Bearish sentiments dominated the local bourse this week, as the market recorded losses on four of the five trading sessions following profit-taking activities. Consequently, the All-Share index declined by 0.1% w/w to settle at 43,199.27 points.
November 19, 2021/Cordros Report
Global economy
According to the Office for National Statistics (ONS), headline inflation in the United Kingdom (U.K) resumed uptrend in October, rising to 4.2% y/y (September: 3.1% y/y) – the highest since December 2011 (4.8% y/y). Asides from the existing drivers, the uptrend in domestic prices was magnified by the 12.2% increase in the cap on energy prices, which took effect on the 1st of October in response to the soaring global energy prices. Accordingly, price pressures were most significant in the housing & utilities (6.8% y/y vs September: 1.9% y/y), transport (9.9% y/y vs September: 8.4% y/y), food (1.2% y/y vs September: 0.8% y/y) and restaurants & hotels (6.3% y/y vs September: 5.1% y/y) sub-baskets. On a month-on-month basis, the headline inflation jumped to 1.1% from 0.3% in September. In the near term, we expect the ongoing global energy crunch to keep domestic prices elevated amid persistent supply chain bottlenecks. Consequently, we believe the stakes are high for the Bank of England (BOE) to hike interest rates at its next meeting in December.
According to the recently released data from the Eurostat, Euro Area’s consumer prices rose to a 13-year high of 4.1% y/y in October (September: +3.4% y/y). The heightened inflationary pressure is reflective of the (1) surging energy prices, (2) demand recovery following the sustained ease of COVID-19 restrictions, and (3) persistent supply chain disruptions. Accordingly, the most significant price increases were seen in cost of energy (+23.7% y/y vs September: +17.6% y/y), services (+2.1% y/y vs September: +1.7% y/y) while non-energy industrial goods (+2.0% y/y vs September: +2.1% y/y) and food, alcohol & tobacco (+1.9% vs September: +2.0% y/y) grew at a slower pace. On a month-on-month basis, consumer prices rose by 0.8% in October (September: +0.5% m/m). We expect further increases in both the headline and core inflation over the short term. Our prognosis is hinged on the persistent impact of (1) elevated global gas prices and (2) supply chain disruptions on domestic price levels.
Global markets
Global stocks posted mixed performances as investors sentiments were shaped by (1) progress on the Democrats’ Build Back Better bill in the US, (2) uncertainties regarding the path of monetary policy from the US Fed and, (3) spiraling COVID-19 cases in Germany and central Europe which sparked concerns on the negative consequences of re-imposition of lockdowns. In the US, the (DJIA; -0.6% and S&P; +0.5%) moved in opposite directions as investors weighed the prospect of delayed interest rate hikes from the Fed against news out of Europe about fresh lockdowns. In Europe, the STOXX Europe (+0.2%) managed to eke out a weekly gain despite concerns that Germany may rekindle lockdown measures while the FTSE 100 (-1.3%) declined on the back of losses in the shares of miners and oil companies. In Asia, the Nikkei 225: (+0.5%) was buoyed by reactions to a record stimulus package approved by the Prime Minister to support struggling households and firms. Similarly, the Chinese market (SSE: +0.6%) posted gains due to rally in logistics stocks late in the week, which masked negative sentiments induced by disappointing earnings from Alibaba. Elsewhere, the Emerging (MSCI EM: -0.9%) closed lower consequent upon sell-offs in India (-1.7%). While the Frontier (MSCI FM: -1.0%) market stocks declined following bearish sentiments in Kenya (-1.2%).
Nigeria
Economy
According to the National Bureau of Statistics (NBS), headline inflation moderated for the seventh consecutive month to 15.99% y/y in October (September: 16.63% y/y) – the lowest since December 2020 (15.75% y/y). Sifting through the breakdown provided, we highlight that the food inflation (-123bps to 18.34% y/y) slowed to an 11-month low in line with the base-induced moderation in prices of farm produce (-76bps to 18.31% y/y) and processed food (-136bps to 18.35% y/y). Similarly, core inflation (-51bps to 13.24% y/y) slowed to a 5-month low despite price increases across utilities (+12bps to 10.43% y/y), transportation (+7bps to 15.03% y/y), and clothing & footwear (+17bps to 14.67% y/y). We expect food prices to increase over the short term due to the festive induced demand amidst below-average primary harvest. Similarly, we expect utilities and transport prices to maintain their uptrends given the increase in gas and diesel prices. Consequently, we look for a m/m headline inflation of 1.01% in November and 1.07% in December, translating to y/y readings of 15.32% y/y and 14.70% y/y, respectively.
Nigeria’s economy grew slower in Q3-21 compared to the prior quarter, as the impact of the favourable base from the prior year began to dissipate. According to the recently released GDP report by the National Bureau of Statistics (NBS), the Nigerian economy grew by 4.03% y/y in Q3-21 (Q2-21: +5.01% y/y). The Oil sector contracted for the sixth consecutive quarter, declining by 10.73% y/y in Q3-21 (Q2-21: -12.65% y/y), reflective of the impact of lingering production challenges. On the other hand, Trade (+11.90% y/y vs Q2-21: +22.49% y/y) and Telecoms (+10.87% y/y vs Q2-21: +5.90% y/y) sub-sectors were the major drivers of the Non-oil sector’s (+5.44% y/y vs Q2-20: +6.74% y/y) performance. We expect Oil sector’s production challenges to persist due to the nature of challenges constraining output. In contrast, we expect the dissipating base effects from the prior year to slow the Non-oil sector’s growth. Accordingly, we forecast the economy will grow by 2.44% y/y in Q4-21, translating to a growth of 2.94% in 2021FY.
Capital markets
Equities
Bearish sentiments dominated the local bourse this week, as the market recorded losses on four of the five trading sessions following profit-taking activities. Consequently, the All-Share index declined by 0.1% w/w to settle at 43,199.27 points, with the MTD and YTD return settling at +2.8% and +7.3%, respectively. Notably, profit-taking in TOTAL (-9.9%), GTCO (-7.5%), FBNH (-3.7%) and NB (-2.8%) drove the weekly loss. Activity levels were mixed, as trading volumes declined by 4.8% w/w while value grew by 33.4% w/w. Sectoral performance was broadly bearish as all sectors closed in the red. The Oil and Gas (-3.6%) led the losers’ chart followed by Banking (-1.6%), Consumer Goods (-1.4%), Insurance (-0.5%), and Industrial Goods (-0.1%) indices.
In the week ahead, we expect a mixed market performance as the bulls and bears are likely to be in a gridlock due to the opposing forces of bargain-hunting activities in stocks with attractive dividend yields ahead of 2021FY dividend declarations and intermittent profit taking activities. 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 475bps w/w to 20.0% this week, in light of the funding pressures for the November bond auction settlement (NGN225.25 billion), CBN’s weekly OMO (NGN25.00 billion) and FX auctions that offset the sole inflow from OMO maturities (NGN70.50 billion).
Next week, we envisage the OVN would remain elevated in the double-digit region as expected debits for CRR, possible net NTB issuances and CBN’s weekly auctions inflows are likely to offset expected inflows from FAAC disbursements, OMO maturities (NGN33.00 billion) and FGN bond coupon payments (NGN17.87billion).
Treasury bills
Bullish trading sentiments persisted in the Treasury bills secondary market still on the back of declining primary market offer rates in the NTB segment and as foreign investors increased their OMO portfolio. Accordingly, the average yield across all instruments contracted by 11bps to 5.3%. Across the market segments, the average yield declined by 14bps and 8bps to 5.5% and 5.1% at the OMO and NTB segments, respectively.
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 NGN118.73 billion worth of maturities to market participants.
Bonds
The Treasury bonds secondary market traded snapped the mixed trading sentiments recorded in the last two weeks and traded with bearish sentiments as investors (1) took profits on their bond auction winnings and (2) reacted to the increased stop rate of the longer dated instrument on offer. Accordingly, the average yield expanded by 7bps to 11.1%. Across the benchmark curve, the average yield declined at the short (-3bps) end following sustained demand for the JAN-2026 (-15bps) but expanded at the mid (+13bps) and long (+5bps) segments as investors upwardly repriced the JUL-2030 (+24bps) and JUL-2034 (+10bps) bonds, respectively. At the bond auction, the DMO offered instruments worth NGN150.00 billion to investors through re-openings of the 12.5000% FGN JAN 2026 (Bid-to-offer: 1.0x; Stop rate: unchanged at 11.65%), 16.2499% FGN APR 2037 (Bid-to-offer: 0.9x; Stop rate: unchanged at 12.95%) and 12.9800% FGN MAR 2050 (Bid-to-offer: 3.4x; Stop rate: 13.30%, previously: 13.20%) bonds. Following the significant level of demand (subscription: NGN267.15 billion; bid-to-offer: 1.8x), the DMO eventually over-allotted instruments worth NGN225.25 billion, resulting in a bid-to-cover ratio of 1.2x.
Next week, we maintain our view of lower yields given our expectations of limited supply of debt instruments and deliberate efforts by the DMO to reduce domestic borrowing costs for the government.
Foreign Exchange
Nigeria’s FX reserve declined for the third consecutive week as the gross reserves closed lower by USD102.58 million w/w, to USD41.41 billion (18th November 2021). Meanwhile, the naira appreciated by 0.2% w/w to NGN414.40/USD at the I&E window (IEW) but depreciated by 2.5% to NGN554.00/USD at the parallel market. At the IEW, total turnover (as of 18th November 2021) declined by 20.8% WTD to USD589.96 million, with trades consummated within the NGN386.00 – 453.75/USD band. In the Forwards market, the 1-month (+0.1% to NGN415.57/USD), 3-month (+0.2% to NGN421.02/USD), 6-month (+0.2% to NGN430.06/USD) and 1-year (+0.1% to NGN447.00/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) is 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 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 over the short-to-medium term.
