We observed investors took advantage of the gains recorded over the past month in booking profit on bellwether stocks. Accordingly, the NGX All-Share Index shed 0.1% to close at 42,014.50 points.
November 5, 2021/Cordros Report
Global economy
The United States Federal Open Market Committee (FOMC) voted unanimously to maintain the key policy rate in a target range of 0.00% – 0.25%. In line with our expectations, the major highlight of the meeting was the Fed’s decision to begin reducing the monthly pace of its net asset purchases by USD15.00 billion (USD10.00 billion for Treasury securities and USD5.00 billion for agency mortgage-backed securities) later this month and by USD30.00 billion beginning in December. In addition, the Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month. The underlying tone of the FOMC suggests that the Fed remains largely accommodative, particularly as the Committee is in no rush to hike rates despite concerns that higher inflation may not be quite as transitory as initially expected. Overall, we expect the Fed to wind down its net asset purchases by June 2022 based on the current pace of reduction, paving the way for a possible rate hike in H2-22.
At its November meeting, the Monetary Policy Committee (MPC) of the Bank of England (BOE) voted by a majority of 7 – 2 to hold the key policy rate steady at 0.1%. The Committee also maintained the existing asset purchase programme, targeting GBP895.00 billion by the end of 2021FY. However, unlike its previous meetings, where votes were unanimous, 3 out of 9 members voted for changes to the bond-purchase programme reflecting growing worries over elevated inflationary pressures. The Committee also kept the prospect of a rate hike alive, noting that it would be necessary to increase the Bank Rate over the coming months if the labour market conditions continue to move in line with its central projections. The (1) divergence in voting pattern and (2) tone of the meeting suggests that the Committee is beginning to feel unease with the inflationary pressures despite highlighting that it would be transitory. Accordingly, we expect the BOE’s interest rate hike to come within H1-22 if the labour market conditions continue to improve.
Global markets
Global stocks hovered around the record levels attained in the prior week as upbeat third-quarter earnings in US and Europe alongside dovish comments by the US Federal Reserve and the Bank of England buoyed investors’ sentiment. Furthermore, a better-than-expected US jobs data released later in the week added to overall optimism about the global economic recovery. Accordingly, US (DJIA; +0.9% and S&P; +1.6%) were on course to end the week higher as reassurances given by Federal Reserve Chairman calmed investors’ nerves about the pace of interest rate hikes. In Europe, the STOXX Europe (+1.6%) and FTSE 100 (+0.6%) were set for weekly gains on the back of a strong batch of quarterly earnings and easing concerns around global monetary policy tightening. Likewise, in Asia, the Nikkei 225: (+2.5%) rallied, mirroring Wall Street’s positive sentiments. On the other hand, the SSE (-1.6%) declined as growing concerns about Chinese developers’ debt defaults unsettled investors. Elsewhere, the Emerging (MSCI EM: +0.3%) closed higher consequent upon gains in Taiwan (+1.8%), which offset losses in China (-1.6%). While the Frontier (MSCI FM: -0.5%) market stocks declined following bearish sentiments in the Nigerian (-0.1%) market.
Nigeria
Economy
The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in October (based on September revenue) reversed the previous month’s decline as it increased by 6.2% m/m to NGN739.97 billion (September: NGN696.97 billion). We understand that a significant increase in the Petroleum Profit Tax (PPT), Oil and Gas Royalties and Excise Duty were responsible for the increased disbursement in October. Notwithstanding, Companies Income Tax (CIT), VAT and Import Duty declined marginally. Of the total amount, the FGN received 40.7% or NGN301.31 billion (September: NGN289.26 billion), State Governments received NGN274.48 billion (September: NGN246.16 billion), while the Local Governments received NGN164.18 billion (September: NGN161.54 billion). We maintain our expectations that the amount to be shared by the tiers of government would remain stable at current levels (NGN650.00 billion to NGN750.00 billion) over the medium term. Our prognosis is hinged on the impact of (1) general improvement in economic activities and (2) rally in oil prices, which would partly offset the decline in crude oil production volume.
Production challenges have continued to undermine the gains associated with rising oil prices on the oil sector as Nigeria’s crude oil output remained below the quota permitted by the OPEC+ production agreement. According to the October edition of the OPEC Monthly Oil Market Report (MOMR), Nigeria’s average crude oil production (excluding condensates) stood at 1.45mb/d in September (August: 1.30mb/d) – 13.2% below the 1.67mb/d which the current agreement (as of the 4th November meeting) permits. As a result, average crude oil production declined by 2.8% q/q in Q3-21 to 1.38mb/d (Q2-21: 1.42mb/d). We attribute the production decline to the combined impact of (1) infrastructure decay and (2) complexities of operating the oil facilities. On the latter, given that some of the significant oil wells were closed during the COVID-19 pandemic, there have been difficulties getting them back to normal operations post-COVID. Based on the preceding, we imagine that the oil sector contracted on a quarter-on-quarter basis in Q3-21. That said, we do not expect a material change to the current development over the short term, given the nature of challenges which mostly involve a dearth of infrastructure investment.
Capital markets
Equities
The local bourse could not consolidate the gains recorded in the prior week as profit-taking dominated activities this week. We observed investors took advantage of the gains recorded over the past month in booking profit on bellwether stocks. Accordingly, the NGX All-Share Index shed 0.1% to close at 42,014.50 points. Notably, profit-taking in UNILEVER (-14.4%), WAPCO (-5.6%), ETI (-5.1%) and FLOURMILL (-2.7%) drove the weekly loss. Consequently, the MTD and YTD return moderated to -0.1% and +4.3%, respectively. Activity levels mirrored the market’s broad-gauge decline, as trading volumes and value declined by 52.4% w/w and 64.2% w/w, respectively. Analysing by sectors, the Banking (-1.7%), Oil and Gas (-1.6%), and Consumer Goods (-0.7%) indices declined. On the flip side, the Insurance (+1.0%) and Industrial Goods (+0.9%) indices recorded gains.
Looking ahead, we expect investors to rebalance their portfolios based on an assessment of corporate earnings released for Q3-21. As a result, we expect market performance to remain mixed in the week ahead as investors rotate their portfolios towards dividend-paying stocks amid intermittent profit-taking activities. Overall, 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 613bps w/w to 12.4%, as inflows from FAAC disbursements (NGN438.64 billion) saturated the system and offset the outflows from CBN’s weekly OMO (NGN25.00 billion) and FX auctions.
We expect the OVN rate to expand next week, following anticipated funding pressures for CBN’s (NTB, OMO and FX) auctions which are likely to outweigh the minimal expected inflow from OMO maturities (NGN4.30 billion).
Treasury bills
Trading in Treasury bills secondary market turned bullish this week, following sustained demand in reaction to the NTB stop rate moderation and as some local banks sought to reinvest funds from OMO maturities earlier in the week. Thus, the average yield declined by 20bps to 5.7%. Across the market segments, the average yield at the OMO segment contracted by 28bps to 6.1%. Similarly, the average yield at the NTB segment settled lower by 15bps to 5.3%.
In the coming week, we expect the outcome of the NTB auction to shape the direction of yields in the T-bills market. At the auction, the CBN is set to roll over NGN150.82 billion worth of maturities to market participants.
Bonds
The Treasury Bonds secondary market traded with mixed sentiments, albeit with a bearish bias as investors (1) traded in lower volumes following the unclear direction of FI yields at the primary market and (2) continued to cherry-pick attractive instruments, especially at the long end. Consequently, the average yield inched higher by 3bps to 11.3%. Across the benchmark curve, the average yield was unchanged at the short end but expanded at the mid (+9bps) segment as more sell pressures were witnessed on the NOV-2029 (+19bps) bond. Meanwhile, the average yield contracted at the long (-4bps) end following demand for the JUL-2045 (-54bps) bond.
In the short term, we maintain our view of lower yields given our expectations of limited supply and deliberate efforts by the DMO to reduce domestic borrowing costs for the government.
Foreign Exchange
Nigeria’s FX reserves snapped its ten consecutive weeks of accretion as it closed lower by USD102.20 million w/w, to USD41.73 billion (4th November 2021). Meanwhile, the naira appreciated by 0.2% w/w apiece to NGN414.30/USD and NGN564.00/USD at the I&E window (IEW) and parallel market, respectively. At the IEW, total turnover (as of 4th November 2021) decreased by 38.9% WTD to USD486.13 million, with trades consummated within the NGN404.00 – 453.10/USD band. In the Forwards market, the 1-month (+0.1% to NGN416.07/USD), 3-month (+0.5% to NGN422.22/USD) and 6-month (+0.5% to NGN431.48/USD) contracts reflected appreciations of the naira to the greenback, while the 1-year (-0.9% to NGN450.72/USD) contract depreciated.
Although the CBN has enough liquidity to support the market in the near term, we think foreign inflows (53.8% of FX inflows to the IEW pre-pandemic) are paramount for sustained FX liquidity over the medium term given their level of importance in the IEW. Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value as implied by REER (NGN456.67/USD) and (2) flexibility in the exchange rate would be significant in attracting foreign inflows back to the market. Accordingly, we expect the CBN to devalue the IEW exchange rate between NGN440.00/USD and NGN460.00/USD over the short-to-medium term.
