Despite the shortened trading session, the bullish momentum in the local bourse gained steam as the All-Share Index rose above the 40,000 psychological mark to close at 40,221.17 points – the highest level since 21st February 2021.
September 30, 2021/Cordros Report
Global economy
In the United States, the U.S. Census Bureau reported that durable goods orders increased markedly by 1.8% m/m in August (July: +0.5% m/m) – the highest in four months and more than double market expectations of a 0.7% increase. The strong growth was underpinned by strong demand for non-defence and capital goods in line with businesses’ desperation to replenish inventories, although supply chain disruptions remain a challenge. Accordingly, the most significant rise in new orders were seen in orders for nondefense aircraft and parts (+77.9% m/m vs July: -36.3% m/m), capital goods (+6.7% m/m vs July: -3.1% m/m), transportation equipment (+5.5% m/m vs July: -0.4% m/m) and manufacturing with unfilled orders (+3.3% m/m vs July: -0.4% m/m). On a year-on-year basis, durable goods orders increased by 13.2% – c.18.0% above pre-pandemic levels. We expect business investment to sustain the momentum in the short term as businesses continue to restock. Consequently, we think the boost in business investment would limit the expected slow rise in Q3-21 GDP growth emanating from a slowdown in consumer spending compared to Q2-21.
According to the China Federation of Logistics and Purchasing (CFLP), China’s manufacturing PMI slowed for the sixth consecutive month to 49.6 points in September from 50.1 points in August, indicating the first contraction in factory activities since February 2020 (35.7 points). The decline in factory activities was underpinned by higher raw material costs and electricity rationing, which fueled production bottlenecks within the period. Meanwhile, non-manufacturing PMI jumped to 53.2 points from an 18-month low of 47.5 in August as progress with vaccination cushioned the impact of the Delta variant of COVID-19 outbreaks. Overall, the composite PMI rose to 51.4 points from 48.9 points in the prior month, supported by the growth in business activity which outweighed the contraction in factory activity. Although the government has lifted restrictions in some cities given the progress with vaccinations, we expect the (1) spread of the COVID-19 Delta variant and (2) clampdown on property and tech sectors to continue to weigh on the economy over the short term.
Global Markets
In what can be regarded as a widespread risk-off sentiment, global stocks tumbled as lingering worries about (1) a slowing global economy, (2) a looming energy crisis following soaring inflation and (3) China’s Evergrande crisis dented sentiments. Accordingly, U.S. (DJIA: -1.1%; S&P: -2.0%) stocks were set to close the week and month in red on fears of rising inflation and uncertainty around Congress’ ability to raise the debt ceiling. Likewise, European stocks posted mixed performances as the STOXX Europe (-1.8%) was to end the week lower as a surge in government bond yields triggered selloffs in tech stocks. Conversely, the FTSE 100 (+1.0%) was on course for a weekly gain buoyed by a sharp U.K. economic growth upgrade. Elsewhere, Asian (Nikkei 225: -0.6%; and SSE: -2.0%) shares closed lower on concerns about slowing growth in China amid reactions to the selloffs on Wall Street. Similarly, Emerging (MSCI EM: -1.7%) and Frontier (MSCI FM: -0.5%) market stocks mirrored the bearish trend across global equities consequent upon losses in China (-2.0%) and Kuwait (-0.2%), respectively.
Nigeria
Economy
In line with our expectation, the amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in September (based on August revenue) declined by 8.4% m/m to NGN696.97 billion (August: NGN760.72 billion) – the first month-on-month decline in four months. We understand that the decline was due to lower inflows from Petroleum Profit Tax (PPT), Companies’ Income Tax (CIT), excise duty, and oil & gas royalties. Of the total amount, the FGN received 41.5% or NGN289.26 billion (August: NGN321.23 billion), State Governments received NGN246.16 billion (August: NGN272.93 billion), while the Local Governments received NGN161.54 billion (August: NGN166.56 billion). We expect the amount to be shared by the tiers of government to remain stable at current levels (NGN650.00 billion to NGN750.00 billion) over the coming months. Our prognosis is hinged on the impact of (1) official exchange rate alignment with the IEW and (2) rally in oil prices, which would partly offset the decline in crude oil production volume.
According to the recently released data from the Nigerian National Petroleum Corporation (NNPC), the corporation incurred NGN149.28 billion as PMS under-recovery cost in August (July: NGN175.32 billion), putting the total PMS under-recovery costs at NGN906.29 billion as of 8M-21. Recall that the FGN announced the removal of fuel subsidies in March 2020 when oil prices declined precipitously. However, under-recovery costs resurfaced in January 2021 when the FGN decided to leave the PMS pump price unchanged within a range of NGN162.00 – NGN165.00 per litre, despite the increase in the expected open market price (September 2021: NGN278.14/litre vs December 2020: NGN163.34/litre). Accordingly, under-recovery costs have increased by more than 5-fold from NGN25.37 billion in January 2021 to NGN149.28 billion as of August. As a result, we estimate under-recovery costs will settle at NGN1.63 trillion or 32.5% of our projected FGN’s retained revenue (NGN5.02 trillion) in 2021E. Given that the under-recovery costs were not provided for in the 2021 budget and the NNPC deducts them before remittance to the Federation Account, it implies that sub-optimal revenue will be obtained from the NNPC over the rest of the year.
Capital Markets
Equities
Despite the shortened trading session, the bullish momentum in the local bourse gained steam as the All-Share Index rose above the 40,000 psychological mark to close at 40,221.17 points – the highest level since 21st February 2021. Interestingly, the gains recorded on the last two trading sessions (Wed: 1.9% and Thur: 1.6%) drove the market to the green territory for the week. Pertinently, investors’ buying interest in DANGCEM (+14.3%), FBNH (+7.3%), NESTLE (+5.7%), FLOURMILL (+2.8%), OKOMUOIL (+2.6%), and GTCO (+2.2%) drove the benchmark Index 3.2% higher. Activity levels mirrored the upbeat performance as volume and value traded increased by 73.2% w/w and 17.9% w/w, respectively. Consequently, the MTD return turned positive (+2.6%), while the YTD loss moderated to -0.1%. Save for the Insurance (-0.4%) index which declined, gains in the Industrial Goods (+6.7%), Consumer Goods (+3.4%), Oil and Gas (+0.9%), and Banking (+0.6%) indices reflected the overall market performance.
We expect the bears to dominate market performance in the coming week, as investors cash out on the gains across bellwether stocks this week. However, we expect this to be tempered by bargain hunting activities from early birds ahead of the Q3-21 earnings season. However, we advise investors to take positions in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings.
Money market and fixed income
Money market
The overnight (OVN) rate contracted by 150bps w/w to 15.8%, as the liquidity surfeit from FAAC disbursements (NGN407.71 billion), OMO maturities (NGN101.61 billion) and FGN bond coupon payments (NGN40.77 billion) offset late debits for CRR, weekly FX auction and net NTB issuances (NGN3.54 billion).
In the absence of significant inflows next week, we expect the OVN rate to remain elevated in the double-digit region as funding for CBN’s weekly auctions are likely to drain system liquidity.
Treasury bills
Trading in the Treasury bills secondary market was bullish, as average yield across all instruments declined by 22bps to 5.8% following (1) the healthy system liquidity in the early parts of the week, and (2) as market participants sought to cover lost bids from Wednesday’s NTB PMA. Across the market segments, the average yield contracted by 11bps to 6.3% at the OMO segment and by 32bps to 5.3% at the NTB segment. At the NTB PMA, the CBN offered NGN111.87 billion for sale and eventually allotted NGN115.42 billion – NGN4.61 billion of the 91D, NGN2.09 billion of the 182D and NGN108.71 billion of the 364D bills with stop rates of 2.50% (unchanged), 3.50% (unchanged), and 7.50% (previously 7.20%), respectively. With a subscription level of NGN174.74billion, we highlight that demand was strong at this auction (Bid-cover ratio: 1.5x).
We expect yields to trend higher in the coming week, as investors react to the recent increases in auction stop rates at the primary market.
Bonds
The Treasury Bonds secondary market traded with mixed sentiments, albeit with bullish bias, as inflows from bond coupon payments supported demand levels despite sell pressures observed after the slight uptick in bond and NTB auction stop rates. Overall, the average yield pared by 3bps to 11.2%. Across the benchmark curve, the average yield declined at the short (-28bps), mid (-3bps) segments following demand for the APR-2023 (-45bps) and MAR-2027 (-6bps), respectively. Elsewhere, it expanded at the long (+13bps) end as investors upwardly repriced the JUL-2045 (+54bps) bond.
In the face of reduced supply by the DMO, we maintain our expectations of lower average yields in the medium term as investors are likely to continue cherry picking attractive instruments across the yield curve.
Foreign Exchange
The accretion to Nigeria’s FX reserves was sustained for the sixth consecutive week, as the gross reserve position closed higher by USD304.67 million w/w to USD36.41 billion (28th September 2021). Meanwhile, the naira appreciated by 0.4% w/w to NGN413.38/USD at the I&E window (IEW) but depreciated by 0.4% w/w to NGN574.00/USD at the parallel market. At the IEW, total turnover (as of 29th September 2021) decreased by 19.9% WTD to USD711.30 million, with trades consummated within the NGN404.00 – 448.53/USD band. In the Forwards market, the rates on the 1-month (+0.1% to NGN415.06/USD), 3-month (+0.5% to NGN420.22/USD), 6-month (+0.8% to NGN428.06/USD), and 1-year (+1.5% to NGN443.78/USD) contracts reflected the appreciations of the naira to the greenback.
We expect improved liquidity in the IEW over the medium term, given our expectation of (1) increased oil receipts 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.
