The bears dictated proceedings in the domestic bourse, as profit-taking activities dominated market performance, with the benchmark index recording declines on three of the five trading sessions of the week. Precisely, the All-share Index declined by 0.2% to close at 42,262.85 points.
December 24, 2021/Cordros Report
Global economy
For the first time since the heat of the pandemic in April 2020, the People’s Bank of China (PBoC) cut the leading benchmark lending rate – the one-year loan prime rate – by 5bps to 3.8%, while leaving the five-year loan prime rate unchanged at 4.65%. The move signals the government’s intentions to push ahead with its monetary easing policies, in order to offset the loss in economic momentum witnessed in H2-21, from property slowdown, energy shortages, and lingering weakness in consumer activity. We highlight that the easing of the lending rate is coming off the heels of the reduction in the bank reserve requirement ratio by the PBoC, which effectively increased the liquidity in the financial system by c. USD200.00 billion. We think the easing of the benchmark rate though marginal is a step in the right direction in strengthening support for economic stability. However, for a significant economic impact, the cut would have to be followed by a series of other easing measures such as more cuts to the reserve requirement ratio and rate cuts as well as fiscal stimulus.
In the US, orders for durable goods rose in November – the highest increase in six months – beating economic forecasts by 90bps and indicating steady demand ahead of 2022. According to the US Commerce Department, durable goods orders increased by 2.5% m/m (October 2021: +0.1% m/m). The higher-than-expected increase was largely driven by a substantial rebound in orders for transportation equipment (+6.5% m/m). Orders for non-defense aircraft and parts also came in higher, increasing by 34.1% m/m in November after plunging by 4.1% in October. Excluding the sharp increase in orders for transportation equipment, durable goods orders climbed by 0.8% m/m in November. We highlight that core orders remain c. 21.0% above their pre-COVID levels. We think strong demand and lingering supply challenges will encourage businesses to continue ramping up investment in 2022. Nonetheless, we highlight that the Omicron variant poses strong downside risks to business sentiment and capital expenditure plans.
Global markets
Global stocks posted positive performances as sentiments were buoyed by optimism that the Omicron coronavirus variant may not derail the global economic recovery amid reinstatement of travel bans and lockdown measures. Accordingly, US stocks (DJIA +1.7%; and S&P 500: +2.3%) reached all-time highs, following positive economic data later in the week. Similarly, European equities (STOXX Europe: +1.9% and FTSE 100: +1.4%) rallied on hopes that the global economy will shrug off the Omicron variant flareups. Asian markets posted mixed performances, as the Nikkei 225 (+0.8%) posted a weekly gain, mirroring the trend on Wall Street, while Chinese equities (SSE: -0.4%) declined following heightened US-China tensions and renewed lockdown in China. Elsewhere, the Emerging (MSCI EM: +0.3%) and Frontier (MSCI FM: +0.3%) market stocks posted positive returns consequent upon gains in the Taiwanese (+0.8%) and Kuwaiti (+1.3%) markets, respectively.
Nigeria
Economy
According to the November Domestic & Foreign Portfolio Investment report of the Nigerian Exchange Limited (NGX), total transaction value at the domestic equities market declined by 7.9% m/m to NGN196.14 billion in November (October: NGN213.07 billion). The decrease was mainly due to a 25.8% m/m decrease in domestic transactions (64.5% of total transaction value), reflecting moderated participation of both institutional (-27.8% m/m vs October: NGN112.31 billion) and retail investors (-22.0% m/m vs October: NGN58.34 billion). Meanwhile, foreign transactions increased by 64.0% m/m to NGN69.56 billion. We highlight that the total transaction value at the local bourse printed NGN1.74 trillion in 9M-21 (9M-20: NGN1.90 trillion). In the short term, while the declaration of 2021FY dividends may support market performance in H1-22, we believe buying activities will be constrained by expectations regarding monetary policy direction and developments in the political landscape. Also, FPIs who have exhibited a lacklustre interest in domestic equities are likely to remain on the sidelines due to election uncertainties and normalisation of monetary policy by central banks in advanced countries.
Sequel to the recently released 2022FY budget by the Ministry of Finance, Budget, and National Planning, the Senate passed the 2022 Appropriation Bill, raising the total estimates of the Federal Government’s budget from the proposed aggregate expenditure of NGN16.39 trillion to NGN17.13 trillion for 2022FY. The budget figures were increased amid uncertainty in the global oil market due to the emergence of the omicron variant of COVID-19. Out of the total sum of NGN17.13 trillion for 2022FY, the budget committee increased allotment for Statutory transfers (+13.2% to NGN869.6 billion), Debt Service (+5.3% to NGN3.80 trillion), Recurrent Expenditure (+1.0% to NGN6.90 trillion), and Capital Expenditure (+0.9% to NGN5.40trillion). Accordingly, the revised budget is now 17.6% higher than the 2021E budget (NGN14.57 trillion). On the flip side, the crude oil price benchmark driving the FGN proposed revenue was reviewed upward from USD52.00 per barrel to USD62.00 per barrel. In our opinion, the actual deficit would remain significantly ahead of the budgeted deficit in 2022FY. Our expectation is hinged on (1) revenue underperformance given the over-optimistic revenue projections and (2) near-perfect execution of the expenditure items (save for capital spending) in line with historical trends.
Capital markets
Equities
The bears dictated proceedings in the domestic bourse, as profit-taking activities dominated market performance, with the benchmark index recording declines on three of the five trading sessions of the week. Precisely, the All-share Index declined by 0.2% to close at 42,262.85 points. Notably, selloffs of FBNH (-4.6%), MTNN (-2.3%), ACCESS (-2.2%), and ZENITH BANK (-1.6%) stocks drove the weekly loss. Consequently, the MTD and YTD return settled at -2.3% and +4.9%, respectively. Activity levels were weak, as trading volumes and value declined by 26.7% w/w and 18.8% w/w, respectively. Sectoral performance was broadly positive as the Insurance (+1.8%), Consumer Goods (+0.8%), Industrial Goods (+0.4%) and Banking (+0.1%) indices closed in the green. The Oil and Gas (-0.5%) index was the sole loser.
As the year draws to a close, we expect yield-seeking investors to take positions in stocks with attractive dividend yields ahead of the 2021FY dividend declarations. However, we advise investors to take positions in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings.
Money market and fixed income
Money market
The overnight (OVN) rate expanded by 75bps w/w to 12.5%, following slight deteriorations in liquidity (average net system liquidity position this week: NGN85.70 billion vs last week: NGN99.09 billion) on the back of funding pressures for CBN’s weekly FX auction outweighing inflows from OMO maturities (NGN45.00 billion).
In the coming week, we expect the OVN rate to trend lower in the absence of significant funding pressures, amid expected inflow from FAAC disbursements and OMO maturities (NGN60.00 billion).
Treasury bills
The Treasury bills secondary market traded with bullish sentiments, reflecting the downward pressures on recently re-issued bills. Accordingly, the average yield across all instruments contracted by 5bps to 4.8%. Across the market segments, most of the yield decline was witnessed at the NTB segment (-4bps to 4.5%), while the OMO segment pared by 1bp to 5.5%.
In the coming week, we expect the outcome of the NTB auction to shape the direction of yields in the T-bills market. The CBN is set to roll over NGN17.59 billion worth of maturities to market participants at the auction.
Bonds
Though with a slight bearish bias, mixed trading persisted in the Treasury bonds secondary market following the sustained dearth in demand as investors preferred non-sovereign instruments. Consequently, the average yield expanded slightly by 1bp to 11.6%. Across the benchmark curve, the average yield closed higher at the short (+2bps) end following sell pressures on the JAN-2022 (+26bps) bond but remained unchanged at the mid and long segments.
For the rest of the year, 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 decline as the CBN maintained its interventions in the FX market. Thus, the gross reserves closed lower by USD69.31 million w/w, to USD40.60 billion (22nd December 2021). Meanwhile, the naira was flat at NGN415.10/USD at the I&E window (IEW) but appreciated by 0.2% w/w to NGN572.00/USD at the parallel market. At the IEW, total turnover (as of 24th December 2021) declined by 16.8% WTD to USD1.01 billion, with trades consummated within the NGN404.00 – 469.98/USD band. In the Forwards market, the naira rate appreciated at the 1-month (+0.3% to NGN414.84/USD), 3-month (+0.1% to NGN420.22/USD), 6-month (+0.3% to NGN428.30/USD), and at the 1-year (+0.6% to NGN444.57/USD) 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.
