Positive sentiments returned to the local bourse this week as investors took advantage of the moderation in share prices last week to make re-entries into companies with attractive dividend yields. Accordingly, the NGX All-Share Index rose by 0.4% w/w to close at 47,328.42 points.
February 25, 2022/Cordros Report
Global Economy
The United Kingdom’s (UK) private-sector output expanded at the fastest pace since June 2021, in line with the rebound in service sector activity. According to flash estimates from the IHS Markit/CIPS, the UK’s Composite PMI rose to 60.2 points in February (January: 54.2 points) – the highest since June 2021 (61.7 points). The output expansion was driven by the Services PMI (60.8 points vs January: 54.1 points), which rose to an 8-month high given the strong recovery in consumer spending on travel, leisure, and entertainment amidst the relaxation of COVID-19 containment measures. Meanwhile, the Manufacturing PMI (57.3 points vs January: 57.3 points) was unchanged as more robust production growth supported factory activity during the period. Although we expect the service sector to continue to support the overall private sector activity in the short term, we expect the growth pace to slow given the impact of (1) Russia-Ukraine crisis uncertainties, (2) higher energy prices, and (3) lingering inflationary pressures.
Global stocks came under intense selling pressures this week as investors were spooked by the escalation of the tensions between Russia and Ukraine after Putin ordered troops to move into two breakout regions (Donetsk and Luhansk) of Ukraine. However, investors’ worries eased late in the week following the West’s decision not to exclude Russia from the SWIFT interbank payments system. Consequently, US (DJIA: -2.5%: S&P 500: -1.4%) stocks were set to end the week in red as investors fled to safety following stern warnings from US officials over the ongoing geopolitical tensions between Russia and Ukraine. In Europe, the STOXX Europe (-4.7%) and FTSE 100 (-4.1%) suffered huge losses as investors liquidated investment in stocks and rotated into safe-havens. In Asia, the Nikkei 225 (-2.4%) and the SSE (-1.1%) mirrored the downbeat mood in the global market as investors’ sentiments were dampened by Putin’s decision to invade Ukraine. Emerging (MSCI EM: -6.2%) stocks posted losses consequent to the sell-offs in India (-3.4%) and China (-1.1%). Similarly, Frontier (MSCI FM: -5.4%) market stocks declined, following weakness in Kenya (-5.6%) and Morocco (-5.5%).
Based on the recently released data by the National Bureau of Statistics (NBS), collections from Company Income Tax (CIT) increased by 17.6% y/y to NGN347.81 billion in Q4-21 (Q4-20: NGN295.72 billion). We attribute the increase to improved business activities in line with the sustained gains from the reopening of the economy in contact-facing sectors. Accordingly, there was a broad-based increase across the local (+59.8% y/y to NGN258.85 billion) and foreign (+40.0% y/y to NGN88.96 billion) CIT collections. On a quarter-on-quarter basis, we highlight that the CIT collection declined by 26.4% in Q4-21 (vs Q3-21: +0.1% q/q to NGN472.52 billion). Overall, the total CIT collected rose by 19.6% y/y to NGN1.69 trillion in 2021FY (2020FY: NGN1.41 trillion). We expect the CIT collections to continue to improve, albeit slowly, over the short term in the absence of any major shock to the economy. Our expectation of a moderate rise is in line with the normalisation of business activities after the initial post-COVID boost seen in 2021FY.
Equities
Positive sentiments returned to the local bourse this week as investors took advantage of the moderation in share prices last week to make re-entries into companies with attractive dividend yields. Accordingly, the NGX All-Share Index rose by 0.4% w/w to close at 47,328.42 points. Notably, bargain hunting in SEPLAT (+7.5%), GTCO (+2.7%), INTBREW (+4.8%), and MTNN (+0.8%) drove the weekly gain. Accordingly, the MTD and YTD return settled at +1.5% and +10.8%, respectively. However, activity levels were weaker than in the prior week, as trading volumes and value declined by 3.2% w/w and 37.0% w/w, respectively. Performance across sectors was broadly positive in line with the directional movement in NGXASI, as the Oil and Gas (+3.9%), Insurance (+0.7%), and Banking (+0.2%) indices posted gains. The Consumer Goods (-1.1%) index closed lower while the Industrial Goods index closed flat.
In the weeks ahead, we expect the NGX floor to be flooded with corporate earnings as more companies publish their audited 2021FY numbers, accompanied by dividend declarations. As things stand, we believe investors have fully priced-in dividend expectations. Hence, we think positive surprises from dividend-paying stocks would provide a catalyst for increased buying activities. Notwithstanding, 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 100bps w/w to 15.0%, as funding pressures for net NTB issuances (NGN142.73 billion) and CBN’s weekly OMO (NGN100.00 billion) and FX auctions outweighed inflows from OMO maturities (NGN227.20 billion).
We expect the OVN rate to trend northwards in the coming week as the CBN would likely mop up the extra liquidity emanating from FAAC disbursements (c. NGN359.76 billion) and OMO maturities (NGN70.00 billion).
Treasury Bills
Trading in the Treasury bills secondary market ended the week on a bullish note, as market participants reacted to declining marginal rates at recent auctions. Consequently, the average yield across all instruments fell by 65bps to 3.8%. Across the market segments, the average yield contracted by 67bps to 4.6% at the OMO segment following reinvestment of this week’s maturing bills. At this week’s OMO auction, the CBN offered and allotted NGN100.00 billion worth of OMO bills to participants and maintained stop rates across the three tenors (96DTM – 7.0%, 180DTM – 8.5% and 362DTM – 10.1%), as with prior auctions. Similarly, the average yield at the NTB segment moderated by 58bps to 3.8% as unmet demand from the NTB auction filtered into the secondary market. At the NTB auction, the CBN offered NGN115.28 billion for sale with a total subscription of NGN602.65 billion. Eventually, the CBN allotted NGN258.01 billion – NGN5.36 billion of the 91-day, NGN11.03 billion of the 182-day and NGN241.61 billion of the 364-day bills – at respective stop rates of 2.24% (previously 2.48%), 3.30% (unchanged), and 4.35% (previously 5.20%).
We expect yields to trend lower further next week, as investors sustain buying activities in reaction to the moderation in the stop rate of the one-year paper at the last primary market auction.
Bonds
Trading in the Treasury bonds secondary market was also bullish, taking a cue from the declining yields in the T-bills market. In addition, investors also reacted positively to the rebound in economic growth as reported by the NBS (GDP print for 2021FY: +3.40% vs 2020FY: -1.92%). Consequently, the average yield contracted by 13bps to 11.1%. Across the benchmark curve, the average yield declined at the short (-20bps) and long (-29bps) segments following buying activities on the MAR-2027 (-45bps) and APR-2037 (-53bps) bonds, respectively, but expanded at the mid (+8bps) segment due to sell pressures on the JUL-2030 (+70bps) bond.
In the coming week, we envisage demand from investors will linger and drive yields lower. Nonetheless, we are maintaining our medium-term view that the FG’s significant frontloading of borrowings for the year in H1-22 will result in an uptick in bond yields, as investors demand higher yields in the face of elevated supply.
Foreign Exchange
After sixteen consecutive weeks of decline, Nigeria’s FX reserves closed higher by USD40.68 million w/w to USD39.84 billion (23rd February 2022). Consequently, the naira appreciated by 0.2% and 0.3% w/w to NGN416.00/USD and NGN574.00/USD at the I&E window (IEW) and the parallel market, respectively. At the IEW, total turnover (as of 24th February 2022) declined by 10.2% WTD to USD442.98 million, with trades consummated within the NGN406.00 – 453.12/USD band. In the Forwards market, the naira rate was flat at the 1-month (NGN418.51/USD) contract; however, the rate depreciated at the 3-months (-0.1% to NGN424.41/USD), 6-months (-0.2% to NGN425.07/USD) and 1-year (-1.6% to NGN455.35/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 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 be significant in attracting foreign inflows back to the market.
