The bullish run in the local bourse persisted for the seventh consecutive week as investors flocked into bellwether stocks following broadly impressive quarterly earnings released. Pertinently, the All-Share Index inched higher by 0.7% w/w to close at 42,038.60 points.
October 29, 2021/Cordros Report
Global economy
Economic growth weakened in the United States as the widespread COVID-19 delta variant weighed on the growth momentum. According to the Bureau of Economic Statistics (BEA), the United States economy grew slower by 2.0% q/q in Q3-21 (Q2-21: +6.7% q/q) – the weakest quarterly growth post-pandemic. The subdued growth was due to the blend of (1) fading impact of government stimulus on consumption, (2) supply chain disruptions and (3) surge in COVID-19 cases during the period. Accordingly, growth slowed substantially across Personal Consumption Expenditure (+1.6% q/q vs Q2-21: +12.0% q/q) and non-residential fixed investment (+1.8% q/q vs Q2-21: +9.2% q/q), while government consumption expenditure (+0.8% q/q vs Q2-21: -2.0% q/q) growth remained soft. On a year-on-year basis, the economy grew by 4.9% y/y in Q3-21 (Q2-21: +12.2% y/y). Although we expect the ongoing global energy crunch and supply chain disruptions to weigh on economic growth over the last quarter of the year, we anticipate an improvement in GDP growth given the sustained progress in the vaccination rate.
At its recently concluded policy meeting, the Governing Council of the European Central Bank (ECB) voted to keep the interest rate on the main refinancing operations, marginal lending facility and deposit lending facility unchanged at 0.00%, 0.25% and -0.50%, respectively. Like the September policy meeting, the Governing Council highlighted that it will continue to conduct net asset purchases under the Pandemic Emergency Purchase Programme (PEPP) until at least the end of March 2022. However, the Council noted that asset purchases would be at a moderately slower pace than in Q3-21 and Q2-21, such that favourable financial conditions are maintained. Notwithstanding, the Council reiterated that the envelope could be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation. The body language of the Council suggests they are in no hurry to hike rates, given their view that the higher inflation is temporary and will likely fade over 2022. Notwithstanding, we expect the Council to announce the tapering plan at its December meeting.
Global markets
Positive sentiments dominated global equities after upbeat earnings reports from companies in US and Europe helped investors overlook a mixed batch of economic data. Accordingly, US (DJIA; +0.1% and S&P; +1.1%) were set to close the week positively as investors reacted positively to US President Joe Biden’s recently revealed USD1.75 trillion (1.5 trillion euro) spending package and solid Q3 earnings delivered by tech companies. Likewise, European stocks (STOXX Europe: +0.4% and FTSE 100: +0.4%) were on course to close higher despite concerns about supply-chain disruptions, as investors digested corporate earnings and the ECB interest rate decisions. On the other hand, the Asian market posted mixed performances as the SSE (-1.0%) closed lower following concerns over China’s slowing economy and its possible impact on corporate earnings. Elsewhere the Japanese (Nikkei 225: +0.3%) closed the week in the green as investors reacted positively to property group China Evergrande decision to make an overdue interest payment ahead of a Friday deadline. On the other hand, the Emerging (MSCI EM: -1.3%) declined following losses in China (-1.0%), while the Frontier (MSCI FM: +1.8%) market posted gains following bullish sentiments in Kuwait (+1.9%).
Nigeria
Economy
According to the September Domestic & Foreign Portfolio Investment report of the Nigerian Exchange Limited (NGX), total transaction value at the domestic equities market increased by 32.1% m/m to NGN118.15 billion in September (August: NGN89.42 billion) – the highest since April (NGN159.93 billion). The increase was mainly due to a 46.4% m/m increase in domestic transactions (79.4% of total transaction value), reflecting robust participation of institutional investors (+92.6% m/m vs August: NGN32.21 billion). Meanwhile, foreign transactions declined by 4.0% m/m to NGN24.35 billion. We highlight that the total transaction value at the local bourse printed NGN1.33 trillion in 9M-21 (9M-20: NGN1.34 trillion). We expect domestic investors’ activities to maintain current momentum as investors take positions in dividend-paying stocks ahead of 2021FY dividend declarations. 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.
While speaking at a panel session during the 27th National Economic Summit, the Finance Minister highlighted that the FGN only factored in subsidy payment for H1-22 in the proposed 2022FY budget. Accordingly, she revealed that the FG is considering the complete deregulation of the downstream oil & gas industry in H2-22. Meanwhile, we recall that the FGN in April ordered that the petrol subsidy should remain in place for the next six months to enable the government to carry out comprehensive consultations before reaching a final decision on the issue. We think it is unlikely the government will eliminate PMS subsidy in July 2022 as this would create room for opposition parties to score cheap political points, particularly as the 2023 general elections would be a few months away. Besides, similar statements have been made in the past with labour unions restraining the government. That said, the eventual commencement of activities at the Dangote refinery could decide the fate of age-long fuel subsidies.
Capital markets
Equities
The bullish run in the local bourse persisted for the seventh consecutive week as investors flocked into bellwether stocks following broadly impressive quarterly earnings released. Notably, investors’ buying interest in GUINNESS (+23.1%), TOTAL (+17.5%), OKOMUOIL (+7.7%), NB (+3.0%) AIRTELAFRI (+1.3%), and MTNN (+0.9%) drove the benchmark index higher. Pertinently, the All-Share Index inched higher by 0.7% w/w to close at 42,038.60 points. Consequently, the MTD and YTD return increased to +4.5% and +4.4%, respectively. Likewise, the activity levels mirrored the upbeat performance, as trading volumes and value grew by 83.8% w/w and 80.8% w/w, respectively. Across our sectoral coverage, the Insurance (+5.3%), Oil and Gas (+4.0%), Banking (+2.4%), Consumer Goods (+1.5%) and Industrial Goods (+0.5%) indices all closed positive.
In the coming week, we expect positive reaction to the flurry of earnings released this week as investors rotate their portfolio towards dividend-paying stocks ahead of 2021FY dividend declarations. However, we expect profit-taking activities later in the week as the bears are likely to cash out on the gains across counters. 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 contracted by 75bps w/w to 18.5% as inflows from FAAC disbursements (NGN438.64 billion), FGN bond coupon payments (NGN160.32 billion) and OMO maturities (NGN93.00 billion) outweighed funding pressures for CRR debits, net NTB issuances (NGN85.00 billion), CBN’s weekly OMO (NGN19.00 billion) and FX auctions.
In the coming week, we expect the OVN rate to trend lower in the absence of significant funding pressures, amid expected inflow from OMO maturities (NGN103.80 billion).
Treasury bills
The Treasury bills secondary market traded with mixed sentiments as the average yield remained unchanged at 5.9%. Across the market segments, the average yield contracted by 7bps to 6.4% at the OMO segment but expanded by 10bps to 5.5% at the NTB segment, following the introduction of new bills to the secondary market. At this week’s NTB PMA, the CBN offered NGN150.05 billion for sale and eventually allotted NGN235.05 billion – NGN2.68 billion of the 91D, NGN2.02 billion of the 182D and NGN230.34 billion of the 364D bills with respective stop rates of 2.50% (unchanged), 3.50% (unchanged), and 6.99% (previously 7.25%). With a subscription level of NGN431.12billion, we highlight that demand was strong at this auction (Bid-cover ratio: 1.8x).
We expect yields to trend lower in the coming week, as investors react to the recent moderation in stop rate at the NTB primary market.
Bonds
Bullish sentiments returned to the Treasury Bonds secondary market as investors (1) anticipated lower yields in the FI market following the outcome of the NTB auction, and (2) cherry-picked on attractive offers as they looked to re-invest the liquidity from FGN bond coupon payments. Consequently, the average yield contracted by 8bps to 11.3%. Across the benchmark curve, the average yield expanded at the short (+7bps) end as investors upwardly repriced the JAN-2026 (+46bps) bond but contracted at the mid (-25bps) and long (-6bps) segments following demand for the NOV-2029 (-33bps) and JUL-2034 (-18bps) bonds, respectively.
In the face of reduced supply of instruments in Q4 and deliberate efforts by the DMO to reduce the government’s domestic borrowing cost, we maintain our expectations of lower average yields in the short term.
Foreign Exchange
The accretion to Nigeria’s FX reserves continued this week following the inflows from IMF SDR and FCY borrowings. Precisely, the gross reserves position closed higher by USD636.61 million w/w to USD41.75 billion (26th October 2021). Meanwhile, the naira was flat w/w at NGN415.10/USD at the I&E window (IEW) but appreciated by 1.1% w/w to NGN565.00/USD at the parallel market. At the IEW, total turnover (as of 28th October 2021) declined by 17.5% WTD to USD702.24 million, with trades consummated within the NGN404.00 – 453.15/USD band. In the Forwards market, the rates on the 1-month (-0.2% to NGN416.67/USD), 3-month (-0.8% to NGN424.47/USD), 6-month (-0.8% to NGN446.53/USD), and at the 1-year (-0.1% to NGN446.53/USD) contracts reflected depreciations relative 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 (USD3.40 billion). Accordingly, we expect the naira to remain relatively range-bound (NGN410.00/USD – NGN415.00/USD) at the IEW.
