In sharp contrast to the record sell-offs across global markets, Nigerian equities recorded their best weekly performance in four months, crossing 26,000 points for the first time since March 2020. Notably, investors interest in large caps NB (+25.1%), MTNN (+3.3%) and DANGCEM (+3.0%) drove the benchmark ASI 2.9% higher, w/w, to 26,319.47 points.
September 25, 2020/Cordros Report
Preliminary estimates by IHS Markit showed that service industry activities in the Eurozone contracted in September due to renewed restrictions amid rising COVID-19 infection cases. Specifically, the Eurozone services PMI swung to a 4-month low of 47.6 points (August: 50.5 points) although the drop is not as bad as during the height of the pandemic. Manufacturing activities, however, continue to flourish with the manufacturing PMI hitting a 31-month high of 56.8 points (August: 55.6 points). Overall, the Composite PMI stood at 50.1 points (August: 51.9 points), reflecting the impact of the stuttering services activities on overall activity in the period. The data suggests that the rebound in activities in the Eurozone may be losing steam, and at worst, the recovery may have stalled. Faced with renewed lockdown measures amid rising cases of infections, the recovery is under more pressure than previously thought.
An increasing number of COVID-19 infections and diminishing fiscal stimulus is reflecting in the labour conditions in the U.S. Initial job claims for the week ended September 18th unexpectedly rose to 870,000 (vs. 11th September: 866,000) according to the U.S. Labour Department. Although this represents the fourth consecutive week the new jobless claims came in below 1 million, we highlight that it is still well above historical levels and above the peak of 665,000 during the Global Financial Crisis. Elsewhere, continuing claims declined to 12.58 million (Prior week: 12.75 million) as people exhausted their eligibility for benefits, which are mostly limited to 26 weeks. If renewed containment measures are introduced, this is likely to constrain business activity and hurt employment prospects. However, amidst ongoing electioneering in the US, it is difficult to see material fiscal stimulus being agreed upon in the near term.
Global equities were set for a dire week, with many major markets headed for their worst weeks since the peak of the coronavirus panic, as the absence of fresh stimulus for the U.S. economy and a second wave of coronavirus cases raised fears of a slowing global recovery. Consequently, US (DJIA: -3.0%; S&P: -2.2%) and European (STOXX Europe: -3.3%; FTSE 100: -2.7%) shares were on track to end the week lower. Asian (Nikkei 225: -0.7%, SSE: -3.6%) markets also closed lower, taking a cue from Wall Street. In Emerging markets (MSCI EM: -4.6%), the benchmark index was down following a decline in South Korea (5.3%) as tensions on the Korean Peninsula reignited. Conversely, Frontier market (MSCI FM: +0.9%) stocks were on track to end the week higher following a 3.5% gain on the Kuwaiti benchmark index.
Faced with declining output and upward pressure on domestic prices, the Monetary Policy Committee (MPC) reduced the Monetary Policy Rate (MPR) by 100bps to 11.5% and widened the Asymmetric corridor around the MPR to +100/-700bps (Previously: +200/-500bps), while holding the other parameters constant. This firmly established the CBN’s dovish stance as it continued on its quest to push more credit to the private sector. The MPC also attributed rising prices to be due to structural rigidities and supply chain challenges rather than monetary factors. We do not expect any significant growth in domestic credit or aggregate demand, especially given the historical ineffectiveness of the MPR in stimulating output and as banks remain concerned about extending credit amidst the fragile macroeconomic conditions. In our view, the MPC needs to address the issue of the exchange rate, and forex illiquidity, which in our view, are major hindrances to any meaningful economic recovery.
Elsewhere, Nigeria’s PMIs remained in contractionary territory for the fifth consecutive month as (1) weak consumer spending, (2) low level of business activities, and (3) high cost of procurement brought about by currency weakness and limited access to foreign exchange, continued to dampen the country’s macroeconomic environment. According to the CBN, Manufacturing PMI for the month of September stood at 46.9 points (August: 48.5 points) while the non-Manufacturing PMI stood at 41.9 points (August: 44.7 points). While the supplier delivery time grew faster (53.5 vs. 53.0 points in August), production level (47.3 vs. 49.2 points in August), new orders (46.4 vs. 49.2 points in August), employment level (44.1 vs. 44.6 points in August), and raw materials inventories (43.0 vs. 46.1 in August) continued to contract. The weak PMI indicates a slowing in the pace of economic recovery even as the rate of COVID-19 infections declines, and as restrictions are eased. Activities are expected to remain under pressure amidst weak household consumption, rising inflation, and forex exchange weakness and illiquidity.
In sharp contrast to the record sell-offs across global markets, Nigerian equities recorded their best weekly performance in four months, crossing 26,000 points for the first time since March 2020. Amidst a sharp drop in fixed income yields following further monetary easing by the MPC, the stock market recorded a significant increase in activity with total volumes and value traded surging by 46.3% and 68.9% w/w, respectively. Notably, investors interest in large caps NB (+25.1%), MTNN (+3.3%) and DANGCEM (+3.0%) drove the benchmark ASI 2.9% higher, w/w, to 26,319.47 points. The MTD and YTD returns for the index currently stand at 3.9% and -1.9% respectively. Accordingly, the Consumer Goods (+6.0%) index topped the sectoral charts, followed by the Banking (+3.6%), Industrial Goods (+2.4%), Oil & Gas (+1.2%) and Insurance (+1.1%) indices.
We expect the market might continue to benefit as domestic investors seek alpha-yielding opportunities in the face of increasingly negative real returns in the fixed income market. However, we advise investors to trade in only fundamentally justified stocks as the weak macro environment remains a significant headwind for listed companies.
Money market and Fixed income
The overnight (OVN) rate jumped by 8.50ppts to 11.5%, as system liquidity was pressured by funding for FGN bond (NGN106.15 billion) and OMO (NGN70.00 billion) auction debits, and the FX retail auction held during the week, despite the inflows from OMO maturities (NGN300.00 billion), FGN bond coupon payments (NGN18.12 billion) and FX retail refunds.
Next week, we expect the OVN to trend southwards, as system liquidity is further supported by inflows from FGN bond coupon payments (NGN40.77 billion) and OMO maturities (NGN18.77 billion).
Due to the sustained and elevated level of liquidity in the system, the overall Treasury bills secondary market remained bullish, as the average yield across all instruments contracted by 24bps to 1.8%. Demand remained significant at the OMO segment (contracted by 43bps to 1.9%) of the market, despite renewed supply from the CBN, as market participants continued to play in the short and mid segments of the market. Conversely, the average yield expanded by 8bps to 1.7% at the NTB segment, as investors paid little attention to the market. At the OMO auction, the CBN fully allotted NGN70.00 billion worth of bills – NGN10.00 billion of the 131-day, NGN10.00 billion of the 166-day and NGN50.00 billion of the 348-day – at respective stop rates of 4.77% (previously 4.86%), 7.60% (previously 7.68%), and 8.70% (previously 8.88%).
We expect trading activity in the T-bills market to remain bullish next week, due to the healthy liquidity in the system. At the NTB segment, we expect the focus to be shifted to the primary market, where the CBN will be rolling over NGN113.97 billion worth of instruments.
Trading in the FGN bonds secondary market was bullish, as investors covered for lost bids at the primary market auction (PMA). Consequently, the average yield across instruments contracted by 48bps to close at 7.1%. At the PMA, the DMO offered instruments worth NGN145.00 billion to investors through re-openings of the 12.50% JAN 2026 (Bid-to-offer: 3.4x; Stop rate: 6.00%), 12.50% MAR 2035 (Bid-to-offer: 1.8x; Stop rate: 8.52%), 9.80% JUL 2045 (Bid-to-offer: 1.0x; Stop rate: 8.90%) and 12.98% MAR 2050 (Bid-to-offer: 4.1x; Stop rate: 8.94%) bonds. Despite a total subscription of NGN360.22 billion, the DMO eventually allotted instruments worth NGN103.81 billion, resulting in a bid-cover ratio of 3.5x.
We expect trading in the Treasury bonds secondary market to also be impacted by the ample liquidity in the system. Thus, we should see sustained demand, as investors cherry-pick across relatively attractive yields in the space.
Nigeria’s FX reserves recorded its first weekly decline in five weeks, falling by USD47.33 million w/w to USD35.77 billion. Across the FX windows, the naira remained flat against the US dollar at NGN386.00/USD at the I&E window but weakened by 0.4% to NGN465.00/USD in the parallel market, despite CBN’s weekly FX sale to BDCs. In the Forwards market, the rates appreciated across the 1-month (+0.1% to NGN386.47/USD), 3-month (+0.2% to NGN387.48/USD), 6-month (+0.3% to NGN389.82/USD) and 1-year (+0.2% to NGN399.44/USD) contracts.
Despite the CBN’s stronger commitment towards exchange rate unification, we still see legroom for the currency to depreciate further in the medium-to-long term, at least towards its REER derived fair value. Our prognosis is hinged on (1) the widening current account (CA) position, (2) currency mispricing, which could induce speculative attacks on the naira, and (3) the resumption of FX sales to the BDC segment of the market which should place an additional layer of pressure on the reserves.