The bulls continued to dictate proceedings on the local bourse, as the gradual release of corporate earnings bolstered buying interests in dividend-paying stocks. Accordingly, the All-Share Index rose by 0.5% w/w to close at 46,205.05 points.
January 28, 2022/Cordros Report
Global economy
At its first 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%. A notable development at the meeting was the Fed’s guidance that its asset purchases are likely to end in March, highlighting that the balance sheet reduction would happen after commencing rate hikes and would be “in a predictable manner”. In addition, the Committee expressed that with inflation (7.0% as of December 2021) well above its 2.0% target and a strong labour market, it will soon be appropriate to raise the target range for the federal funds rate. The underlying tone of the FOMC suggests that the Fed has discarded its transitory view on inflation and shifted grounds to a less accommodative stance. Accordingly, we believe the market will be bracing up for at least three interest rate hikes this year, with the strong possibility of a 25bps hike at the next meeting scheduled for March 15-16.
Consolidating the recovery momentum recorded post-pandemic, economic growth in the United States advanced for the sixth consecutive quarter. According to the Bureau of Economic Statistics (BEA), the United States economy grew faster by 6.9% q/q in Q4-21 (Q3-21: +2.3% q/q), reflecting continued gains from vaccinations, resilient external demand, and government stimulus package supporting consumer spending. The growth outturn was supported by the Gross Private Domestic Investment (5.2% q/q vs Q3-21: 2.1% q/q), Exports of goods and services (2.4% q/q vs Q3-21: -0.6% q/q), and Personal Consumption Expenditure (2.3% q/q vs Q3-21: 1.4% q/q) sub-components. On a year-on-year basis, the economy grew by 5.5% y/y in Q4-21 (Q3-21: +4.9% y/y) – the strongest since 1984. Although we expect the slowdown in infection rate and vaccination progress to support expansion in economic activities, we believe medium-term growth prospects will be constrained by (1) elevated inflationary pressures, (2) lingering supply chain bottlenecks, and (3) tightening of monetary conditions by the Federal Reserve.
Global markets
Global equities remained under pressure as investors’ sentiments were shaped by (1) a slew of positive economic data, (2) mixed corporate earnings, (3) geopolitical tensions, and (4) hawkish comments from US Federal Reserve. Accordingly, US stocks (DJIA -0.3%; and S&P 500: -1.6%) erased earlier gains as investors reacted negatively to the latest comments from Fed on monetary policy tightening. Elsewhere, European equities posted mixed performances, with the STOXX Europe (-0.9%) set for a weekly loss as investors traded cautiously following the recent hawkish turn by the Federal Reserve amid Russia’s/Ukraine tensions. Conversely, the FTSE 100 (+0.8%) was buoyed by a positive reaction to strong earnings from Apple and US GDP data. Elsewhere, Asian markets (Nikkei 225: -2.9%; and SSE: -4.6) recorded huge losses as Chinese tech companies led losses amid growing concerns that the US Federal Reserve may raise interest rates faster than expected. Likewise, the Emerging market (MSCI EM: -4.2%) and Frontier market (MSCI FM: -1.6%) stocks settled lower consequent upon losses in China (-4.6%) and Kuwait (-0.5%), respectively.
Nigeria
Economy
In line with our prognosis (see report: MPC to Retain MPR with a Mild Hawkish Tone), the Monetary Policy Committee (MPC) unanimously voted to retain the MPR at 11.5% alongside other key monetary policy parameters at its first meeting of the year. The Committee expressed that the economy will remain on a growth trajectory given the continued rebound in economic activities and better-than-expected performance in Q3-21. The Committee also expects inflationary pressures to increase marginally in the short term before moderating at the end of Q1-22. As predicted, the CBN Governor noted the impact of the normalisation of monetary policy in advanced countries on the exchange rate and domestic price pressures by extension. However, the Committee expects the impact of capital flow reversals to be limited compared to historical trends, given that the country did not record significant inflows from the surge in global liquidity conditions. For us, the timing of a change to a hawkish stance would be primarily hinged on the policy actions of global central banks as they redirect their efforts towards curbing inflationary pressures. Therefore, we maintain our view of a 100bps hike in the MPR over H2-22.
The Federal Government has halted its plan to remove fuel subsidies indefinitely following heightened pressures from labour unions amidst considerations ahead of the oncoming 2023 elections. Specifically, the government disclosed that it would retain petrol subsidy payments for the next 18 months and will now amend the 2022 Appropriation Act to accommodate the new change to provide for subsidy payments from July 1. Accordingly, the Federal Executive Council (FEC) has approved NGN3.00 trillion for subsidy payment in 2022FY. Given the proposed expenditure of NGN17.13 trillion in the 2022FY budget, the provision for subsidy translates to 17.5% of the proposed public spending. Also, the NGN3.00 trillion approved by FEC is 50.3% and 43.4% of the capital component and recurrent expenditure of the 2022FY budget, respectively. With the deficit of NGN6.39 trillion in the approved 2022FY budget, we believe the actual deficit could deviate materially from this amount if we incorporate the provision for subsidy payment. The preceding lends credence to our view that the government may borrow more than it had initially projected. The decision of the FG did not come as a surprise to us, given the inertia of policymakers in implementing bold reforms, particularly in pre-election years. We believe the commencement of operations at Dangote Refinery may be the ultimate game-changer in liberating the country from the long-standing debate on the deregulation of PMS prices.
Capital markets
Equities
The bulls continued to dictate proceedings on the local bourse, as the gradual release of corporate earnings bolstered buying interests in dividend-paying stocks. Accordingly, the All-Share Index rose by 0.5% w/w to close at 46,205.05 points. Notably, bargain hunting in ETI (+44.8%), GUINNESS (+14.0%), INTBREW (+18.0%), AIRTELAFRI (+10.0%) and TOTALENERGIES (+8.6%) spurred the weekly gain. Consequently, the YTD return improved to +8.2%. Activity levels were weaker than the prior week, as trading volume and value declined by 22.0% and 59.8% w/w, respectively. Analysing by sectors, the Banking (+4.8%), Oil and Gas (+3.5%) and Consumer Goods (+2.0%) indices recorded gains while the Industrial Goods (-5.1%) and Insurance (-3.1%) indices closed in the red.
With the outcome of the MPC meeting aligning with market expectations amid negative real returns in the fixed income market, we expect investors to continue to cherry-pick stocks with attractive dividend yields. However, we advise investors to take positions in only fundamentally justified stocks as the fragility of the macroeconomic environment remains a significant headwind for corporate earnings.
Money market and fixed income
Money market
The overnight (OVN) rate declined by 14.00ppts w/w to 1.3%, as inflows from the maturing JAN-2022 bond (NGN605.31 billion), FAAC disbursements (NGN420.37 billion), OMO maturities (NGN110.00 billion), and FGN bond coupon payments (NGN49.61 billion) saturated the system and outweighed funding pressures for net NTB issuances (NGN94.42 billion) and CBN’s weekly auctions – FX and OMO (NGN40.00 billion).
Next week, we expect the CBN to mop up the pent-up liquidity in the market. Thus, we envisage an expansion in the OVN rate to double-digit levels.
Treasury bills
Trading in the Treasury bills secondary market was bullish, as average yield across all instruments contracted by 25bps to 4.6%, following the liquidity surfeit in the system. Across the market segments, the average yield at the OMO segment contracted by 59bps to 5.2%, given improved demand for higher-yielding bills. At the primary market, the CBN sold NGN40.00 billion worth of OMO bills to market participants and maintained the stop rates at 7.00%, 8.50%, and 10.10% on the short, mid, and long-dated instruments, as with prior auctions. Elsewhere, the average yield at the NTB segment declined by 7bps to 4.3%, as participants sought to cover lost auction bids in the secondary market. On Wednesday at its bi-weekly PMA, the CBN offered NGN129.33 billion for sale and recorded the highest demand level YTD, with a subscription level of NGN475.63 billion (Bid-to-offer ratio: 3.7x; previously 1.5x). Eventually, the CBN allotted NGN223.75 billion – NGN2.68 billion of the 91D, NGN3.54 billion of the 182D, and NGN217.53 billion of the 364D bills with respective stop rates of 2.48% (previously 2.49%), 3.30% (previously 3.45%), and 5.40% (previously 5.50%).
We expect yields to trend higher in the coming week as we expect a shortfall in system liquidity.
Bonds
Trading in the Treasury Bonds secondary market was bearish following the expiry of the JAN-2022 bond that resulted in a higher average yield, although there was increased demand at the belly of the curve amid the improved liquidity from the maturing bond. Consequently, the average yield expanded by 23bps to 11.6%. Across the benchmark curve, the average yield expanded at the short (+118bps) end but declined at the mid (-48bps), and long (-2bps) segments as buying activities increased on the NOV-2029 (-54bps) and MAR-2035 (-20bps) bonds, respectively.
In the medium 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 sustained its descent for the twelfth consecutive week, declining by USD163.80 million to USD40.15 billion (27th January 2022) on the back of CBN’s continued support of the naira at the official channels. Meanwhile, the naira was flat at NGN416.33/USD at the I&E window (IEW) but depreciated by 0.5% to NGN573.00/USD at the parallel market. In the Forwards market, the naira also depreciated at the 1-month ( -0.4% to NGN 418.92/USD), 3-month (-0.6% to NGN425.57/USD), 6-month (-0.7% to NGN434.99/USD) and 1-year (-1.2% to NGN449.81/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.
