Tuesday, January 11, 2021 / by Coronation Research 

Another January, another rally. Eight of the past 12 years has seen a rally during January. In seven out of eight of those occasions, there was a point, later in the year, when it was possible to buy the market more cheaply. With very few exceptions, it does not pay to chase a January rally.

FX

Last week, the exchange rate at the Investors and Exporters Window (I&E Window) strengthened by 4.57% to close at N416.00/US$1, rebounding from the slump the week before. Elsewhere, the continued interventions of the Central Bank of Nigeria in the FX markets brought about a further, albeit modest, decline in its foreign exchange (FX) reserves by 0.05% on the week to US$40.50bn. However, the CBN’s position remains strong as the level of FX reserves remains high in the long-term context. Hence, as liquidity rises in the official FX markets, it seems possible that stability will be maintained in the I&E and NAFEX rates in the near term. 

Bonds & T-bills

Last week, activity in the Federal Government of Nigeria (FGN) bond secondary market was bearish. The average benchmark yield for bonds rose by 4bps to 11.59%. Notably, the yield on the 10-year (+1bp to 12.61%) bond expanded while the yields on the 3-year (-3bps to 9.11%) and 7-year (-10bps to 12.33%) bonds tightened. We reiterate our expectation that a future rise in bond yields is unlikely to be sharp as the monetary authorities appear content with 2021’s economic and monetary outcomes and are likely concerned with the government’s cost of servicing debt while awaiting clarity on the FG’s domestic borrowing plan for 2022.

Trading in the Treasury Bill (T-Bill) secondary market was mixed, as the average benchmark yield for T-bills fell by a marginal 1bp to 4.42%. The yield on the 321-day T-bill was down by 1bp to close at 5.23%. This week, the Debt Management Office (DMO) is expected to roll over N77.60bn (US$186.54m) worth of maturing bills at the primary auction. Elsewhere, the average yield for OMO bills fell by 1bp to 5.49%; the yield on the 270-day OMO bill stayed flat at 5.52%. At the OMO auction, the Central Bank of Nigeria (CBN) sold N50bn worth of bills and maintained stop rates across the three tenors. 

Oil

Last week, the price of Brent rose by 5.10%, its third consecutive weekly gain, to US$81.75/bbl – the highest level since 25 November 2021. The rise followed supply disruptions in Kazakhstan and Libya amidst concerns about the rapid global rise in Omicron infections. Consequently, Brent is up 5.10% year-to-date and has traded at an average of US$80.70/bbl, 13.84% higher than the average of US$70.89/bbl in 2021. Elsewhere, the Organisation of the Petroleum Exporting Countries and its allies (OPEC+) agreed and ratified its 400,000 bbl/d increase for February, in line with its declared schedule. Consequently, we maintain our expectation that the price of Brent oil is likely to remain well above the US$60.00/bbl mark during the first half of this year. 

Equities

The NGX All-Share Index rose 2.66% last week to 43,854.42 points, its highest level in almost four years (since 6 February 2018). Accordingly, the index is up 2.66% year-to-date. Airtel Africa +10.00%, PZ Cussons Nigeria +9.84%, Lafarge Africa +7.72%, Oando +7.24%, and Ardova +6.54% closed positive last week, while Nigerian Breweries -4.00%, Unilever Nigeria -3.45%, Dangote Cement -2.72%, Dangote Sugar Refinery -2.30% and Fidelity Bank -1.57% closed negative. Across the NGX sub-indices, the NGX Oil and Gas +2.68% led the gainers, followed by the NGX Banking +0.78%, NGX Pension +0.38%, NGX Industrial Goods +0.34% and NGX 30 +0.28% indices. Conversely, the NGX Insurance – 0.93% and the NGX Consumer Goods -0.87% indices were the losers for the week. 

Beware the January Rally

How reliable is an equity market rally in January? Rallies in January are quite common in Nigeria. Over the past 12 years, there have been eight. The last two years, 2020 and 2021, are cases in point. Many years begin with enthusiasm, and sometimes it pays off by year-end.

How many January rallies turn into full-year rallies? Over the past 12 years, five of the eight January rallies turned into full-year rallies. In other words, on three occasions, they didn’t. In five cases (2010, 2012, 2013, 2020 and 2021) it paid to follow the rally. And in three cases (2011, 2014 and 2018) is cost money to do this. A statistical split of this kind is pretty much useless, so we need to look further into the data.

What interests us is the psychology of buying in January. Let’s say, for instance, we buy the market in January either because we are optimistic about the New Year or because we see the market taking off and we do not want to miss out. What does the data tell us about this wisdom of buying at this point? 

The data is unforgiving. In nine of the 12 years, there was a point, later in the year, when it was cheaper to buy the market than at the extreme point in January. In that case, it appears that chasing the market in January was wrong 75% of the time. 

This needs some explaining. In the seven out of the eight cases when there was a bull market in January, there was a point later in the year when the market could have been bought more cheaply (2013 was the exception). Of course, it is difficult to time the market (we give the dates of the post-January low points in the table), and sometimes the best time to buy the market came close to the end ofthe year (and December rallies themselves are unreliable, in our view). 

Of the four years when there was a bear market in January (2015, 2016, 2017 and 2019), it would have paid to have bought the market at the low point in January and held to the end of the year twice (2016 and 2017), and it would have lost money to have done this on the other two occasions (2015 and 2019). So, there can be no clear rule about bear markets in January. 

In a later publication, we will relate these moves to the fundamental drivers in the market each year. For now, we observe that most of the time, when there is a bull market in January, there is usually a chance to buy the market more cheaply later in the year. For that reason, and although we are optimistic about the equity market on fundamental grounds (low interest rates, earnings growth), we are wary of January rallies. 

Model Equity Portfolio

In the first week of 2022, the Model Equity Portfolio rose by 1.74% compared with a rise in the NGX Exchange All-Share Index (NGX-ASI) of 2.26%, therefore underperforming by a significant 93 basis points. During 2021, it gained 9.36% against a gain in the NGX-ASI of 6.07%, outperforming it by 328bps.

The first week of the year was characterised by a buying spree in quite small stocks (in terms of index weights) and in general these are not stocks which we favor (with the exception of Seplat which rallied 2.3% last week) with regard to their quality and earnings prospects. There were also quite large price changes in some of the principal index weights, but liquidity in these names was low. 

As we explain above, rallies in January are not typical of what happens during the rest of the year, most of the time. Therefore, and despite the very worrying underperformance over a four-day period (last week’s trading began on Tuesday), we will bide our time. 

A further issue was created by the listing of BUA Foods on Tuesday and a subsequent rally during the week. The stock is 4.5% of the index and is moving very fast. 

Last week, and as forewarned in the last edition of Nigeria Weekly Update, we followed the guidance of our recent Nigerian telecom sector report ‘Delivering a Digital Future’ in which we recommend a Buy for MTN Nigeria with target price of N266.17/share and a Sell for Airtel Africa with a target price of N793.84/share. However, liquidity in these two stocks was very low last week, and since we respect market liquidity (despite the fact that this is a theoretical fund with notional positions), we were unable to transact much. We will continue this week.