Bargain hunting in banking stocks was the overarching theme during the week as investors flocked into Tier-1 names ahead of Q3-21 corporate earnings releases. Based on the preceding, the All-Share Index advanced by 1.6% w/w to close at 40,868.36 points.
October 8, 2021/Cordros Report
Global economy
According to flash estimates released by the IHS Markit, the United States (U.S) Composite PMI moderated for the fourth consecutive month to 55.0 points in September (August: 55.4 points) – the lowest level in twelve months. The slowdown in the composite PMI was due to the impact of (1) labour shortages, (2) rising input costs, and (3) persistent supply chain disruptions on business activities. Accordingly, the Manufacturing (60.7 points vs August: 61.1 points) and Services (54.9 points vs August: 55.1) PMI recorded declines during the review period. Nonetheless, the Composite PMI remains above the 50-points threshold for the 15th consecutive month amid rising COVID-19 cases, which appears to have peaked in September. We expect labour supply and demand to improve over the short term, given our expectation of a decline in COVID-19 cases. However, persistent supply chain disruptions could undermine factory and business activities. Accordingly, we expect a moderate improvement in output expansion over the short term
Overall business activity in the United Kingdom (U.K) maintained strong recovery despite supply chain constraints and shortages of raw materials. According to flash estimates from the IHS Markit/CIPS, business activity as measured by the Services PMI printed 55.4 points in September, slightly above August’s six-month low of 55.0 points despite a faster rise in fuel and energy cost during the period. The expansion in the Services PMI was supported by a broader reopening of the economy following the lifting of almost all COVID-19 containment measures. On the other hand, the Manufacturing PMI softened to 52.7 points in September (August: 54.1 points) due to the supply chain disruptions and labour shortages that constrained factory activity. Overall, the Composite PMI advanced marginally by 0.1 points to 54.9 points (August: 54.8 points), but still much weaker than the peak of 62.9 points in May. We expect output expansion to continue to moderate over the short term, given the impact of (1) supply chain disruptions on deliveries of inputs and (2) labour shortages as the competition for skilled workers continue to deepen in the economy.
Global Markets
Positive sentiments resurfaced across global markets after two weeks of jitters. Although the U.S job market report released late in the week showed weakness in the labour market recovery, investors’ sentiments were buoyed by abated fears of a potential debt default in the world’s largest economy. In U.S, the DJIA (+1.2%) and S&P (+1.0%) were set for weekly gains as buying sentiments improved following the Senate’s decision to temporarily raise the Treasury Department’s debt ceiling by USD480.00 until December. In Europe, the (STOXX Europe: +1.0%; & FTSE 100: +0.9%) were set to end the week higher as the surge in energy prices eased off gradually, amid the positive sentiments on Wall Street. Asian markets posted mixed performances as the Nikkei 225: (-2.5%) erased gains accumulated earlier in the week following lingering concerns on China’s Evergrande. After reopening from a week-long National holiday, the SSE (+0.7%) shares posted a weekly gain fueled by a rally in tech and financial stocks amid easing political tensions between China and United States. Emerging (MSCI EM: +0.5%) and Frontier (MSCI FM: +0.6%) market stocks also closed higher following bullish sentiments in China (+0.7%) and Nigeria (+1.6%), respectively.
Nigeria
Economy
Recent data published by the Debt Management Office (DMO) revealed that Nigeria’s public debt stock increased by 7.1% q/q to NGN35.47 trillion in Q2-21 (Q1-21: NGN33.11 trillion). We highlight that the debt stock increase was due to a 9.9% q/q and 5.4% q/q increase in the external and domestic borrowings, respectively. While the rise in the domestic debt stock was in line with the increase in (1) FGN’s bond issuance (+6.2% q/q) and NTB (+15.0% q/q) during the period, we highlight that the increased external borrowing reflects a 3.0% q/q and 1.6% q/q increase in the multilateral and bilateral debt stock, respectively. Barring the securitisation of the outstanding CBN’s Ways and Means, we expect the total public debt stock to hit NGN38.72 trillion by year-end in line with the additional borrowing by the States and FGN to fund their 2021FY fiscal operations – estimated at NGN5.80 trillion.
According to the H1-21 Budget Implementation Report (BIR) released by the Budget Office of the Federation, the FGN’s actual retained revenue (NGN2.31 trillion) grossly underperformed the prorated budgeted revenue (NGN3.32 trillion) by 30.4%. The underperformance was due to a 46.5% decline in oil revenue (23.3% of total actual revenue during the period) compared to the prorated budget (NGN1.01 trillion) as the impact of low crude oil production continues to mask the rally in oil prices. Besides, there were no inflow from stamp duties (vs prorated budget: NGN250.00 billion) and grants (vs prorated budget: NGN177.43 billion). Meanwhile, actual expenditure (NGN5.81 trillion) was 0.7% ahead of the prorated budget (NGN5.76 trillion) as recurrent debt expenditure was 21.5% higher than the prorated budget (NGN1.66 trillion), reflecting the interest on CBN’s Ways & Means (NGN587.56 trillion) which the FGN did not make provision for in the 2021FY budget. Accordingly, the actual deficit settled at NGN3.48 trillion in H1-21 – 42.5% higher than the prorated budget. At the present run rate, the budget deficit could widen to c. NGN7.00 trillion by year-end. However, we think the recent Eurobond issuance and ongoing domestic borrowings may reduce the FGN’s reliance on the CBN over the rest of the year.
Capital Markets
Equities
Bargain hunting in banking stocks was the overarching theme during the week as investors flocked into Tier-1 names ahead of Q3-21 corporate earnings releases. Based on the preceding, the All-Share Index advanced by 1.6% w/w to close at 40,868.36 points. As a result, the MTD and YTD return increased to +1.6% and +1.5%, respectively. Notably, bargain hunting in large-cap stocks namely; FBNH (+21.7%), AIRTELAFRI (+6.3%), and ZENITHBANK (+4.5%), drove the weekly gain. However, activity levels were mixed, as trading volumes decreased by 1.4% w/w, while trading value grew by 34.8% w/w. Across sectors, the Banking (+4.5%), Oil and Gas (+0.2%) and Industrial Goods (+0.1%) posted gains while the Insurance (-1.5%) and Consumer Goods (-0.5%) indices declined.
In the week ahead, we do not expect the bulls to repeat the flawless victory that pervaded the local bourse this week as the bears are likely to book profit across most counters. 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 contracted by 125bps w/w to 14.5% in the absence of significant funding pressures to offset the positive average liquidity position (NGN62.59 billion) during the week.
We expect tighter system liquidity in the coming week, as anticipated debits for CRR and CBN’s weekly auctions are likely to outweigh inflows from OMO maturities (NGN112.00 billion).
Treasury bills
The Treasury bills secondary market closed the week on a bearish note as the average yield across all instruments expanded by 7bps to 5.9%. Across the market segments, the average yield expanded by 15bps to 6.5% at the OMO segment. Elsewhere, it pared by 1bp to 5.3% at the NTB segment as local banks invested idle funds in the higher-yielding long-dated NTB instruments.
We envisage the yield on T-bills will settle lower in the coming week, as investors improve buying activities with limited offers in light of significantly lower net issuances at the past few auctions. Also, we expect quiet trading in the first few days at the NTB segment as participants position for the mid-week PMA, with the CBN set to roll over NGN121.66 billion worth of maturities.
Bonds
Bearish sentiments returned to the Treasury bonds secondary market as investors continue to upwardly reprice instruments on the back of increased cut-off rates at recent auctions. Consequently, the average yield expanded by 14bps to 11.3%. We highlight that selling activity was spread across the benchmark curve, with the average yield expanding at the short (+25bps), mid (+21bps) and long (+10bps) segments as investors sold off the JAN-2026 (+45bps), MAR-2027 (+69bps) and APR-2037 (+21bps) bonds, respectively. The DMO published the Q4-21 bond issuance calendar on Wednesday, which showed a reduction in volumes offered (to NGN400.00-480.00 billion from NGN450.00-540.00 billion in Q3-21). Also, the short and mid dated instruments were changed to the JAN-2026 and APR-2037 bonds, respectively (previously FEB-2028 and MAR-2036).
In reaction to our prognosis of reduced supply by the DMO, we reiterate our expectation of lower average yields in the medium term as investors are likely to take positions across the curve. In the week ahead, we expect the release of September 2021 CPI (Cordros Forecast: 16.49%) to further shape market sentiments and the direction of yields.
Foreign Exchange
Nigeria’s FX reserves sustained its weekly accretion, as the gross reserve position closed higher by USD1.20 billion w/w to USD37.99 billion (6th October 2021). Meanwhile, the naira depreciated by 0.2% w/w to NGN414.30/USD at the I&E window (IEW) but appreciated by 0.3% w/w to NGN573.00/USD at the parallel market. At the IEW, total turnover (as of 7th October 2021) decreased by 39.8% WTD to USD512.81 million, with trades consummated within the NGN404.00 – 448.30/USD band. In the Forwards market, the rate was flat at the 1-month (NGN415.60/USD) contract, while the 3-month (-0.2% to NGN421.01/USD), 6-month (-0.3% to NGN429.44/USD), and 1-year (-0.4% to NGN445.68/USD) contracts reflected depreciations 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.
