The dominance of the bulls ensured the local bourse kicked off the first trading week of 2022 on a strong footing, as the benchmark index recorded gains in all trading sessions this week. Precisely, the All-Share Index advanced by 2.7% w/w to close at 43,854.42 points.
January 7, 2022/Cordros Report
Global economy
Factory activity in the United States (US) witnessed another subdued expansion as material shortages persisted. According to the IHS Markit, the US Manufacturing PMI moderated to 57.7 points in December 2021 (November: 58.3 points) – the lowest since November 2020 (56.7 points). The subdued upturn was primarily due to the lingering impact of raw material shortages and supplier delivery delays amidst a slow rise in new orders. Similarly, the Services PMI moderated to 57.6 points (November: 58.0 points). Still, the data signalled a sharp upturn in service sector business activity, despite the pace of growth easing to a three-month low – a more robust client demand supported the upturn. Overall, the Composite PMI settled at 57.0 points (November: 57.2 points), primarily supported by the service sector as factor activity rose at a relatively muted pace. We expect the expansion in private sector activities to continue to moderate over the short term, given the lingering 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.
According to the IHS Markit, the Eurozone Composite PMI moderated to 53.3 points in December 2021 (November: 55.4 points) – the slowest expansion since March (53.2 points). Analysing the broad classifications, we highlight that the subdued rise in private sector activity was primarily driven by the Services PMI (53.1 points vs November: 55.9 points), which slowed to an eight-month low amid the spread of the omicron variant of the COVID-19 pandemic. Meanwhile, the Manufacturing PMI (58.0 points vs November: 58.4 points) remained strong, supported by a further easing of the supply chain crisis as average lead times for delivery of inputs improved. That said, output growth remained subdued overall and unchanged from November. Over the short term, we believe the rapid spread of the omicron variant of the COVID-19 pandemic poses a significant downside risk to the economic outlook in 2022 amidst the lingering challenges from raw material shortages.
Global markets
Global stocks ended the first trading week of 2022 on a sour note, as investors continue to grapple with rising Omicron cases and concerns that the US Federal Reserve may turn to a more hawkish stance in the coming months. Accordingly, US stocks (DJIA -0.3%; and S&P 500: -1.5%) were poised for a weekly loss after the minutes of the US Fed’s meeting and payroll data (released on Friday) fueled worries that policymakers may unwind economic stimulus sooner than expected. European equities posted mixed performances as the STOXX Europe: (-0.2%) was weighed down by disappointing regional economic data. Conversely, the FTSE 100: (+0.8%) managed to eke out a weekly gain, supported by the rally in banking stocks. Asian markets (Nikkei 225: -1.1%; and SSE: -1.7%) declined following a rout in Chinese tech stocks amid surging coronavirus cases in Japan. Elsewhere, the Emerging (MSCI EM: -1.2%) and Frontier (MSCI FM: -0.9%) market stocks posted negative performances following bearish sentiments in the Chinese (-1.7%) and Bahrain (-0.5%) markets, respectively.
Nigeria
Economy
During the public presentation of the approved 2022 FGN budget, the Minister of Finance provided an update on the 2021 budget implementation. Specifically, the FGN’s actual retained revenue (including GOEs) settled at NGN5.51 trillion in 11M-21 – 26.0% below the pro-rated budget (NGN7.44 trillion) but the highest revenue print on record. The revenue underperformance was due to a 47.4% and 75.4% underperformance of oil revenue and FGN drawdowns from Special Accounts, respectively. Similarly, the FGN’s aggregate expenditure (NGN12.56 trillion) underperformed the pro-rated expenditure (NGN13.36 trillion) by 5.9% during the same period. Accordingly, the fiscal deficit rose to a record high of NGN7.05 trillion – 19.3% higher than the pro-rated budget (NGN5.91 trillion). We expect the fiscal deficit to remain significantly elevated over the medium term in line with our expectation of (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. Accordingly, we do not see any respite to debt accumulation over the medium term.
According to the CBN, Nigeria’s Current Account (CA) printed a surplus position for the second consecutive quarter in Q3-21. Precisely, the CA surplus settled at USD3.68 billion in Q3-21 (Q2-21: USD348.88 million on account of (1) higher trade balance surplus (USD1.77 billion vs Q2-21: USD307.01 million) and (2) lower net outflows from the service account (USD2.51 billion vs Q2-21: USD3.15 billion). The higher trade balance surplus was primarily due to an 11.6% q/q decline in imports in line with the slowdown in non-oil (-17.1% q/q) imports. At the same time, we attribute the lower net outflow from the service account to the impact of (1) CBN’s FX demand management strategies and (2) delta variant of the pandemic, which led countries to reinstate stringent measures to limit the movement of people. We now expect the CA deficit to settle at USD4.50 billion or 1.0% of GDP in 2022FY (2021E: USD2.25 billion surplus). Our forecast is hinged on expected pressure in the service account in line with expected (1) increased global mobility and (2) CBN’s gradual relaxation of FX demand management strategies.
Capital markets
Equities
The dominance of the bulls ensured the local bourse kicked off the first trading week of 2022 on a strong footing, as the benchmark index recorded gains in all trading sessions this week. Precisely, the All-Share Index advanced by 2.7% w/w to close at 43,854.42 points. Notably, foreign investors’ demand for AIRTELAFRI (+10.0%), and bargain hunting in BUAFOODS (+9.9%), WAPCO (+7.7%), and FBNH (+4.0%) stocks spurred the weekly gain. Accordingly, the YTD return printed +2.7%. Activity levels were strong, as trading volume and value surged by 103.7% w/w and 246.8% w/w, respectively. However, the performances across the sectors were mixed, as the Oil and Gas (+2.7%), Banking (+0.8%), and Industrial Goods (+0.3%) indices closed positive while the Insurance (-0.9%), and Consumer Goods (-0.9%) declined.
In the near term, we believe positioning for 2021FY dividends will continue to support buying activities in the market even as institutional investors continue to search for clues on the direction of yields in the FI market. 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 425bps w/w to 14.8% this week, as funding pressures for CBN’s CRR debits and weekly OMO (NGN50.00 billion) and FX auctions outweighed inflows from OMO maturities (NGN70.00 billion).
In the coming week, we expect the OVN rate to trend higher as debits for CBN’s weekly auctions will likely offset the sole expected inflows from OMO maturities (NGN60.00 billion).
Treasury bills
Slight bullish sentiments returned to the Treasury bills secondary market on the back of declining primary market offer rates in the NTB segment and increasing bids for OMO bills. Thus, the average yield contracted by 2bps to 4.8%. Across the market segments, the average yield at the NTB segment pared by 1bps to 4.4%. Similarly, the average yield at the OMO segment declined by 1bp to 5.5%. On Thursday, the CBN sold NGN50.00 billion worth of bills to market participants and maintained stop rates across the three tenors, as with previous auctions.
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 NGN77.61 billion worth of maturities to market participants at the auction.
Bonds
Trading in the Treasury bonds secondary market opened the first week of 2022 on a bearish note, as investors upwardly repriced select instruments amid tepid demand. Consequently, the average yield expanded slightly by 2bps to 11.6%. Across the benchmark curve, the average yield closed higher at the short (+12bps) and long (+5bps) ends due to sell pressures on the JAN-2026 (+23bps) and APR-2049 (+40bps) bonds, respectively but declined at the mid (-3bps) segment as investors demanded the FEB-2028 (-11bps) bond.
In the short term, we expect FGN bond yields to oscillate around current levels, pending clarity from the DMO regarding the execution of the FG’s domestic borrowing plan for 2022. We believe the publication of the FGN bond issuance calendar for Q1-22 will provide the needed clarity.
Foreign Exchange
Nigeria’s FX reserve sustained its descent, as it declined by USD1.78 million w/w to USD40.52 billion (5th January 2022). Meanwhile, the naira appreciated by 4.6% w/w to NGN416.00/USD at the I&E window (IEW) but depreciated by 0.9% w/w to NGN570.00/USD at the parallel market. In the Forwards market, the naira rate appreciated at the 1-month (+0.5% to NGN416.78/USD), 3-month (+0.9% to NGN422.70/USD), 6-month (+1.2% to NGN432.40/USD), and at the 1-year (+1.3% to NGN442.85/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.
