Local stocks managed to eke out a weekly gain despite pressure from profit-taking activities, as the All-Share Index ended the week 0.3% higher to close at 43,308.29 points.
November 26, 2021/Cordros Report
Global economy
According to preliminary estimates from the IHS Markit/CIPS, the United Kingdom’s (UK) output expansion remain upbeat as the composite PMI printed 57.7 points in November (October: 57.8 points). Analysing the breakdown, the Manufacturing PMI rose to a 3-month high in November (58.2 points vs October: 57.8 points), driven by solid growth in new orders, output and employment amidst the shortages of critical components. Meanwhile, business activity as measured by the Service PMI moderated slightly to 58.6 points in November (October: 59.1 points). Nonetheless, we highlight that the print was well above the post-lockdown low seen in August (55.0 points), reflecting the continued albeit gradual rebound in export sales in line with the more liberal international travel restrictions. We expect output expansion to continue to moderate, albeit slowly over the short term, given the impact of (1) supply chain disruptions on deliveries of inputs and (2) spillover impact of re-imposition of containment measures in some European countries.
Flash estimates released by the IHS Markit showed that the United States (US) Manufacturing PMI rose to 59.1 points in November (October: 58.4 points). The increase was primarily due to the expansion of new orders at a sharper pace compared to October amidst raw material delays and labour shortages. On the other hand, the Services PMI moderated to 57.0 points (October: 58.7 points). Still, the print remains above the sector’s long-run pre-pandemic average (c. 55.0 points), underpinned by increased domestic and institutional travel in line with the further easing of COVID-19 restrictions. Overall, the Composite PMI slowed to 56.5 points (October: 57.6 points) amidst labour shortages and raw material delays. Like the UK, we expect private sector expansion to continue to moderate over the short term, given the impact of (1) supply chain disruptions on deliveries of inputs and (2) labour shortages as the competition for skilled workers continue to deepen in the economy.
Global markets
Negative sentiments dominated global equities as risk-off sentiment reverberated across the world. This was due to the combined impact of worries over the normalization of monetary policy and the spread of a new COVID-19 variant, as renewed restrictions in major regions dampened investors’ hopes about the global recovery. US markets experienced a shortened trading week due to the Thanksgiving holiday on Thursday. However, the (DJIA; +0.6% and S&P; +0.1%) managed to end the week in the green as investors assessed the strong economic data and minutes from the Fed Reserve meeting earlier in the week. In Europe, the STOXX Europe (-4.1%) and FTSE 100 (-2.1%) plummeted as investors were rattled by the surge in Covid cases in the region. Likewise, in Asia, the Nikkei 225: (-3.3%) plunged as reports of a new COVID-19 variant raised concerns over its potential effect on the global recovery. On the other hand, the SSE (+0.1%) managed to eke out a weekly gain despite regulatory jitters in China. Elsewhere, the Emerging (MSCI EM: -1.1%) mirrored the downbeat mood across global equities consequent upon sell-offs in South Korea (-1.2%), which offset gains in China (+0.1%). While the Frontier (MSCI FM: +0.1%) market stocks posted marginal gains primarily driven by bullish sentiments in the Vietnamese (+3.1%) market.
Nigeria
Economy
In line with our expectations (see report: MPC to Leave Monetary Policy Parameters Unchanged), the Monetary Policy Committee (MPC) unanimously voted to retain the MPR at 11.5% alongside other key monetary policy parameters at its last meeting of the year. The Committee expects that with the sustained interventions by the CBN, economic activities would continue to normalise in the short-to-medium term leading to improved output growth and lower inflationary pressures. We observed that a recurring theme at the meeting was the likely impacts of the normalisation of monetary policy by central banks in advanced countries. We think the concerns of the Committee is justified given the attendant effect of rising global bond yields on capital flows into emerging economies like Nigeria. Moreover, there has been a chorus among systemically critical central banks to wind down their asset purchase programme. Thus, we think the underlying tone suggests the Committee is bracing up for a change to a hawkish policy from H2-22 when we believe (1) the Committee will judge that substantial progress has been made in supporting economic recovery and (2) the US Fed would wind down its net asset purchases.
According to the October Domestic & Foreign Portfolio Investment report of the Nigerian Exchange Limited (NGX), total transaction value at the domestic equities market increased by 80.3% m/m to NGN213.07 billion in October (September: NGN118.15 billion) – the second consecutive month of increase and the highest since March (NGN228.50 billion). In line with our expectations, the increase was due to the broad-based participation from the domestic and foreign investors. Precisely, gross domestic transactions increased by 81.9% m/m to NGN170.65 billion, while foreign transactions increased by 74.2% m/m to NGN42.42 billion. We expect domestic investors’ activities to maintain the current momentum as investors hunt for bargains in dividend-paying stocks ahead of 2021FY dividend declarations in H1-22. Similarly, we expect increased participation from FPIs on account of expected improved dollar liquidity at the IEW. Accordingly, we see scope for improved activities from both the domestic and foreign investors over the medium term.
Capital markets
Equities
Local stocks managed to eke out a weekly gain despite pressure from profit-taking activities, as the All-Share Index ended the week 0.3% higher to close at 43,308.29 points. Gains in AIRTELAFRI (+3.8%), following foreign investors’ interest and bargain-hunting activities in FBNH (+3.9%) and NESTLE (+2.2%) spurred the weekly gain. Based on the preceding, the MTD and YTD return settled at +3.0% and +7.5%, respectively. Activity levels were stronger than the prior week, as trading volumes and value increased by 146.7% w/w and 10.9% w/w, respectively. Sectoral performance was mixed as the Insurance (+3.6%) index emerged as the sole gainer while the Consumer Goods (-2.0%), Oil and Gas (-0.9%), and Banking (-0.3%) indices declined. The Industrial Goods index closed flat.
In the week ahead, we expect market performance to be dominated by the bulls, as positioning by early birds in dividend-paying stocks ahead of 2021FY dividend declarations should outweigh profit-taking activities. 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 433bps w/w to 3.0%, as inflows from FAAC disbursement (c. NGN387.00 billion), OMO maturities (NGN33.00 billion) and FGN bond coupon payments (NGN17.87 billion) saturated the system and limited the impact of outflows for NTB net issuances (NGN97.00 billion) and CBN’s weekly OMO (NGN25.00 billion) and FX auctions.
In the coming week, inflows from OMO maturities (NGN54.30 billion) and FGN bond coupon payments (NGN5.63 billion) are expected to hit the system. Nonetheless, we expect the OVN rate to expand from current levels in the face of higher debits for CBN’s weekly auctions
Treasury bills
Activity in the Treasury bills secondary market was bullish, as market participants looked to the secondary market to fill unmet demand from Wednesday’s NTB auction. Consequently, average yields across all instruments contracted by 14bps to 5.2%, majorly driven by yield decline in the NTB space (-25bps to 4.9%). Elsewhere, the average yield on OMO bills expanded slightly by 2bps to 5.5%. At the bi-weekly NTB PMA, demand remained robust, as there was an oversubscription of 3.5x on the NGN118.73 billion worth of bills on offer. The auction closed with the CBN allotting NGN2.04 billion of the 91D, NGN3.78 billion of the 182D and NGN209.90 billion (amount on offer: NGN111.07 billion) of the 364D, at respective stop rates of 2.50% (unchanged), 3.50% (unchanged), and 5.89% (previously 6.50%). Also, the CBN sold NGN25.00 billion worth of bills to market participants at this week’s OMO auction and maintained stop rates across the three tenors, as with previous auctions.
We expect yields to trend higher in the coming week as banks sell off positions to meet funding requirements amid the anticipated liquidity squeeze.
Bonds
Trading in the Treasury bonds secondary market remained tepid with low volumes traded, following a dearth in demand, as investors sought higher yields from non-sovereign sources. As selling pressures dominated the week’s proceedings, the average yield expanded by 5bps to 11.4%. Across the benchmark curve, yields contracted at the short (-12bps) following demand for the JAN-2022 (-56bps) bond, but expanded at the mid (+19bps) and long (+4bps) as investors sold off MAR-2027 (+28bps) and MAR-2050 (+9bps) bonds, respectively.
In the short term, we expect yields to oscillate around current levels, driven by thin maturities and deliberate efforts by the DMO to reduce domestic borrowing costs for the government. Also, we expect non-bank liquidity to be geared towards relatively higher non-sovereign instruments, thus tempering demand.
Foreign Exchange
Nigeria’s FX reserve sustained its descent as the gross reserves closed lower by USD61.05 million w/w, to USD41.33 billion (24th November 2021). Meanwhile, the naira depreciated by 0.2% w/w to NGN415.07/USD at the I&E window (IEW) and by 2.3% to NGN563.00/USD at the parallel market. At the IEW, total turnover (as of 25th November 2021) increased by 19.2% WTD to USD783.39 million, with trades consummated within the NGN406.00 – 453.75/USD band. In the Forwards market, the 1-month (-0.1% to NGN415.94/USD), 3-month (-0.1% to NGN421.22/USD), 6-month (-0.1% to NGN430.36/USD) and 1-year (-0.2% to NGN448.01/USD) contracts reflected depreciations 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.
