amid significant funding pressures in the system for FGN bond (NGN274.45 billion), CBN’s weekly FX and OMO (NGN20.00 billion) auctions.

Considering inflows from FAAC disbursement, FGN bond coupon payments (NGN160.32 billion) and OMO (NGN20.00 billion) maturities, we expect the OVN rate to remain range bound at current level, barring any significant mop-up activity by the CBN.

Treasury bills

The Treasury bills secondary market remained bearish following the persistent illiquidity in the interbank market. As a result, the average yield across all instruments expanded by 52bps to 6.5%. Across the market segments, the average yield was higher by 52bps to 7.7% at the OMO secondary market and by 58bps to 4.6% at the NTB secondary market. At this week’s OMO auction, the CBN offered and allotted bills worth NGN20.00 billion with allotments of NGN5.00 billion of the 96-day, NGN5.00 billion of the 187-day and NGN15.00 billion of the 355-day – at respective stop rates of 6.90% (previously 7.00%), 8.48% (previously 8.50%), and 10.10% (unchanged).

Given our expectation for improved system liquidity next week, we expect increased demand for T-bills and envisage yields will moderate from current levels. Also, we expect quiet trading at the NTB market as participants position for next week’s PMA, with NGN88.46 billion worth of maturities on offer.

Bonds

Trading in the Treasury bonds secondary market was bearish, as yields adjusted to the higher stop rates at Wednesday’s FGN bond auction. Consequently, the average yield expanded by 20bps to 11.6%. Across the benchmark curve, average yield expanded at the short (+6bps), mid (+32bps) and long (+11bps) segments, following sell-offs of the JUL-2021 (+47bps), NOV-2029 (+54bps) and JUL-2034 (+50bps) bonds, respectively. At the auction, the DMO offered instruments worth NGN150.00 billion to investors through re-openings of the 16.2884% FGN MAR 2027 (Bid-to-offer: 0.69x; Stop rate: 12.25%), 12.50% MAR 2035 (Bid-to-offer: 1.12x; Stop rate: 13.34%) and 9.80% FGN JUL 2045 (Bid-to-offer: 3.50x; Stop rate: 13.85%). We note that the demand was weaker (subscription: NGN265.68 billion; bid-to-offer: 1.8x) compared to March (Subscription: NGN333.48 billion; Bid-to-offer: 2.2x). Conclusively, the DMO allotted NGN157.95 billion, and issued an additional NGN116.50 billion as non-competitive allotment, bringing the total sales to NGN274.45 billion.

We expect improved liquidity and in turn, higher demand in the bonds secondary market, following coupon payments on the APR-2023, APR-2029 and APR-2049 bonds. Thus, we expect yields to decline from current levels in the week ahead. Farther out, we maintain our stance on continued uptick in yields, as the DMO’s intention to securitize the Ways and Means balance portends more supply of domestic debt instruments.

Foreign exchange

Nigeria’s FX reserves recorded its first decline in five weeks, as it fell by USD131.97 million w/w to USD35.12 billion (22nd April 2021). Meanwhile, the naira appreciated by 0.2% to NGN410.00/USD at the I&E window (IEW) but weakened by 0.6% to NGN485.00/USD in the parallel market. At the IEW, total turnover (as of 22nd April 2021) increased by 6.3% WTD to USD317.36 million, with trades consummated within the NGN381.00 – 437.41/USD band. In the Forwards market, the rate depreciated in the 1-month (-0.2% to NGN413.70/USD) contract, strengthened in the 1-year (+0.1% to NGN448.27/USD) contract and stayed flat in the 3-month (NGN419.70/USD) and 6-month (NGN428.59/USD) contracts.

We expect improved liquidity in the IEW over the medium term, given higher oil prices and an expected increase in crude oil production. Accordingly, we expect the naira to remain relatively range-bound (NGN410.00/USD – NGN415.00/USD) at the IEW. Similarly, we believe the CBN will devalue the naira by 5.3% to NGN400.00/USD at the interbank market to narrow the gap with the IEW rate.