The local bourse managed to eke out a weekly gain despite profit-taking activities, as the All-Share Index ended the week 0.1% higher at 38,962.28 points.
September 24, 2021/Cordros Report
Global economy
At its penultimate meeting of the year, the United States Federal Open Market Committee (FOMC) voted unanimously to maintain the key policy rate in a target range of 0.00% – 0.25%. Similarly, the Committee voted to continue the asset purchase programme by at least USD120.00 billion per month. However, the Committee noted that ever since it indicated increasing its asset purchases by at least USD120.00 billion per month in December 2020, the economy has made progress towards its maximum employment and price stability goals. Accordingly, the Committee judged that moderation in the pace of its asset purchases might soon be warranted if the progress continues broadly as expected. Consequently, we expect the Committee to announce tapering its asset purchases at its November meeting and begin in December if labour market conditions continue to improve. Overall, we expect the key policy rate to remain steady at the 0.00% – 0.25% target range by the end of the year.
According to flash estimates from the IHS Markit, overall business activity in the Eurozone grew at a markedly slower rate in September amid the rising concerns over the impact of the delta variant of the pandemic. On the one hand, business activity as measured by the Services PMI slowed to 56.3 points in September (August: 59.7 points) – the slowest since May (55.2 points). On the other hand, factory activity as measured by the Manufacturing PMI declined to 58.7 points in September (August: 60.3 points), reflecting the impact of reduced orders from customers and supply chain bottlenecks. Overall, the Composite PMI declined by 3.4 points to 56.1 points in September (August: 59.5 points) – the lowest reading since April (53.8 points). Although we believe the sustained easing of COVID-19 containment measures will keep activities in a decent shape, we expect growing concerns over the impact of the Delta variant on demand and supply to continue to weigh on business activities and sentiments in the short term.
Global markets
Global stocks posted mixed performances as investors’ sentiments hung on a balance between the optimism about global economic recovery and potential risks from the debt crisis at China’s Evergrande Group. Accordingly, U.S. (DJIA: +0.5%; S&P: +0.4%) stocks were set to close the week in the green as investors shrugged off the Fed Reserve’s intention to roll back its massive monetary stimulus amid the uptick in weekly jobless claims. In Europe, the STOXX Europe (+0.5%) and FTSE 100 (+1.3%) were on course for weekly gains despite profit-taking activities later in the week induced by the troubled property developer China Evergrande. However, Asian (Nikkei 225: -0.8%; SSE: 0.0%) shares declined on concerns that a potential default by Chinese giant property developer could lead to a slowdown in the world’s second-largest economy. Similarly, Emerging (MSCI EM: -0.5%) and Frontier (MSCI FM: -0.3%) market stocks were on track to close lower following losses in South Korea (-0.5%) and Kenya (-2.4%), respectively.
Nigeria
Economy
The Federal Government has raised USD4.00 billion after its 2-day virtual meetings with foreign investors, with the order book peaking at USD12.20 billion. The amount raised is consistent with the government’s plan to part-finance the 2021FY fiscal deficit in line with the 2021 Appropriation Act. A breakdown of the issuance showed that the country sold USD1.25 billion of 7-year bonds at a yield of 6.1%, USD1.50 billion of 12-year bonds at a yield of 7.4% and USD1.25 billion of 30-year bonds at a yield of 8.3%. We recall that the Senate approved Eurobond issuance of at least USD3.00 billion but not more than USD6.18 billion. We think the FGN could (1) tap into the IMF’s SDR facility at a floating rate of 0.05% as of 23rd September 2021 or (2) issue a second round of Eurobond to cover the amount that has not been raised. Accordingly, we see scope for reduced domestic borrowings over the rest of the year. In addition, we expect the accretion to the external reserve will enhance the CBN’s ability to improve liquidity in the FX market.
According to the August Domestic & Foreign Portfolio Investment report of the Nigerian Exchange Limited (NGX), total transaction value at the domestic equities market declined by 0.4% m/m to NGN89.42 billion in August (July: NGN89.77 billion), representing a new record low since April 2017 (NGN54.90 billion). The decline was primarily due to a 13.7% m/m decrease in domestic transactions (71.6% of total transactions), reflecting the limited participation from the domestic retail (-15.2% m/m) and institutional (-12.1% m/m) investors. Meanwhile, foreign transactions (NGN25.36 billion vs July: NGN15.53 billion) increased on a month-on-month basis – we attribute this to the knock-on impact of IMF’s SDR allocation and the recently concluded Eurobond issuance on FPIs appetite for stocks. Our expectation of yield moderation in the fixed income market bodes well for the equities market over the short to medium term. Similarly, we expect improved participation from FPIs on account of increased dollar liquidity at the I & E window given inflows from IMF’s SDR allocation and the Eurobond issuance. Accordingly, we see scope for improved activities from both the domestic and foreign investors over the medium term.
Capital markets
Equities
The local bourse managed to eke out a weekly gain despite profit-taking activities, as the All-Share Index ended the week 0.1% higher at 38,962.28 points. Gains in OKOMUOIL (+5.6%), following renewed investors’ interest, managed to offset the declines in ZENITHBANK (-1.3%) and GTCO (-0.9%) this week. Activity levels were stronger as volume and value traded surged by 49.5% w/w and 28.2% w/w, respectively. Consequently, the MTD and YTD losses moderated to -0.7% and -3.2%, respectively. Performances across sectors were mixed, with the Insurance (+1.7%) and Oil and Gas (+1.4%) indices recording gains while the Banking (-0.4%) index declined. The Consumer Goods and Industrial Goods indices closed flat.
We expect savvy investors to take advantage of the moderation in the share prices of bellwether stocks to make a re-entry in the week ahead. However, we expect intermittent profit-taking activities to persist as investors search for clues on the direction of yields in the FI market. Accordingly, we think the market will exhibit a choppy pattern. Overall, 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 contracted by 50bps w/w to 17.3%, as inflows from FAAC disbursements (c. NGN407.71 billion) and FGN bond coupon payments (NGN59.54 billion) outweighed funding pressures for the monthly FGN bond auction (NGN277.05 billion) and CBN’s weekly FX auction.
We expect the OVN rate to expand next week, as we expect the CBN to maintain its tight liquidity management posture and mop up the combined NGN145.77 billion inflows from OMO maturities (NGN105.00 billion) and FGN bond coupon payments (NGN40.77 billion).
Treasury bills
The Treasury bills secondary market traded with bearish sentiments, as local banks sold off instruments to meet their funding obligations. Thus, the average yield expanded by 6bps to 6.0%. Across the market segments, the average yield at the OMO segment expanded by 8bps to 6.4%. Similarly, the average yield at the NTB segment closed higher by 6bps to 5.6%.
In the coming week, we expect the outcome of the NTB auction to shape the direction of yields in the T-bills market. At the auction, the CBN is set to roll over NGN111.87 billion worth of maturities to market participants.
Bonds
Bullish sentiments returned to the Treasury Bonds secondary market due to (1) increased demand in anticipation of a lower yield environment following the FGN’s Eurobond issuance; and (2) investors seeking to fill lost bids from Wednesday’s bond auction. Consequently, the average yield contracted by 7bps to 11.2%. We highlight that buying activity was spread across the benchmark curve, with the average yield declining at the short (-15bps), mid (-12bps) and long (-8bps) segments following demand for the JAN-2026 (-41bps), MAR-2027 (-68bps) and MAR-2035 (-22bps) bonds, respectively. At the bond auction, the DMO offered instruments worth NGN150.00 billion to investors through re-openings of the 13.9800% FGN FEB 2028 (Bid-to-offer: 1.1x; Stop rate: unchanged at 11.60%), 12.4000% MAR 2036 (Bid-to-offer: 2.5x; Stop rate: unchanged at 12.75%) and 12.9800% FGN MAR 2050 (Bid-to-offer: 3.1x; Stop rate: 13.00%, previously: 12.80%) bonds. Following the significant level of demand (subscription: NGN334.32 billion; bid-to-offer: 2.2x), the DMO eventually over-allotted instruments worth NGN277.05 billion, resulting in a bid-to-cover ratio of 1.2x.
Next week, we maintain our view of lower yields given our expectations of limited supply of debt instruments and deliberate efforts by the DMO to reduce domestic borrowing costs for the government.
Foreign Exchange
Nigeria’s FX reserves sustained its weekly accretion as it closed higher by USD498.47 million w/w to USD35.95 billion (22nd September 2021), surpassing the year start mark of USD35.37 billion. Meanwhile, the naira depreciated by 0.5% w/w and 0.3% w/w to NGN414.90/USD and NGN571.50/USD at the I&E window (IEW) and parallel market, respectively. At the IEW, total turnover (as of 23rd September 2021) decreased by 34.0% WTD to USD693.94 million, with trades consummated within the NGN404.00 – 448.53/USD band. In the Forwards market, the rate was flat at the 1-month (NGN416.07/USD) contract, while the 3-month (-0.3% to NGN422.22/USD), 6-month (-0.4% to NGN431.67/USD) and 1-year (-1.2% to NGN450.61/USD) contracts continue to reflect the depreciation of the naira to the greenback.
We expect improved liquidity in the IEW over the medium term, given our expectation of (1) increased oil inflows in line with the rise in crude oil prices and (2) inflows from FCY borrowings (USD6.18 billion) and IMF SDR (USD3.50 billion). Accordingly, we expect the naira to remain relatively range-bound (NGN410.00/USD – NGN415.00/USD) at the IEW.
