The Nigerian equities market ended the last trading week of 2021 on a bullish note as the All-Share Index edged up by 1.1% to close at 42,716.44 points. Accordingly, the MTD loss moderated to -1.2% while the YTD return for the index closed the year at 6.1%, substantially lower than the 50.0% gain recorded in 2020.
December 31, 2021/Cordros Report
Global economy
According to the Chinese National Bureau of Statistics (NBS), China’s manufacturing PMI rose slightly to 50.3 points in December (November: 50.1 points) – the second consecutive month of increase and the highest since July (50.4 points). We believe the growth reflects the country’s increased support to the real sector to enhance aggregate supply of commodities. Accordingly, we highlight that the production index (51.4 points vs November: 52.0 points) remained in the expansionary territory for the second consecutive month, while the new orders (49.7 points vs November: 49.4 points) and employment (49.1 points vs November: 48.9 points) indices increased marginally. Similarly, the non-manufacturing PMI (52.7 points vs November: 52.3 points) grew slightly faster in line with activity improvement in the contact-facing sectors after the pandemic-induced slowdown last month. We maintain our expectation that the overall output expansion would remain sluggish over the short term due to the impact of (1) intermittent new COVID-19 cases, (2) property investment slowdown and (3) lingering semiconductor chip shortages.
According to the United States Department of Labor, the initial jobless claims in the U.S. declined by 8,000 to 198,000 in the week ending 25th December (vs week ending 18th December: 206,000) – close to the 52-year low of 188,000 recorded the week ending 3rd December. For us, the data suggests the impact of the omicron variant on the job market has been relatively muted despite the fact that it is highly transmissible. Accordingly, we think the decline in the initial jobless claims reflects (1) continued recovery of the economy and (2) Employers’ quests to retain workers at a time when it is tough to find replacements. Meanwhile, continuing claims for unemployment insurance settled at 1.72 million – the lowest since the week ending 7th March 2020 (1.71 million) just before the pandemic ravaged the economy. Although the robust vaccination program and labour shortages in the face of strong demand from companies are favourable for the job market, we think a persistent surge in COVID-19 infections poses a downside risk on the labour market in the short term.
Global markets
Global stocks were on course for ending the last trading week of 2021 on an impressive note, as investors evaluated the prospects for a year-end rally amid surging omicron cases globally. Consequently, US (DJIA: +1.2%; S&P 500: +1.1%) stocks were set to close the week in the green territory driven by gains in tech and travel shares amid strong U.S data released during the week. Likewise, European (STOXX Europe: +1.3; and FTSE 100: +0.4%) stocks posted positive performances, supported by gains in commodity-linked and industrial stocks. Asian (Nikkei 225: 0.0%; SSE: +0.6%) markets ended the ultimate trading week of 2021 mixed, as investors’ sentiments were shaped by better-than-expected Chinese data and a rally in US-listed Chinese equities. Emerging markets stocks (MSCI EM: +0.2%) recorded mild gains driven by bullish sentiments in China (+0.6%) while Frontier (MSCI FM: 0.0%) market stocks ended the week unchanged.
Nigeria
Economy
According to the CBN’s monthly economic report, the FGN’s retained revenue declined by 10.4% m/m to NGN376.33 billion in August (July: NGN420.20 billion). The decline was primarily due to a 52.2% m/m reduction in independent revenue (c. 15.0% of total FGN’s retained revenue) in line with the lower revenue inflow from MDAs and government business interests. Similarly, the FGN’s aggregate expenditure declined by 18.8% m/m to NGN781.61 billion in August (July: NGN962.05 billion), reflecting reduction across recurrent (-18.3% m/m to NGN683.46 billion) and capital (-32.1% m/m to NGN56.78 billion) expenditures. Overall, the fiscal deficit moderated by 25.2% m/m to NGN405.28 billion (July: NGN541.85 billion) as the decline in aggregate expenditure outweighed the impact of lower revenue. We expect the fiscal deficit to widen over the medium term in line with our expectation of (1) continued revenue underperformance relative to the budget and (2) persistent increase in expenditure. Accordingly, we do not see any respite to debt accumulation over the medium term.
The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in December (based on November revenue) increased by 0.6% m/m or c. NGN4.00 billion to NGN676.00 billion (November: NGN671.91 billion). We understand that the increased pay-out was due to significant month-on-month revenue increase across Petroleum Profit Tax (PPT), Value Added Tax (VAT), Companies’ Income Tax, and Oil & Gas royalties. Overall, the FGN received 38.7% or NGN261.00 billion (November: NGN284.29 billion), State Governments received NGN259.00 billion (November: NGN231.34 billion), while the Local Governments received NGN155.00 billion (November: NGN156.28 billion). We maintain our expectations that the amount to be shared by the tiers of government would remain stable at current levels (NGN650.00 billion to NGN750.00 billion) over the medium term. Our prognosis is hinged on the impact of (1) sustained improvement in economic activities and (2) rally in oil prices, which would partly offset the decline in crude oil production volume.
Capital markets
Equities
The Nigerian equities market ended the last trading week of 2021 on a bullish note as the All-Share Index edged up by 1.1% to close at 42,716.44 points. Notably, investors’ buying interest in NESTLE (+10.0%), MTNN (+7.8%), ACCESS (+5.1%), and ZENITHBANK (+3.1%) drove the benchmark index higher. Accordingly, the MTD loss moderated to -1.2% while the YTD return for the index closed the year at 6.1%, substantially lower than the 50.0% gain recorded in 2020. Activity levels were stronger than in the prior week, as trading volume and value increased by 3.1% w/w and 6.1% w/w respectively. Performance across sectors was broadly positive as the Consumer Goods (+6.2%), Banking (+2.6%), and Insurance (+1.9%), indices posted gains, while the Industrial (-3.9%) and Oil and Gas (-1.1%) indices declined.
In the first trading week of the new year, we expect the bulls to retain dominance as buying activities due to positioning for 2021FY dividends will likely suppress selling activities. 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 contracted by 200bps w/w to 10.5%, following inflows from OMO maturities (NGN60.00 billion) which offset funding pressures for CBN’s weekly FX auction.
In the first week of the new year, we envisage the OVN rate would remain elevated in the double-digit region as expected debits for CRR and CBN’s weekly auctions inflows are likely to outweigh expected inflows from OMO maturities (NGN50.00 billion)
Treasury bills
Proceedings in the Treasury bills secondary market traded ended the week on a mixed note as the average yield was unchanged at 4.8%. Across the market segments, the average yield at the OMO segment expanded by 6bps to 5.5%. Elsewhere, the average yield at the NTB segment settled lower by 1bp to 4.4%. At Wednesday’s NTB PMA, the CBN offered NGN52.31 billion worth of instruments for sale to market participants and demand at this auction was strong with a subscription level of NGN82.25 billion (Bid-offer ratio: 1.6). Eventually, the CBN allotted NGN52.76 billion – NGN2.49 billion of the 91D, NGN2.16 billion of the 182D and NGN48.11 billion of the 364D bills with respective stop rates of 2.49% (unchanged), 3.45% (unchanged), and 4.90% (previously 5.00%).
We expect yields to trend lower next week, as investors sustain buying activities in reaction to the moderation in the stop rate of the one-year paper at the last primary market auction.
Bonds
The Treasury bonds secondary market continued trading with mixed sentiments, although with a bullish bias, following the persistently lower demand as investors opted for non-sovereign instruments. Consequently, the average yield pared by 1bp to 11.6%. Across the benchmark curve, the average yield declined at the short (-3bps) and long (-2bps) ends following demand for the APR-2023 (-7bps) and APR-2049 (-9bps) bonds, respectively but expanded at the mid (+2bps) segment as investors sold off the MAR-2027 (+7bps) bond.
In the first week of the new year, we expect yields to oscillate around current levels, as activities are likely to remain tepid due to the festivities. 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 USD61.41 million w/w, to USD40.53 billion (30th December 2021). Meanwhile, the naira depreciated by 4.6% to NGN435.00/USD at the I&E window (IEW) but appreciated by 0.5% w/w to NGN565.00/USD at the parallel market. At the IEW, total turnover (as of 30th December 2021) declined by 70.6% WTD to USD346.77 million, with trades consummated within the NGN405.00 – 453.12/USD band. In the Forwards market, the naira rate depreciated at the 1-month (-1.0% to NGN418.88/USD), 3-month (-1.4% to NGN426.36/USD), 6-month (-2.1% to NGN437.71/USD), and at the 1-year (-0.9% to NGN448.81/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.
