Local stocks closed in the green territory despite profit-taking activities, as the All-Share Index ended the week 1.1% higher to settle at 42,353.31 points.
December 17, 2021/Cordros Report
Global economy
At its last meeting of the year, the Federal Open Market Committee (FOMC) voted to keep the key policy rate in a target range of 0.00% – 0.25%. The major highlight of the meeting was the Fed’s decision to reduce the monthly pace of its net asset purchases at a faster pace. Precisely, the Committee decided to reduce the monthly pace of its net asset purchases by USD30.00 billion (USD20.00 billion for Treasury securities and USD10.00 billion for agency mortgage-backed securities) in December and by USD60.00 billion beginning in January 2022. The underlying tone of the FOMC suggests that the Fed have become more worried that higher inflation may not be quite as transitory as initially expected and could linger, resulting in a more proactive stance. Indeed, the Committee is now on track to conclude the program in early 2022, rather than mid-2022 as initially planned, and members now project three interest rate hikes in 2022 from the current range.
The Monetary Policy Committee (MPC) of the Bank of England (BOE) voted by a majority of 8 – 1 to increase the key policy rate by 15bps to 0.25%. The Committee also maintained the existing stock of asset purchases, targeting GBP895.00 billion by the end of 2021FY. In arriving at its decision, the Committee judged that the labour market conditions have strengthened, and there are some signs of greater persistence in domestic cost and price pressures. Besides, the Committee noted that maintaining the current monetary policy stance when the headline inflation was materially above the 2.0% target and the output gap appeared to have narrowed might cause medium-term inflation expectations to drift up further. Despite the immediate short-term concerns over the economy given the surging Omicron variant cases, the Committee’s decision to hike the key policy rate reflects its renewed focus on attaining price stability. Accordingly, we expect the BOE to hike rates further in 2022.
Global markets
Global stocks faltered as investors’ focus shifted to economically sensitive stocks amid caution over economic risks emanating from the omicron virus strain and global central banks renewed focus on curbing inflationary pressures. Consequently, the US (DJIA; -0.2% and S&P 500; -0.9%) erased earlier gains as the Fed Reserve’s pivot unveiled a quicker tapering of bond purchases. In Europe, the STOXX Europe (+0.2%) recorded mild gains, driven by buying interest in tech stocks earlier in the week. Conversely, the FTSE 100 (-0.4%) declined as the Bank of England’s surprise decision to raise interest rates heightened investors’ worries about a hawkish monetary policy. Elsewhere, In Asia, the Nikkei 225: (+0.4%) managed to eke out a weekly gain despite renewed omicron fears. On the other hand, the SSE (-0.9%) declined as the US sanctioned more Chinese tech firms underscoring tensions between Beijing and Washington. Elsewhere, the Emerging (MSCI EM: -1.2%) and Frontier (MSCI FM: -0.4%) market stocks mirrored the downbeat mood across global equities consequent upon sell-offs in the Chinese (-0.9%) and Kuwaitian (-1.1%) markets, respectively.
Nigeria
Economy
Recent data published by the Debt Management Office (DMO) showed that Nigeria’s public debt stock increased by 7.2% q/q or NGN2.54 trillion to NGN38.01 trillion in Q3-21 (Q2-21: NGN35.47 trillion). We highlight that the debt stock increase was primarily due to a 13.6% q/q growth in external debt (NGN15.57 trillion or 41.0% of total public debt as of Q3-21), reflective of the USD4.00 billion Eurobond issued by the FGN in September. In addition, the domestic debt (NGN22.43 or 59.0% of total public debt as of Q3-21) increased by 3.1% q/q, driven by a 3.4% q/q growth in the FGN’s portion of the domestic debt stock. We do not see any respite to debt accumulation over the medium term, given our expectation that increased borrowings will be required to plug the rising fiscal deficit. Our prognosis is hinged on (1) continued revenue underperformance relative to the budget and (2) persistent increase in expenditure.
According to the National Bureau of Statistics (NBS), headline inflation moderated for the eighth consecutive month to 15.40% y/y in November (October: 15.99% y/y) – the lowest since November 2020 (14.89% y/y). Sifting through the breakdown provided, we highlight that the food inflation (-113bps to 17.21% y/y) slowed to a 14-month low, in line with the base-induced moderation across the Farm produce (-164bps to 16.67% y/y) and Processed food (-98bps to 17.36% y/y) sub-baskets. On the flip side, core inflation (+61bps to 13.85% y/y) resumed an uptrend due to the troika impact of (1) festive-induced demand in the recreation sub-sector, (2) higher energy prices, and (3) pass-through impact of currency depreciation at the parallel market. We expect the headline CPI to rise by 1.10% m/m, with the base effect from the prior year translating to a 59bps moderation in y/y inflation rate to 14.81% y/y in December. Our prognosis is hinged on (1) festive-induced demand pressure of food items and (2) an expected mild increase in energy prices amidst stable PMS prices.
Capital markets
Equities
Local stocks closed in the green territory despite profit-taking activities, as the All-Share Index ended the week 1.1% higher to settle at 42,353.31 points. Gains in MTNN (+7.2%), DANGSUGAR (+6.7%), TOTALENERGIES (+2.4%), and DANGCEM (+1.2%) spurred the weekly gain. Based on the preceding, the MTD and YTD return printed -2.1% and +5.2%, respectively. However, activity levels were weaker than the prior week, as trading volumes and value decreased by 49.7% w/w and 42.9% w/w, respectively. Sectoral performance was mixed as the Consumer Goods (+0.6%) index recorded the sole gain while the Industrial Goods (-5.9%), Banking (-1.8%), and Oil and Gas (-0.6%) indices declined. The Insurance index closed flat.
We expect market performance to be dominated by the bulls in the week ahead, as positioning by early birds in dividend-paying stocks ahead of 2021FY dividend declarations should outweigh profit-taking activities. Notwithstanding, 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 600bps w/w to 11.8% this week, as the healthy system liquidity position brought forward from last week and the supporting inflow from OMO maturities (NGN40.00 billion) helped offset funding pressures for the December FGN (NGN98.80 billion) and CBN’s weekly FX auctions.
In the coming week, we envisage the OVN rate would trend northwards and remain elevated as expected debits for CRR and CBN’s weekly auctions are likely to outweigh the sole expected inflow from OMO maturities (NGN45.00 billion).
Treasury bills
Trading in the Treasury bills secondary market was mixed, albeit with a bullish tilt, following relatively higher demand for OMO bills in the absence of renewed primary market supply this week. Accordingly, the average yield across all instruments pared by 2bps to 4.9%. Across the market segments, most of the yield decline was witnessed at the OMO segment (-3bps to 5.5%) while the NTB segment was unchanged at 4.5%. At the bi-weekly NTB PMA, demand remained sizeable, as the NGN5.86 billion worth of bills on offer were oversubscribed by 11.5x. The auction closed with the CBN allotting NGN960.66 million of the 91D, NGN1.10 billion of the 182D and NGN3.80 billion of the 364D, at respective stop rates of 2.49% (previously 2.50%), 3.45% (unchanged) and 5.00% (previously 5.34%).
We envisage that lower yields on T-bills would persist following expected improved buying activities in reaction to the lower rates on recently (re)issued bills.
Bonds
The Treasury bonds secondary market also traded on a mixed note, although with a bullish bias, as investors remained on the sidelines but continued to cherry-pick instruments across the curve. Consequently, the average yield declined slightly by 2bps to 11.6%. Across the benchmark curve, the average yield contracted at the short (-11bps) end as investors increased their demand for the APR-2023 (-58bps) bond, but expanded at the mid (+1bp) and long (+3bps) segments following sell pressures on the JUL-2030 (+3bps) and APR-2037 (+19bps) bonds, respectively. At the bond auction, the DMO offered instruments worth NGN100.00 billion to investors through re-openings of the 12.5000% FGN JAN 2026 (Bid-to-offer: 10.5x; Stop rate: unchanged at 11.65%) and 16.2499% FGN APR 2037 (Bid-to-offer: 2.1x; Stop rate: 13.10% – previously 12.95%) bonds. Despite the significant level of demand (subscription: NGN132.61 billion; bid-to-offer: 1.3x), the DMO eventually under-allotted instruments worth NGN98.80 billion, resulting in a bid-to-cover ratio of 1.3x.
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 USD181.19 million to USD40.71 billion (15th December 2021) as the CBN continued to support the naira at the official channels. Meanwhile, the naira was flat at NGN415.07/USD at the I&E window (IEW) but appreciated by 0.3% to NGN572.00/USD at the parallel market. At the IEW, total turnover (as of 16th December 2021) declined by 11.7% WTD to USD1.01 billion, with trades consummated within the NGN405.00 – 469.51/USD band. In the Forwards market, the naira was unchanged at the 1-month (NGN 415.96/USD) contract but appreciated at the 3-month (+0.2% to NGN420.55/USD), 6-month (+0.2% to NGN429.51/USD) and 1-year (+0.1% to NGN447.37USD) contracts
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.
