Following losses recorded by top cement player; DANGCEM (-10.0%), the local bourse extended its losing streak, for the second consecutive week. Thus, the All-Share index closed the week 0.7% lower at 41,882.97 points, with the MTD and YTD return settling at -3.2% and +4.0%, respectively.
December 10, 2021/Cordros Report
Global economy
According to China’s National Bureau of Statistics (NBS), headline inflation rose for the second consecutive month to 2.3% y/y in November (October: +1.5% y/y) – the highest since August 2020 (+2.4% y/y). The increase was largely due to increased demand and supply chain constraints amidst the intermittent COVID-19 outbreaks during the period. Accordingly, food prices (+1.6% y/y vs October: -2.4% y/y) rose for the first time in six months, given the slower fall in pork prices. Meanwhile, the non-food basket rose slightly by 1bp to 2.5% y/y (October: +2.4% y/y) with the most significant price pressures witnessed in the transportation & communication (7.6% y/y vs October: +7.0% y/y) and recreation (3.0% y/y vs October: +2.9% y/y) sub-baskets. On a month-on-month basis, consumer prices rose by 0.4% in November (October: +0.7% m/m). We expect the inflationary pressures to persist over the short-to-medium term in line with the troika impact of (1) persistent supply chain disruptions, (2) higher energy prices and (3) base-induced mild decline in pork prices.
Domestic price pressures in the United States (US) gathered momentum as robust consumer demand continues to collude with pandemic-induced supply constraints. According to the Bureau of Labor Statistics (BLS), headline inflation rose by 60bps to 6.8% y/y in November (October: +6.2% y/y) – the ninth consecutive month above the Fed’s 2.0% target and the highest since June 1982 (+7.1% y/y). The upward pressure on domestic prices reflects 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 gasoline (+58.1% y/y vs October: +49.6% y/y), food (+6.1% y/y vs October: +5.3% y/y), shelter (+3.8% y/y vs October: +3.5% y/y) and new vehicles (+11.1% y/y vs October: +9.8% y/y). 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 speed up its asset purchases tapering and potentially increase the pace of interest rate hike in 2022.
Global markets
Global stocks were broadly positive following optimism on vaccines for the Omicron variant. Furthermore, the US inflation data released on Friday eased concerns about the Federal Reserve’s aggressive tightening of its monetary policy. In the US, the DJIA (+3.4%) and S&P 500 (+2.8%) halted two weeks of bearish trading as fears over the latest coronavirus variant abated. European equities (STOXX 600: +2.7%, FTSE 100: +2.6%) were set for a weekly gain, boosted by a strong recovery in mining stocks. In Asia, the Nikkei 225: (+1.5%) closed the week positively on receding concerns about the Omicron variant. Similarly, the Chinese market (SSE: +1.6%) rallied as Alibaba Group Holding Ltd. led a rebound in Chinese tech firms earlier in the week. Likewise, the Emerging (MSCI EM: +1.9%) and Frontier (MSCI FM: +0.7%) market stocks mirrored the bullish trend across global equities, consequent upon gains in China (+1.6%) and Kuwait (+1.3%), respectively.
Nigeria
Economy
According to the National Bureau of Statistics (NBS), Nigeria’s trade deficit increased by 61.6% q/q to NGN3.02 trillion in Q3-21 (Q2-21: NGN1.87 trillion), marking the eighth consecutive quarter of negative trade balance. The increased trade balance emanated from a 17.3% q/q increase in total imports (NGN8.15 trillion vs Q2-21: NGN6.95 trillion) in line with the growth recorded across the different categories of import safe for the commodities not elsewhere specified (-43.4% q/q). Meanwhile, total exports rose slowly by 1.0% q/q to NGN5.13 trillion (Q2-21: NGN5.08 trillion) as low crude oil production volume weighed on the rally in oil prices during the period. Notably, crude oil (78.5% of total exports) and agricultural goods (1.5% of total exports) exports declined by 1.3% q/q and 51.9% q/q, respectively. We expect lower crude oil production volume to limit export earnings over the short term. At the same time, we expect total imports to increase slowly in line with domestic economic performance. Accordingly, we expect the trade balance deficit to grow moderately over the short term.
In line with our expectations, Company Income Tax (CIT) collections continue to reflect the improvement in domestic economic activities after the COVID-19 induced slump in 2020FY. According to the NBS, CIT collections increased by 13.6% y/y to NGN472.52 billion in Q3-21 (Q2-21: +17.4% y/y to NGN472.07 billion). The increased CIT collections were primarily due to the improved business performance in line with the gradual recovery of the domestic economy. The total amount generated was broadly classified into local payment (NGN292.01 billion or 61.8% of total CIT) and foreign CIT payment (NGN180.52 billion or 38.2% of total CIT). That said, total CIT collections amounted to NGN1.34 trillion in 9M-21 – 20.1% y/y growth compared with NGN1.11 trillion recorded in 9M-20. Over the short term, we maintain our expectation of increased CIT payments, albeit moderately, given the improved level of business activities compared to the prior year. Furthermore, we reiterate that the increase in CIT and VAT collections bodes well for the FGN’s non-oil revenue over the medium term.
Capital markets
Equities
Following losses recorded by top cement player; DANGCEM (-10.0%), the local bourse extended its losing streak, for the second consecutive week. Thus, the All-Share index closed the week 0.7% lower at 41,882.97 points, with the MTD and YTD return settling at -3.2% and +4.0%, respectively. However, activity levels were stronger than in the prior week, as trading volumes and value grew by 104.9% w/w and 54.9% w/w, respectively. Sectoral performance was broadly positive as the Banking (+5.5%), Oil and Gas (+1.3%), Insurance (+1.2%), Industrial Goods (+0.9%), and Consumer Goods (+0.1%) indices all closed in the green.
In the week ahead, we expect the bulls to regain dominance in the market given the moderation in the prices of bellwether stocks in the last three weeks. However, we do not rule out the possibility of continued profit-taking activities. 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 200bps w/w to 17.8%. The increase in the funding rate was due to outflows for CRR, CBN’s weekly OMO (NGN30.00 billion) and FX auctions which outweighed this week’s sole inflow from OMO maturities (NGN50.00 billion).
We still expect the OVN rate to remain elevated at double-digit levels next week, given the thin inflows expected from OMO maturities (NGN40.00 billion) amid possible debits for CBN’s weekly auctions.
Treasury bills
Trading in the Treasury bills secondary market ended the week with bullish sentiments, 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 1bp to 4.9%, majorly driven by yield decline in the NTB space (-17bps to 4.3%). Similarly, the average yield on OMO bills pared by 1bp to 5.5%. At the bi-weekly NTB PMA, demand remained sizeable, as the NGN53.73 billion worth of bills on offer were oversubscribed by 4.6x. The auction closed with the CBN allotting NGN1.55 billion of the 91D, NGN789.10 million of the 182D and NGN51.39 billion of the 364D, at respective stop rates of 2.50% (unchanged), 3.45% (previously 3.50%), and 5.34% (previously 5.89%). Also, the CBN sold NGN30.00 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.
As we anticipate a tighter system liquidity next week, we expect higher yields on T-bills as local banks are likely to sell-off positions to meet funding requirements.
Bonds
The Treasury bonds secondary market opened the week on a bearish note (13bps higher), extending the sell pressures from last week. Though we witnessed pockets of demand for mid to long dated instruments, the demand level remained tepid. Consequently, the average yield expanded by 15bps to 11.6%. Across the benchmark curve, yields contracted at the short (-9bps) and long (-3bps) ends due to demand for the JAN-2026 (-36bps) and JUL-2045 (-21bps) bonds, respectively, while yields expanded at the mid (+50bps) segment, following sell-offs of the FEB-2028 (+58bps) bond. Notably, the DMO released the December 2021 bond auction circular indicating NGN100.00 billion on offer across the reopening of two instruments – JAN-2026 (NGN50.00 billion) and APR-2037 (NGN50.00 billion).
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 remained under pressure, declining by USD187.63 million to USD40.93 billion (8th December 2021) as the CBN continued to support the naira at the official channels. Meanwhile, the naira depreciated by 0.1% w/w to NGN415.10/USD at the I&E window (IEW) and by 1.2% to NGN574.00/USD at the parallel market. At the IEW, total turnover (as of 9th December 2021) increased by 32.3% WTD to USD1.16 billion, with trades consummated within the NGN404.00 – 464.75/USD band. In the Forwards market, the naira was unchanged at the 1-month (NGN416.08/USD), 3-month (NGN421.31/USD), and 6-month (NGN430.39/USD) contracts, but appreciated at the 1-year (+0.1% to NGN447.92/USD) contract.
In our opinion, the CBN has enough supply to support the FX market over the short term, given inflows from the recently issued Eurobond and the IMF’s SDR. However, foreign inflows are paramount for sustained FX liquidity over the medium term, in line with our expectation that accretion to the reserves will be weak given that crude oil production levels remain quite low. Thus, FPIs which have historically supported supply levels in the IEW (53.8% of FX inflows to the IEW in 2019FY) will be needed to sustain FX liquidity levels. 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.
