This week was a keenly contested battle between the bulls and the bears as mixed sentiments dominated trading activities on the local bourse. Pertinently, the NGX All-Share Index shed 0.1% w/w to close at 47,140.48 points. Notably, profit-taking in SEPLAT (-5.9%), GTCO (-1.5%), ACCESS (-1.4%), AIRTELAFRI (-0.9%) and DANGCEM (-0.5%) drove the weekly loss.
February 18, 2022/Cordros Report
Global Economy
According to the Office for National Statistics (ONS), headline inflation in the United Kingdom (UK) rose by 10bps to 5.5% y/y in January (December 2021: 5.4% y/y) – the highest since March 1992 (7.1% y/y). The persistent inflationary pressure primarily reflects the troika impact of (1) persistent increase in energy prices, (2) low base effect from the prior year, and (3) lingering supply chain disruptions. Accordingly, pressures were most significant in the prices of utilities (7.1% y/y vs December 2021: 6.9% y/y), gas (28.3% y/y vs December 2021: 28.1% y/y), clothing & footwear (6.3% y/y vs December 2021: 4.2% y/y) and electricity (19.2% y/y vs December: 18.8% y/y). On a month-on-month basis, the headline inflation settled at -0.1% (December 2021: +0.5% m/m). The short-term inflation expectation is biased to the upside given the persistent global rise in energy prices amidst the lingering supply chain constraints. Consequently, we think the sustained increase in domestic prices could pile more pressure on the Bank of England (BOE) to hike the key interest rate again at its next meeting in March.
China’s domestic prices moderated further in line with the decline in pork prices. According to China’s National Bureau of Statistics (NBS), the headline inflation settled at 0.9% y/y in January (December 2021: 1.5% y/y) – the lowest in five months. Decomposing the breakdown, we highlight that food prices declined by 3.8% y/y (December 2021: -1.2% y/y) in line with the faster decline in pork prices (-41.6% y/y vs December 2021: -36.7% y/y) as slaughtering enterprises continue to increase pork supplies. Elsewhere, the non-food basket settled at 2.0% y/y (December 2021: 2.0% y/y) – pressure was most significant in the transportation & communication (5.2% y/y vs December: 5.0% y/y) sub-basket. On a month-on-month basis, consumer prices rose by 0.4% in January (December 2021: -0.3% m/m). We expect food prices to continue to decline over the short term, given the persistent decline in pork prices. Similarly, we expect the reduced demand associated with the intermittent rise in COVID-19 infections to keep the core basket in check. The preceding could give the PBoC the room to ease its policy stance in the near term.
Global Markets
Global stocks posted mixed performances this week as concerns over an imminent policy tightening cycle from the Fed and geopolitical tensions weighed on investors’ sentiments. Consequently, U.S (DJIA: -1.2%: S&P 500: -0.9%) stocks were set to end the week in red amid renewed concerns over the ongoing geopolitical tensions between Russia and Ukraine. In Europe, the STOXX Europe (-1.1%) and FTSE 100 (-1.6%) were poised to end the week in red as investors shifted to defensive sectors and safe havens whilst maintaining their gaze on the spat between Russia and Ukraine. In Asia, the Nikkei 225 (-2.1%) mirrored the downbeat mood on Wallstreet as fears over a possible Russian invasion of Ukraine continued to dampen sentiment. Conversely, the SSE (+0.8%) posted a weekly gain as investors reacted positively to augmented efforts to contain omicron spread amid hopes for easing in Russia-Ukraine tensions. Emerging (MSCI EM: +0.2%) market stocks posted gains consequent to the positive sentiments in China (+0.8%), while Frontier (MSCI FM: -0.2%) market stocks declined, following weakness in the Nigerian market (-0.1%).
Nigeria
Economy
According to the National Bureau of Statistics (NBS), headline inflation moderated slightly by 3bps to 15.60% y/y in January (December 2021: 16.63% y/y). We attribute the price moderation to the dissipating impact of the peak festive-induced demand amidst the pre-existing structural challenges. Accordingly, the food basket (-24bps to 17.13% y/y) moderated given the price decline across the Processed food (-30bps to 17.16% y/y) and Farm produce (-5bps to 17.01% y/y) sub-baskets. Meanwhile, the core basket remained unchanged at 13.87% y/y (December 2021: 13.87% y/y). Over the medium term, we expect the inflationary pressure to persist, albeit marginally, given the (1) persistent increase in energy prices, (2) expected depreciation of the currency to NGN440.00/USD at the IEW and (3) additional tax measures in the 2021 Finance Act. Consequently, we revise our 2022FY average and year-end inflation base-case projections to 14.75% y/y (previously: 13.64% y/y) and 13.87% y/y (previously: 13.55% y/y), respectively.
Based on the recently released GDP report by the NBS, real GDP grew by 3.98% y/y in Q4-21 (Q3-21: 4.03% y/y), marking the fifth consecutive quarter of growth since the pandemic induced recession in Q3-20. Accordingly, the Q4-21 tally brought the 2021FY growth print to 3.40% y/y (2020FY: -1.92% y/y). Analysing the breakdown, we highlight that the non-oil sector remains the economy’s growth engine as the oil sector maintained its contraction for the seventh consecutive quarter. The non-oil sector’s growth was primarily driven by the (1) Agriculture (3.58% y/y vs Q3-21: 1.22% y/y), (2) Trade (5.34% y/y vs Q3-21: 11.90% y/y), (3) ICT (5.03% y/y vs Q3-21: 9.66% y/y) and (4) Finance & Insurance (24.14% y/y vs Q3-21: 23.23% y/y). While we expect the Oil sector to maintain its contraction in Q1-22, we project the non-oil sector to grow, albeit slowly, as the impact of (1) base effects from the prior year and (2) government stimulus packages dissipate. Overall, we have revised our estimates for Q1-22 and 2022FY growth upwards to 2.81% y/y (Previously: 2.09% y/y) and 2.92% y/y (Previously: 2.65% y/y), respectively.
Capital markets
Equities
This week was a keenly contested battle between the bulls and the bears as mixed sentiments dominated trading activities on the local bourse. Pertinently, the NGX All-Share Index shed 0.1% w/w to close at 47,140.48 points. Notably, profit-taking in SEPLAT (-5.9%), GTCO (-1.5%), ACCESS (-1.4%), AIRTELAFRI (-0.9%) and DANGCEM (-0.5%) drove the weekly loss. Accordingly, the MTD and YTD return settled at +1.1% and +10.4%, respectively. However, activity levels were stronger than in the prior week, as trading volumes and value rose by 28.7% w/w and 35.5% w/w, respectively. Performance across sectors was mixed, as the Consumer Goods (+2.3%) and Insurance (+1.0%) indices posted gains, while the Oil and Gas (-3.4%), Banking (-0.7%) and Industrial Goods (-0.3%) indices closed in the red.
In the coming weeks, we expect the NGX floor to be flooded with corporate earnings as more companies publish their audited 2021FY numbers, accompanied by dividend declarations. We believe this would provide a catalyst for buying activities even as risk-averse investors are likely to remain cautious due to medium-term expectations of an uptick in FI yields. Overall, we advise investors to seek trading opportunities 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 10.00ppts w/w to 14.0% this week, as elevated funding pressures for CRR debits, FGN bond auction settlement (NGN297.39 billion), CBN’s weekly OMO (NGN60.00 billion), and FX auctions outweighed inflows from OMO maturities (NGN135.90 billion) and FX retail refunds.
Next week, we envisage that the OVN will remain relatively rangebound in the double-digit region, as the expected inflows from OMO maturities (NGN230.00billion) and FGN bond coupon payments (NGN49.89 billion) support liquidity positions amid CBN’s weekly auctions.
Treasury Bills
Bullish trading sentiments continued in the Treasury bills secondary market, fueled by the downward direction of yields at the bonds primary market. Thus, the average yield across all instruments declined by 16bps to 4.4%. Across the market segments, the average yield contracted by 36bps to 5.3% at the OMO segment. Similarly, the average yield moderated by 6bps to 4.2% at the NTB segment as local banks rerouted idle funds to the long-dated instruments. At this week’s OMO auction, the CBN offered and allotted NGN60.00 billion worth of bills to participants, maintaining stop rates across the three tenors, as with prior 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 NGN115.28 billion worth of maturities to market participants at the auction.
Bonds
The Treasury bonds secondary market also closed the week on a bullish note, as (1) yields adjusted to reflect the unexpectedly lower rates at Wednesday’s auction, and (2) market participants looked to the secondary market to fill unmet demand from the auction. Consequently, the average yield contracted by 36bps to 11.2%. Across the benchmark curve, the average yield moderated at the short (-50bps), mid (-60bps) and long (-11bps) segments due to investor’s demand for the MAR-2025 (-114bps), FEB-2028 (-90bps) and JUL-2034 (-27bps) bonds, respectively. At this month’s bond auction, the DMO offered instruments worth NGN150.00 billion to investors through re-openings of the 12.50% FGN JAN 2026 (Bid-to-offer: 4.3x; Stop rate: 10.95%, previously 11.50%) and 13.00% FGN JAN 2042 (Bid-to-offer: 3.1x; Stop rate: 13.00%, unchanged) bonds. As anticipated, demand was higher (subscription: NGN557.72 billion; bid-to-offer: 3.7x) than January’s auction (Subscription: NGN325.24 billion; Bid-to-offer: 2.2x). The DMO eventually over-allotted instruments worth NGN415.42 billion across the competitive (NGN297.39 billion) and non-competitive (NGN118.03 billion) bids.
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 USD72.14 million w/w, to USD39.78 billion (15th February 2022). Meanwhile, the naira depreciated by 0.1% w/w to NGN416.75/USD at the I&E window (IEW) but was unchanged at NGN576.00/USD at the parallel market. At the IEW, total turnover (as of 17th February 2022) declined by 24.5% WTD to USD429.70 million, with trades consummated within the NGN410.00 – 453.11/USD band. In the Forwards market, the naira rate appreciated at the 1-month (+0.1% to NGN418.34/USD), 6-months (+0.1% to NGN433.45/USD) and 1-year (+0.1% to NGN448.06/USD) contracts but was flat at the 3-months (NGN424.15/USD) contract.
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 pretty 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 significantly attract foreign inflows back to the market.
