Global economy

The Monetary Policy Committee (MPC) of the Bank of England (BOE) voted by a majority of 5 – 4 to increase the key policy rate by 25bps to 0.50%. In addition, the Committee voted unanimously for the BOE to begin to unwind its asset purchases by ceasing to reinvest corporate and government bonds once they start to mature. According to the Committee, the decision to increase the policy rate is warranted given the (1) current tight labour market conditions and (2) continuing signs of greater persistence in domestic cost and price pressures. Overall, the Committee judged that some further modest tightening in monetary policy is likely appropriate in the coming months if the economy develops broadly in line with the February Report central projections. The vote split suggests that more Committee members have become more hawkish than before given the unrelenting price pressures. Indeed, the Committee projects that the inflation rate could peak at 7.25% in April. Consequently, the BOE could be on course to hike rates further in 2022.

Euro Area’s growth momentum slowed in the fourth quarter of 2021 in line with the reintroduction of restrictive measures to curb the impact of new variants of the COVID-19 pandemic. According to preliminary estimates from Eurostat, the Euro Area economy grew by 0.3% q/q in Q4-21 (Q3-21: 2.3% q/q) – the slowest growth since the economy exited economic recession in Q1-21. The slow growth reflects the combined impact of the (1) reintroduction of containment measures, albeit less stringent, to combat increased COVID-19 infections, (2) lingering supply chain disruptions and (3) persistent inflationary pressure during the period. On a year-on-year basis, the regional bloc grew by 4.6% y/y in Q4-21 (Q3-21: 3.9% y/y). Overall, the economy grew by 5.2% y/y in 2021FY (2020FY: -6.4% y/y) – suggesting that the economy is yet to recoup pandemic losses. We expect the economy to grow moderately in 2022E after the initial post-COVID boost in 2021FY underpinned by (1) uncertainties relating to new variants of the pandemic, (2) fading impact of monetary and fiscal stimulus, and (3) lingering supply chain constraints.

Global markets

Global stocks staged an impressive comeback from last week’s rout as investors’ sentiments were lifted by the positive corporate earnings released during the week, although concerns over Federal Reserve tightening persisted. Accordingly, US stocks (DJIA +1.1%; and S&P 500: +1.0%) were poised for a weekly gain supported by strong earnings from heavyweight “FAANG” stocks which outweighed a rout in tech stocks. European equities (STOXX Europe: +0.7% and FTSE 100: +0.8%) were on track for a weekly gain, as investors continued to digest hawkish comments from the European Central Bank (ECB) and Bank of England (BOE). In Asian markets, the Japanese (Nikkei 225: +2.7%) market mirrored the trend on Wall Street buoyed by strong earnings reports and hopes for reduced border restrictions in Japan. However, the Chinese (SSE: 0.0%) traded in a lull following the observance of the Lunar New Year holiday in China.  Elsewhere, the Emerging market (MSCI EM: +1.6%) and Frontier market (MSCI FM: +1.9%) stocks closed higher following gains in South Korea (+3.3%) and Kuwait (+0.6%), respectively.

Nigeria

Economy
 
According to the Domestic and Foreign Portfolio Report of the NGX, total transactions at the local bourse declined by 19.3% m/m to NGN158.26 billion in December 2021 (November: NGN196.14 billion). The decline was primarily due to a decrease in the domestic (-2.9% m/m to NGN126.58 billion) and foreign (49.2% m/m to NGN35.32 billion) transactions. We think the continued low participation from the foreign investors reflects the lingering FX liquidity constraints and lack of flexibility in the FX framework. Indeed, foreign investors participation in 2021FY (22.9% of total transactions vs 2020FY: 33.6%) is the lowest since at least 2012, when the NGX started keeping current records. Overall, gross transaction value settled at NGN1.90 trillion in 2021FY (2020FY: NGN2.17 trillion). While the declaration of 2021FY dividends may support market performance in H1-22, we believe buying activities will be constrained by expectations regarding uptick in yields in the FI market. Also, FPIs who have exhibited a lacklustre interest in domestic equities are likely to remain on the sidelines due to FX liquidity challenges and interest rate hikes by central banks in advanced countries.

The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in January (based on December 2021 revenue) increased by 3.5% m/m or NGN23.87 billion to NGN699.82 billion (December 2021: NGN675.95 billion). We understand that the increased pay-out was due to the increased receipts from Company Income Tax (CIT) and Value Added Tax (VAT) in line with the improvement in domestic activities. Overall, the FGN received 39.9% or NGN279.46 billion (December 2021: NGN261.44 billion), State Governments received NGN256.48 billion (December 2021: NGN259.05 billion), while the Local Governments received NGN163.88 billion (December 2021: NGN155.46 billion). We expect actual oil revenue to remain below the FGN’s budget as low crude oil production continues to limit the gains from the rally in oil prices. However, we expect the non-oil revenue to support the aggregate revenue in line with the improvement in economic activities. Accordingly, we expect the amount to be shared by the tiers of government to remain stable at current levels (NGN650.00 billion to NGN750.00 billion) over the medium term.

Capital markets

Equities

The Nigerian equities market mirrored the bullish trend across global stocks, as investors continued to cherry-pick stocks with attractive dividend yields ahead of 2021FY dividend declarations. Thus, the All-Share Index rose by 2.3% w/w to close at 47,279.92 points. Notably, bargain hunting in SEPLAT (+10.1%), PRESCO (+7.6%), GTCO (+7.2%), MTNN (+5.4%) and DANGCEM (+5.5%) drove the weekly gain. Consequently, the MTD and YTD returns printed +1.4% and 10.7%, respectively. Activity levels were decent, as trading volume and value rose by 23.2% and 2.8% w/w, respectively. Performance across sectors was mixed, as the Insurance (-0.9%), Consumer Goods (-0.6%), and Oil and Gas (-0.2%) indices recorded losses while the Banking (+0.2%) index was the sole gainer. The Industrial Goods index closed flat.

In the short term, we expect the bulls to continue to rotate their portfolio towards dividend-paying stocks ahead of 2021FY dividend declarations, 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 12.00ppts w/w to 13.3% this week, following debits for CRR, CBN’s weekly FX auction that offset the sole inflow from OMO maturities (NGN102.23 billion). However, system liquidity was healthy (average net liquidity position this week: NGN285.54 billion vs last week: NGN271.75 billion) for most of the week. 

In the coming week, we expect the OVN to remain relatively elevated in the double-digit region, as the outflows for CBN’s auctions (NTB, OMO and FX) may outweigh the sole inflow from OMO maturities (NGN140.00 billion).

Treasury Bills

Trading sentiments in the Treasury bills secondary market turned bearish, as market participants took profits off their positions on some long-dated instruments in both segments of the market. Thus, the average yield increased by 8bps to 4.7%. Across the market segments, most of the yield expansion was witnessed at the OMO space (+26bps to 5.5%), while the NTB segment expanded slightly by 3bps to 4.4%, amid efforts by local banks to sterilize idle funds. 

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 NGN98.01 billion worth of maturities to market participants at the auction.

Bonds

The Treasury bonds secondary market ended on a mixed note, albeit with a bullish bias,  as investors traded cautiously considering the uncertainty of FI yields direction. Consequently, the average yield pared by 1bp to 11.6%. Across the benchmark curve, the average yield expanded at the short (+9bps) end following the sell-off of MAR-2025 (+22bps) bond but declined at the mid (-6bps) and long (-1bp) segments as investors demanded the NOV-2029 (-12bps) and MAR-2050 (-10bps) bonds, respectively.

In the absence of significant inflows to support demand, we expect bond yields to oscillate around current levels in the coming week. Nonetheless, in the medium term, we still expect frontloading of significant borrowings for the year by the FG to result in an uptick in bond yields, as investors demand higher yields in the face of elevated supply.

Foreign Exchange

Nigeria’s FX reserves sustained its descent as it closed lower by USD136.84 million w/w, to USD39.98 billion (3rd February 2022). Meanwhile, the naira was flat at NGN416.33/USD but appreciated by 0.4% to NGN571.00/USD at the parallel market. In the Forwards market, the 1-month (+0.1% to NGN418.55/USD), 3-month (+0.2% to NGN424.77/USD), 6-month (+0.2% to NGN434.08/USD) and 1-year (+0.2% to NGN448.78/USD) contracts reflected appreciations of the naira to the greenback.   

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.