The bullish momentum in the local bourse switched into a higher gear as the All-Share Index rose above the 45,000 psychological mark to close at 45,957.35 points – the highest level since 19th January 2018 (45,092.83 points). Pertinently, foreign investors’ demand for AIRTELAFRI (+10.0%) and bargain hunting in SEPLAT (+9.4%), DANGCEM (+5.5%), BUACEMENT (+4.2%), NB (+4.4%), DANGSUGAR (+4.4%) and GTCO (+2.4%) drove the benchmark index 3.4% higher.
January 21, 2022/Cordros Report
Global economy
According to the Chinese National Bureau of Statistics (NBS), China’s economic growth eased to 4.0% y/y in Q4-21 (Q3-21: +4.9% y/y) – the slowest since Q2-20 (+3.2% y/y). Beyond the waning impact of the low base from the prior year, we highlight that the slower growth reflects the lingering real estate wobbles, power supply restrictions, and intermittent increase in COVID-19 cases during the period. Accordingly, the Real estate (-2.9% y/y vs Q3-21: -1.6% y/y) and Construction (-2.1% y/y vs Q3-21: -1.8% y/y) sectors declined at a faster pace while the Manufacturing (+3.1% y/y vs Q3-21: +4.6% y/y) sector’s growth slowed. Overall, the economy grew by 8.1% y/y in 2021 – the highest annual growth since 2011FY (9.6% y/y). The annual print largely reflects a base-effect induced recovery from the pandemic-induced slowdown in 2020FY (+2.3% y/y). We expect the GDP growth to moderate in 2022FY given the combined impact of (1) a high base effect from the prior year, (2) subdued external demand, and (3) uncertainties regarding new variants of the pandemic.
According to the Office for National Statistics (ONS), headline inflation in the United Kingdom (UK) rose by 30bps to 5.4% y/y in December (November: 5.1% y/y) – the highest since March 1992 (7.1% y/y). The persistent inflationary pressure largely reflects the impact of (1) persistent increase in energy prices, (2) low base effect from the prior year, (3) lingering supply chain disruptions, and (4) increased demand during the period. Accordingly, price pressures were most significant in the food & non-alcoholic beverages (4.2% y/y vs November: 2.5% y/y), furniture & household goods (7.3% y/y vs November: 6.1% y/y), and clothing & footwear (4.2% y/y vs November: 3.5% y/y) sub-baskets. Overall, the headline inflation rate averaged 2.6% y/y in 2021FY (2020FY: 0.9% y/y). The short-term inflation expectation is biased to the upside given the persistent global rise in energy prices amid supply chain constraints. Consequently, we believe the stakes are high for the Bank of England (BOE) to hike the main interest rate again at its next meeting in February.
Global markets
Like the prior week, global stocks faltered as weak corporate earnings and the prospect of monetary policy tightening by global central banks dented risk appetite. Accordingly, the US (DJIA: -3.3%; S&P: -3.9%) suffered huge losses as weak results from Goldman Sachs weighed on financial stocks even as the selloffs in tech stocks persisted. In Europe, the STOXX Europe (+0.5%) and FTSE 100 (+0.6%) were on course to close the week in green as investors digested a slew of earnings announcements and economic data from the region. In Asia, the Nikkei 225 (-2.1%) settled lower as sentiments were dampened by selloffs on Wall Street and a widening of the COVID-19 quasi-state of emergency to more Japanese prefectures. Conversely, the SSE (0.0%) ended the week unchanged amid a dearth of positive triggers. Emerging (MSCI EM: -0.1%) and Frontier (MSCI FM: -1.9%) market stocks mirrored the downtrend in global equities consequent upon losses in South Korea (-3.0%) and Kuwait (-0.4%), markets, respectively.
Nigeria
Economy
According to the data released by the National Bureau of Statistics (NBS), headline inflation increased by 23bps to 15.63% y/y in December 2021 (November: 15.40% y/y), reversing eight consecutive months of deceleration. On a month-on-month basis, the headline inflation settled at 1.82% – significantly above the 2021FY average (1.22% m/m) and the highest since May 2017 (1.88% m/m). The increase was primarily due to a negative surprise from the food basket (2.19% m/m vs November: 1.07% m/m), which increased significantly above prior December readings for food inflation (10-year average: 1.19% m/m). Meanwhile, the core basket (-14bps to 1.12% m/m) reversed the previous month’s uptrend despite (1) higher utility prices, (2) festive-induced spending, and (3) persistent FX supply challenges in the parallel market. We expect food prices to rise slowly over the short term amidst the high base effect from the prior year. We also expect higher utility prices to pressure the core inflation. Accordingly, we expect the inflation rate to settle at 1.36% m/m in January, with the high base effect from the prior year translating to 15.47y/y.
According to OPEC’s Monthly Oil Market Report (MOMR), Nigeria’s crude oil production (excluding condensates) settled at 1.34mb/d as of Q4-21 (Q3-21: 1.35mb/d) – the lowest since at least 2001 when the organisation started keeping crude oil production records for members. Excluding production data since the onset of the COVID-19 pandemic, the last time Nigeria produced crude oil close to this current range was in Q3-16 (1.44mb/d) – a period characterised by a significant increase in oil assets vandalism and a spike in crude oil theft in the Niger Delta region. We attribute the production decline to the combined impact of (1) infrastructure decay and (2) complexities of operating the oil wells, both of which led to terminal shut-ins in some of the country’s major production facilities. Overall, we do not expect a material change to the current development over the short term, given the nature of challenges which mostly involve a dearth of infrastructure investment. Accordingly, we expect the government’s oil revenue to be constrained over the short term despite the rally in crude oil prices.
Capital markets
Equities
The bullish momentum in the local bourse switched into a higher gear as the All-Share Index rose above the 45,000 psychological mark to close at 45,957.35 points – the highest level since 19th January 2018 (45,092.83 points). Pertinently, foreign investors’ demand for AIRTELAFRI (+10.0%) and bargain hunting in SEPLAT (+9.4%), DANGCEM (+5.5%), BUACEMENT (+4.2%), NB (+4.4%), DANGSUGAR (+4.4%) and GTCO (+2.4%) drove the benchmark index 3.4% higher. Consequently, the YTD gains surged to +7.6%. Activity levels were stronger than in the prior week, as trading volumes and value rose by 18.0% w/w and 45.7% w/w, respectively. Save for the Insurance (-0.3%) index that declined, the Oil and Gas (+5.2%), Industrial Goods (+4.4%), Banking (+1.7%), and Consumer Goods (+1.0%) indices closed positive.
In the week ahead, we believe investors will be focused on the outcome of the MPC meeting to gain further clarity on the movement of yields in the FI market. Consequently, we expect a “choppy theme” as cautious trading will likely dominate the market. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the weak macro story remains a significant headwind for corporate earnings.
Money market and fixed income
Money market
The overnight (OVN) rate expanded by 50bps w/w to 15.3% this week, in light of debits for CRR, the January bond auction settlement (NGN170.64 billion), and CBN’s weekly OMO (NGN20.00 billion) and FX auctions offsetting the inflows from OMO maturities (NGN128.18 billion) and FGN bond coupon payments (NGN105.17 billion).
Next week, we expect improved system liquidity and, by extension, moderation in the OVN rate, as inflows totalling NGN764.92 billion arising from the maturing JAN-2022 bond (NGN605.31 billion), FGN bond coupon payments (NGN49.61 billion) and OMO maturities (NGN110.00 billion) outweigh funding requirements.
Treasury bills
The Treasury bills secondary market traded on a bearish note, (1) mirroring the higher stop rates at the recent NTB auction and (2) as market participants exited positions to provide some respite to their funding obligations. Accordingly, the average yield across all instruments expanded by 6bps to 4.8%. Across the market segments, most of the yield increase was witnessed at the OMO segment (+19bps to 5.8%), while the NTB segment was increased slightly by 2bps to 4.4%. The CBN held an OMO auction this week, allotting NGN20.00 billion worth of instruments. The auction was oversubscribed across the three tenors, with stop rates remaining unchanged from the previous auction.
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 NGN129.33 billion worth of maturities to market participants at the auction.
Bonds
Trading in the Treasury bonds secondary market was bullish, following the lower marginal rates at Wednesday’s auction, prompting investors to sustain the demand witnessed earlier in the week. Consequently, the average yield declined by 10bps to 11.4%. Across the benchmark curve, the buying activities were widespread as the average yield contracted at the short (-46bps), mid (-5bps), and long (-5bps) segments following investors’ higher demand for the JAN-2022 (-238bps), FEB-2028 (-11bps) and MAR-2036 (-14bps) bonds, respectively. At the bond auction, the DMO offered instruments worth NGN150.00 billion to investors through a re-opening of the 12.50% FGN JAN 2026 (Bid-to-offer: 1.5x; Stop rate: 11.50%, previously 11.65%) and a new issue of the 13.00% FGN JAN 2042 (Bid-to-offer: 2.9x; Stop rate: 13.00%) bonds. As expected, demand was higher (subscription: NGN325.24 billion; bid-to-offer: 2.2x) than December’s auction (Subscription: NGN132.61 billion; Bid-to-offer: 1.3x). The DMO eventually over-allotted instruments worth NGN170.64 billion, resulting in a bid-to-cover ratio of 1.9x.
Next week, we envisage bond yields would settle lower as investors re-invest ample liquidity expected from the maturing JAN-2022 bond and coupon payments back into the market. Nonetheless, in the short term, we expect frontloading of significant borrowings for the year to result in an uptick in bond yields as investors demand higher yields in the face of elevated supply.
Foreign Exchange
Nigeria’s FX reserve declined by USD102.94 million to USD40.38 billion (19th January 2022) on the back of CBN’s continued support of the naira at the official channels. Meanwhile, the naira appreciated by 0.1% w/w to NGN416.00/USD at the I&E window (IEW) but depreciated by 0.3% to NGN573.00/USD at the parallel market. In the Forwards market, the naira was unchanged at the 1-month (NGN 417.07/USD) and 3-month (NGN422.89/USD) contracts but appreciated at the 6-month (+0.1% to NGN431.80/USD) and 1-year (+0.6% to NGN444.24/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.
