October 12, 2021/Proshare

By Coronation Research

What are the chances of a bull market in equities for the remainder of 2021? The market rose by 50.03% in 2020, and to have two consecutive positive years in the NGX All-Share Index is rare. However, with market interest rates looking fairly stable, and the possibility of earnings rising, the prospects look reasonable.

FX

Last week, the exchange rate at the Investors and Exporters Window (I&E Window) weakened by 0.22% to N414.30/US$1. Elsewhere, the Central Bank of Nigeria’s FX reserves rose by 4.34% to US$38.18bn (7 October 2021) – the highest level since 24 February 2020 and signifying its seventh consecutive weekly accretion. The accretion partially reflects the US$3.50bn International Monetary Fund’s (IMF) Special Drawing Right (SDR) allocation to Nigeria. In addition, the FGN also successfully raised US$4.00bn in Eurobonds last month. We expect this to give the nation’s foreign reserves a boost, and we expect to see a rise to above US$40.00bn before the end this month. Nevertheless, FX turnover on the official markers remains relatively low. Thus, there may be continued pressure on the official and parallel exchange rates if the CBN does not increase supply, in our view. 

Bonds & T-bills    

Last week, the Federal Government of Nigeria (FGN) bond secondary market closed on a bearish note as weak sentiments, which set in following the increased stop rate at the last T-bill primary auction, persisted. As a result, the average benchmark yield for bonds rose by 14bps to 11.34%. The yields on the 7-year (+20bps to 11.75%) and 3-year (+39bps to 9.22%) bonds widened. However, the yield of an FGN Nairadenominated bond with 10-years to maturity fell by 2bps to 12.00%. On Wednesday, the Debt Management Office (DMO) released its Q4 2021 bond issuance calendar. It will be offering N400bn to N480bn (US$973.2mn to US$1.17bn) across the January 2026, April 2037 and March 2050 bonds. We note that the 2026 and 2037 instruments will be substituted in as the benchmark 10 and 20-year bonds during the quarter (previously the 2028 and 2036 bonds), while the 2050 bond will be maintained as the 30-year tenor offering. We also highlight the marginal reduction in proposed issuances in Q4 (N440bn using the midpoint of the range) relative to the N450bn offering in each of the previous three quarters. Buttressed by the preceding, we reiterate our expectation that a future rise in bond yields, if any, is unlikely to be sharp over the coming months due to unaggressive borrowing as the DMO manages its debt service costs.

Trading in the Treasury Bill (T-Bill) secondary market was mixed, albeit with a bullish tilt, as local banks invested excess liquidity in liquid instruments. Consequently, the average benchmark yield for T-bills fell marginally (-1bp w/w) to 5.27%. Elsewhere, the average yield for OMO bills expanded by 15bps in the week to close at 6.47%. Specifically, the annualised yield on a 335-day T-bill fell by 51bps to 6.98%, while the yield on a 312-day OMO bill fell by 20bps to 7.33%. At this week’s T-bill PMA, we expect the DMO to roll over N121.67bn worth of maturities. 

Oil

The price of Brent hit a peak of US$82.56/bbl last week, its highest level since 10 October 2018, before settling at US$82.39/bbl (+3.92% w/w) at the week’s end. Last week’s gain marked the fifth consecutive weekly gain for the commodity. Year-to-date, Brent is up 59.05% and has traded at an average price of US$68.40/bbl, 58.26% higher than the average of US$43.22/bbl in 2020. The price has continued to rally amidst supply concerns around Hurricane Ida’s disruptions and the persisting energy crunch in parts of Europe and China. Elsewhere, the refusal of the Organisation of the Petroleum Exporting Countries and its allies (OPEC+) to increase production by more than the agreed-upon 400,000 bpd this month further buoyed oil prices. Consequently, we reiterate our view that the price of Brent oil is likely to remain well above the US$60.00/bbl mark for several months. 

Equities

The NGX All-Share Index (NGX-ASI) clinched its fourth consecutive weekly gain, advancing by 1.61% last week to 40,868.36 points – its highest level since 11 February 2021. Consequently, the index erased all its losses for the year, ending the week with a year-to-date return of +1.48%. FBN Holdings +21.74%, Airtel Africa +6.29%, Presco +5.92% and FCMB Group +5.88% closed positive last week, while PZ Cussons -6.09%, Honeywell Flour Mills -5.23%, International Breweries -5.21% and Ardova -2.58% dropped points. Across the sector indices, the NGX Banking index rose by +4.53%, followed by NGX Oil & Gas +0.24% and NGX Industrial +0.11% indices. Conversely, the NGX Insurance -1.51% and Consumer Goods – 0.51% indices posted losses. The Model Equity Portfolio will resume next week. 

Another Bull Market in Equities?

Last week we argued that, given the likelihood that government borrowing will not be aggressive for the rest of this year, future rises in market interest rates are likely to be muted. While there was a massive expansion in FGN bond yields from January until mid-May (the average yield expanded by 658 basis points, according to our measure), these have contracted since then (by 175bps), with the result that FGN bonds are now performing quite well.

What are the implications for the equity market? There are no hard-and-fast rules (not even in the US government debt and equity markets) for the relationship between market interest rates and equity market performance. However, it is often the case that a steep decline in interest rates (or a long period of low interest rates) coincides with a bull market in equities. The preceding was the case – very obviously – in Nigeria in 2020 when 1-year T-bill rates fell from 5.93% pa in January to 0.59% pa in December, and the equity market rallied by 50.03% over the year (left-hand chart).

More surprisingly, when rates rose during the first nine months of 2021 (1-yr T-bill rates rose from 1.78% in January to 6.98% last Friday), the equity market gains from 2020 were not reversed. One can argue that this was partly because the market was very cheap at the beginning of 2020, so a 50.03% gain did not make it expensive. Additionally, one can also argue that, as in 2020, today’s investors are happy to take risk (equities) because T-bill rates in no way compensate for inflation, which stood at 17.01% y/y in September. 

With the equity market up 1.48% year-to-date, is it possible that we will see a second consecutive year of positive performance in the NGX All-Share Index? We think that it is, even though years of back-to-back positive NGX All-Share Index performance are rare.

In our view, we expect the equity market will remain strong, given that fixed income yields appear to have hit the ceiling or resistance at current levels. With the monetary authorities still mainly concerned with driving growth, it seems clear that they, for the time being, seem content to see 1-year yields substantially below 10.0% and average bond yields below 12.0%. Hence, a future rise in yields, if any, is unlikely to be sharp over the rest of the year. 

Elsewhere, we think earnings are likely to be quite good in H2 2021, especially for the top six banks and the telcos, which together make up 43% of the index. On the former, most banks stated they were implementing changes and repricing (e.g., making loans costlier for customers) at the end of Q1 2021 or the beginning of Q2 2021. However, to a large degree, this did not seem to play out in H1 21. Hence, we expect to see the positive pass-through of these changes and stable interest rates on bank earnings in the second half of the year. See Coronation Research, “Nigerian Banks: Resilience Built-In“ 25 June 2021