November 12, 2021/Cordros Report
Global economy
According to the Bureau of Labor Statistics (BLS), headline inflation in the United States (US) surged to a 31-year of 6.2% y/y in October (September: +5.4% y/y). The upward pressure on domestic prices was broad-based, reflecting the impact of (1) ongoing global energy crunch, (2) pent-up demand following continued unwinding of lockdown measures, and (3) persistent supply chain disruptions. Accordingly, pressures were most significant in the prices of energy commodities (+49.5% y/y vs September: +41.7% y/y) followed by food (+5.3% y/y vs September: +4.6% y/y), shelter (+3.5% y/y vs September: +3.2% y/y) and new vehicles (+9.8% y/y vs September: +8.7% y/y). Notably, the core index rose by 4.6% y/y (September: 4.0% y/y) – the highest since 1991. The inflation reading suggests that some previously determined transitory price pressures may be here to stay for some time. Consequently, we think the Fed could be compelled to increase the pace of rate hikes than initially anticipated if the inflationary pressure persists in the short term.
Economic growth in the United Kingdom (UK) lost some steam in Q3-21 as the impact of the resurgence in COVID-19 cases undermined recovery. According to the Office for National Statistics (ONS), the UK economy grew by 1.3% q/q in Q3-21 (Q2-21: +5.5% q/q). The subdued growth reflects the impact of rising commodity prices, supply chain constraints, and the resurgence in Covid-19 cases. Consequently, Household Consumption (2.0% q/q vs Q2-21: 7.2% q/q) grew slower while fixed investment (0.8% q/q vs Q2-21: 0.8% q/q) growth remained soft. On a year-on-year basis, the economy grew by 6.6% y/y in Q3-21 (Q2-21: +23.6% y/y), reflecting the waning impact of the base effects from the prior year amidst the easing of COVID-19 containment measures during the period. Overall, we highlight that the economy is now 2.1% below its pre-pandemic level. Although COVID-19 cases have moderated due to accelerated vaccine administration, we expect tepid growth in the last quarter of the year, as the persistent supply chain disruptions continue to weigh the country’s recovery process amidst the unfavourable base from the prior year.
Global markets
Global stocks posted mixed performances as investors sentiments were shaped by (1) a slew of impressive quarterly corporate earnings in the Eurozone and (2) strong inflation reading in the US later in the week, which fueled uncertainty over the path of the Fed’s monetary policy. In the US, the (DJIA; -1.1% and S&P; -1.0%) halted a streak of record closing highs as hotter-than-expected inflation readings dampened investors’ appetite for risk assets. In Europe, the STOXX Europe (+0.5%) and FTSE 100 (+0.8%) rallied as solid corporate earnings from energy and media stocks helped counter inflation worries and interest rate hikes from the US Fed. In Asia, the Nikkei 225: (0.0%) ended the week directionless amid a dearth of positive triggers. In contrast, the Chinese market (SSE: +1.4%) rallied on optimism that Beijing will ease regulatory curbs on real-estate companies to help stem debt defaults. Elsewhere, the Emerging (MSCI EM: +1.4%) closed higher consequent upon gains in China (+1.4%). While the Frontier (MSCI FM: -0.1%) market stocks declined following bearish sentiments in Morocco (-0.6%).
Nigeria
Economy
According to the data released by the National Bureau of Statistics (NBS), States Internally Generated Revenue (IGR) increased by 38.5% y/y to NGN849.12 billion in H1-21, compared to NGN612.87 billion in H1-20 and NGN693.91 billion in H1-19. We attribute the robust increase in IGR during the period to the improvement in domestic demand and general economic activities. Accordingly, total tax revenue increased by 27.8% y/y to NGN675.57 billion split across PAYE (+16.7% y/y to NGN488.11 billion), Direct Assessment (+71.3% y/y to NGN28.07 billion), Road Tax (+37.2% y/y to NGN16.75 billion), and Other Taxes (+74.0% y/y to NGN142.64 billion). Asides from that, revenue from the MDAs (20.4% of total IGR in H1-21) increased significantly by 106.4% y/y to NGN173.56 billion. We expect the momentum in IGR to be sustained over the rest of the year, given the improvement in domestic demand in the informal sector buoyed by the normalisation of economic activities. That said, the gloomy state of labour market conditions could constrain the growth in PAYE.
The Federal Executive Council (FEC) approved the 2021 – 2025 National Development Plan (NDP) as a successor programme to the Economic Recovery and Growth Plan (ERGP). We understand that the plan targets a c. 5.0% annual GDP growth rate and is structured around six concepts – economic growth and development, infrastructure, public administration, human capital development, social development and regional development. The plan includes an investment size of NGN348.70 trillion over the 5-year period, of which 85.7% is expected to come from the private sector, while the public sector contributes the remaining 14.3%. Like the previous NDPs, we think this is a good plan but overly ambitious given the somewhat unrealistic projections, even as most of the fund is expected to come from the private sector. Consequently, we think the risks to implementing the plan are tilted to the downsides, particularly as it is also susceptible to a change in government.
Capital markets
Equities
Despite recording losses on three of the five trading sessions, gains in telco heavyweights ensured the market closed in the green territory. Specifically, we observed strong buying interest in AIRTELAFRI (+12.8%) and MTNN (+8.8%) due to the euphoria that greeted the announcement of Payment Service Bank (PSB) licence approval by the CBN. Consequently, the All-Share index closed the week 3.0% higher at 43,253.01 points, with the MTD and YTD return settling at +2.9% and +7.4%, respectively. Activity levels were stronger than in the prior week, as trading volumes and value grew by 2.4% w/w and 69.0% w/w, respectively. Across sectors, the Banking (-1.3%), Insurance (-2.2%), Oil and Gas (-0.7%) indices declined while the Consumer Goods (+0.6%) index was the sole gainer. The Industrial Goods index closed flat.
In the week ahead, we expect investors to trade cautiously whilst taking positions in stocks with attractive dividend yields ahead of 2021FY dividend declarations. In addition, we believe the outcome of the bond auction scheduled to hold during the week will also shape market sentiments. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the unimpressive macro story remains a significant headwind for corporate earnings.
Money market and fixed income
Money market
The overnight (OVN) rate expanded by 288bps w/w to 15.3% this week, following the significant debits for CRR, net NTB issuances (NGN45.36 billion) and CBN’s weekly FX auction that offset the healthy system liquidity (average net liquidity position this week: NGN412.08 billion vs last week: NGN97.95 billion) experienced for most of the week.
In the coming week, we expect tighter liquidity in the system, as outflows for the November bond PMA, CBN’s weekly auctions may outweigh the sole inflow from OMO maturities (NGN72.50 billion). Thus, we expect the OVN to trend northwards.
Treasury bills
The Treasury bills secondary market ended the week on a bullish note as (1) the healthy system liquidity, (2) market participants’ filling unmet bids from Wednesday’s NTB PMA at the secondary market and (3) lack of fresh supply at the OMO primary market, supported demand for T-bills. Consequently, the average yield across all instruments declined by 31bps to 5.4%. Across the market segments, the average yield fell by 47bps and 15bps to 5.6% and 5.2% at the OMO and NTB segments, respectively. At Wednesday’s NTB PMA, the CBN offered NGN150.82 billion worth of instruments for sale to market participants. Demand at this auction was solid, with the highest subscription level recorded this year – NGN574.88 billion (Bid-offer ratio: 3.8x vs previous auction: 2.9x). Eventually, the CBN allotted NGN196.18 billion – NGN4.12 billion of the 91D, NGN3.00 billion of the 182D and NGN189.06 billion of the 364D bills with respective stop rates of 2.50% (unchanged), 3.50% (unchanged), and 6.50% (previously 6.99%).
We expect yields to trend lower further 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
Though with a slight bullish bias, mixed trading persisted in the Treasury bonds secondary market, as investors remained on the sidelines awaiting the NTB auction outcome for a clearer direction on FI yields. Consequently, the average yield pared marginally by 1bp to 11.3%. Across the benchmark curve, the average yield declined at the short (-11bps) end following demand for the MAR-2025 (-96bps) bond. Elsewhere, it expanded at the mid (+4bps) segment as investors sold off the FEB-2028 (+6bps) bond while the long end remained unchanged.
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. Nonetheless, in the short-term, we expect yields to hover around current levels, given our expectations of limited supply in Q4-21 and deliberate efforts by the DMO to reduce the government’s domestic borrowing cost.
Foreign Exchange
Nigeria’s FX reserve sustained its decline as the CBN stepped up its interventions in the FX market. Thus, the gross reserves closed lower by USD167.67 million w/w, to USD41.53 billion (10th November 2021). Meanwhile, the naira depreciated by 0.2% w/w to NGN415.10/USD at the I&E window (IEW) but appreciated by 4.4% to NGN540.00/USD at the parallel market. At the IEW, total turnover (as of 11th November 2021) increased by 15.8% WTD to USD654.38 million, with trades consummated within the NGN404.00 – 453.15/USD band. In the Forwards market, the 1-month (+0.1% to NGN415.85/USD), 3-month (+0.1% to NGN421.86/USD), 6-month (+0.1% to NGN430.99/USD) and 1-year (+0.7% to NGN447.63/USD) contracts reflected appreciations of the naira to the greenback.
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.
