The Nigerian equities market recorded its fifth consecutive weekly gain as strong buying interest in FBNH (+29.6%), OKOMUOIL (+8.2%) and GTCO (+3.5%) drove the All-Share Index 1.4% higher to close at 41,438.15 points.
October 15, 2021/Cordros Report
Global economy
According to the Bureau of Labour Statistics (BLS), headline inflation in the United States (US) reversed August’s moderation as it rose by 5.4% y/y in September (August: +5.3% y/y). The pressure on domestic prices reflects the combined impact of the (1) ongoing global energy crunch, (2) pent-up demand following the sustained ease of COVID-19 restrictions, and (3) supply chain disruptions. Accordingly, pressures were most significant in the prices of energy commodities (+41.7% y/y vs August: +41.9% y/y) followed by food (+4.6% y/y vs August: +3.7% y/y), shelter (+3.2% y/y vs August: +2.8% y/y) and new vehicles (+8.7% y/y vs August: +7.6% y/y). Notably, food inflation (+4.6% y/y) is at its highest since December 2011, when food prices increased by 4.7% y/y. On a month-on-month basis, consumer prices rose by 0.4% in September (August: +0.3% m/m). Despite the favourable base from the prior year, we expect the persistent global energy shortage amidst supply chain bottlenecks to keep prices pressured in the short term.
According to China’s National Bureau of Statistics (NBS), headline inflation moderated for the fifth consecutive month to 0.7% y/y in September (August: 0.8% y/y) – the lowest since March 2021 (0.4% y/y). The downtrend in the inflation rate was driven by the sustained decline in the food index (-5.2% y/y vs August: -4.1% y/y), reflective of the continuous decline in pork prices (-46.9% y/y vs August: -44.9% y/y). For us, the sustained decline in pork prices is consistent with the recovery of the country’s pig herds size from the African swine outbreak that affected production in 2020. Meanwhile, the non-food basket (+2.0% y/y vs July: +1.9% y/y) advanced slightly due to a rise in fuel and utility prices (+1.3% y/y vs July: +1.1% y/y). On a month-on-month basis, consumer prices were flat at 0.0% m/m in September (August: +0.1% m/m). Although we expect higher energy prices to exert upward pressures on the non-food index, we believe the impact of (1) improved food supply and (2) a favourable base from the prior year would keep prices within the band of 0.6%-0.9% over the short term.
Global markets
Like the prior week, global stocks edged higher following investors’ positive reactions to the stellar corporate earnings and economic reports in U.S, which temporarily overshadowed concerns over the higher inflation amid supply chain disruptions. Accordingly, US (DJIA; +0.5% and S&P; +1.1%) were set for weekly gains as positive data on the labor market, and solid corporate earnings drove a rally in tech stocks. In Europe, the STOXX Europe (+2.1%) and FTSE 100 (+1.8%) were poised to end the week in green as strong earnings releases in US balanced stagflation worries. Likewise, In Asia, the Nikkei 225: (+3.6%) rallied following bullish sentiments on Wall Street. On the other hand, the SSE (-0.6%) declined as investors weighed the impact of elevated inflation on the prospects of continued recovery in the global economy. Elsewhere, the Emerging (MSCI EM: +0.8%) and Frontier (MSCI FM: +1.2%) market stocks posted weekly gains following bullish sentiments in South Korean (+2.0%) and Nigerian (+1.4%) markets, respectively.
Nigeria
Economy
According to the recently released 2022FY budget details by the Ministry of Finance, Budget & National Planning, the FGN expects to generate NGN10.13 trillion in aggregate revenue – retained revenue in the last five years only achieved a 63.3% average performance rate. Meanwhile, the FGN’s proposed aggregate expenditure (NGN16.39 trillion) for 2022FY is 12.5% higher than the 2021E budget (NGN14.57 trillion) following broad-based increases across debt service, recurrent non-debt expenditure and capital items. Accordingly, the FGN projects a fiscal deficit (including GOEs and project-tied loans) of NGN6.26 trillion or 3.4% of GDP. The FGN expects to finance the deficit through domestic borrowings (NGN2.51 trillion), foreign borrowings (NGN2.51 trillion), project-tied loans (NGN1.16 trillion) and privatisation proceeds (NGN90.73 trillion). If passed by the Senate, we expect the actual deficit to run significantly ahead of the budgeted deficit in 2022FY. Our expectation is hinged on (1) revenue underperformance given the over-optimistic revenue projections and (2) near-perfect execution of the expenditure items (save for capital spending) in line with the historical trends.
Headline inflation sustained deceleration for the sixth consecutive month, as it slowed by 38bps to 16.63% y/y in September (August: +17.01% y/y). The moderation was due to the sustained slowdown in food prices, reflecting the continued impact of the favourable base from the prior year. Specifically, food inflation moderated by 74bps to 19.57% y/y (August: +20.30% y/y) – the lowest since December 2020 (+19.56% y/y). Meanwhile, the core inflation increased by 34bps to 13.74% (August: +13.41% y/y) as prices increased across all of the sub-baskets except for the health (-22bps), transport (-5bps), and communications (-3bps) sub-baskets. On a month-on-month basis, headline inflation increased by 13bps to 1.15% (August: 1.02% m/m). We expect food prices to moderate in October, given the impact of the primary harvest season. However, we expect the impact of currency weakening and higher transportation costs to stoke upward pressures in the core basket. Accordingly, we look for m/m headline inflation reading of 1.27% in October, with the high base effect from the corresponding period of 2020 translating to 30bps moderation in y/y headline inflation to 16.32%.
Capital markets
Equities
The Nigerian equities market recorded its fifth consecutive weekly gain as strong buying interest in FBNH (+29.6%), OKOMUOIL (+8.2%) and GTCO (+3.5%) drove the All-Share Index 1.4% higher to close at 41,438.15 points. Consequently, the MTD and YTD return rose to +3.0% and +2.0%, respectively. Likewise, the activity levels mirrored the upbeat performance, as trading volumes and value grew by 31.6% w/w and 45.1% w/w, respectively. Across our sectoral coverage, the Banking (+2.6%), Insurance (+1.6%), Industrial Goods (+1.0%), Oil and Gas (+0.6%) and Consumer Goods (+0.5%) indices all posted gains.
In the coming week, we expect investors’ sentiment will be shaped by Q3 earnings releases and the outcome of the bond auction scheduled to hold on Wednesday as they seek clarity on the movement of yields in the Fixed Income market. As a result, we envisage a mixed trading pattern due to bargain hunting activities in dividend-paying stocks amid intermittent profit-taking activities. Notwithstanding, we reiterate the need for positioning in only fundamentally sound stocks as the weak macro environment remains a significant headwind for corporate earnings.
Money market and fixed income
Money market
The overnight (OVN) rate expanded by 550bps w/w to 20.0% following debits for CRR, net NTB issuances (NGN65.57 billion), CBN’s weekly OMO (NGN50.00 billion) and FX auctions amid inflow from OMO maturities (NGN110.00 billion).
In the coming week, we expect the OVN rate to trend lower but remain elevated in the double-digit region, given expected outflows for the monthly bond auction and CBN’s weekly auctions, which are likely to offset inflows from OMO maturities (NGN85.00 billion) and FGN bond coupon payments (NGN32.67 billion).
Treasury bills
The Treasury bills secondary market ended the week on a bullish note following (1) the improved system liquidity in the early parts of the week and (2) market participants’ filling unmet demand from Wednesday’s NTB PMA at the secondary market. Consequently, the average yield across all instruments declined by 5bps to 5.8%. Across the market segments, the average yield remained unchanged at 6.5% at the OMO segment but contracted by 7bps to 5.2% at the NTB segment. At the NTB PMA, the CBN offered NGN121.66 billion for sale and eventually allotted NGN187.23 billion – NGN4.22 billion of the 91D, NGN6.95 billion of the 182D and NGN176.06 billion of the 364D bills with stop rates of 2.50% (unchanged), 3.50% (unchanged), and 7.25% (previously 7.50%), respectively. Demand at this auction was very strong, with a subscription level of NGN493.03 billion (Bid-offer ratio: 4.1x vs previous auction: 1.6x).
We expect yields to further trend lower next week, as investors sustain buying activities in reaction to the moderation in the stop rate of the one-year paper at the last primary market auction.
Bonds
The Treasury bonds secondary market closed the week with mixed sentiments, albeit with a bullish tilt, as investors (1) remained on the sidelines awaiting further clarity on the direction of yields and (2) refocused their attention to corporate instruments. Consequently, the average yield pared by 1bp to 11.3%. Across the benchmark curve, the average yield expanded at the short (+2bps) and long (+2bps) ends as investors sold off the JAN-2026 (+20bps) and MAR-2035 (+12bps) bonds, respectively. However, it declined at the mid (-10bps) segment following demand for the MAR-2027 (-31bps) bond.
Next week, we expect the outcome of the bond auction to shape market sentiments and the direction of yields. At the auction, the DMO will be offering instruments worth c. NGN150.00 billion through re-openings of the 12.50% FGN JAN 2026, 16.2499% FGN APR 2037 and 12.98% FGN MAR 2050 bonds.
Foreign Exchange
Nigeria’s FX reserves sustained its weekly accretion, as the gross reserve position closed higher by USD1.03 billion w/w to USD39.42 billion (13th October 2021). Meanwhile, the naira depreciated by 0.2% w/w to NGN415.07/USD at the I&E window (IEW) but appreciated by 0.2% w/w to NGN572.00/USD at the parallel market. At the IEW, total turnover (as of 14th October 2021) declined by 19.8% WTD to USD786.40 million, with trades consummated within the NGN404.00 – 447.60/USD band. In the Forwards market, the rates on the 1-month (-0.1% to NGN416.07/USD), 3-month (-0.3% to NGN421.01/USD), 6-month (-0.5% to NGN431.47/USD), and 1-year (-1.1% to NGN450.61/USD) contracts reflected 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 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.
