The All-Share Index settled below the 35,000 psychological mark breached in the prior week, closing at 34,136.82 points. Notably, investors’ sell down in UBA (-10.9%), DANGSUGAR (-7.7%), FLOURMILL (-7.4%), STANBIC (-6.5%), ZENITH (-5.7%), and DANGCEM (-3.4%) drove the benchmark index 2.6% lower, its first weekly loss in eight weeks.
November 20, 2020/Cordros Report
Japan posted a robust economic performance in the third quarter of the year as household spending and exports grew at record rates amid the continued ease of lockdown measures. According to the Japanese Cabinet Office, GDP grew by 5.0% q/q in Q3-20 following 8.2% contraction in Q2-20. This translates to an annualized growth rate of 21.4% – the fastest pace of growth for the world’s third-largest economy. Given the ease of the COVID-19 containment measures, household spending grew by 20.1% on an annualized basis (Q2-20: -28.7%), while public spending (+9.3% vs. Q2-20: -1.4%) grew by the fastest pace since at least 1990. Similarly, the external sector contributed 12.2ppts to the overall growth in Q3-20 due to a surge in exports (+31.3% vs. Q2-20: -53.4%) on a seasonally adjusted basis. With increasing cases of COVID-19 infections in Europe and the U.S, we expect activities in the external sector to decline, thus, slowing down Japan’s economic growth in Q4-20 amid the sustained government emergency stimulus.
According to the U.K Office for National Statistics (ONS), the inflation rate in the U.K edged up by 0.7% y/y in October (September: 0.5% y/y), driven by a rise in prices of clothing, food, furniture and furnishings. While the clothing index was up by 0.2% y/y (September: -1.6% y/y), following the end of summer sales, the prices of food rose by 0.6% y/y (September: -0.1% y/y) as people stockpiled vegetables and fruits due to renewed lockdown measures to reduce the rising cases of COVID-19 in the country. However, prices were unchanged compared to a month ago (September: +0.4% m/m), with the recreation and cultural services (-0.8% m/m) representing the biggest drag on prices. Over the short term, we expect prices to be largely around their current levels as the renewed lockdown reduces domestic demand. Prices are, however, expected to pick up next year on the back of (1) anticipated pickup in energy prices, (2) end to the temporary VAT in April 2021, and (3) government stimulus amid the recovery of the economy.
Global stocks rallied earlier in the week as optimism over the rollout of a vaccine fuelled interest in risky assets. The impact was however short-lived as anxiety among investors occasioned by the rising number of infections in the U.S and Europe lured flows into government bonds. In the US, the DJIA (+0.0%) and S&P (-0.1%) were on track for ending the week flattish, as fears that the current wave of COVID-19 infections will subdue economic activities weighed on investors sentiment for stocks. In Europe, the STOXX Europe (+0.6%) and FTSE 100 (+0.3%) were on track for their third consecutive weekly gains, albeit marginal due to growing concerns over rising COVID-19 infections. Asian markets posted positive performances, with the Japanese (Nikkei 225: +0.6%) and Chinese (SSE: +2.0%) indices on course for ending the week in the green, driven by investors optimism that governments will not impose stringent measures compared to those adopted in the first wave of the pandemic. Despite concerns on the second wave of the pandemic, Emerging market (MSCI EM: +3.3%) stocks recorded gains on the back of positive sentiments in China (+2.0%) and Brazil (+1.9%) while Frontier market (MSCI FM: +1.0%) gained mainly due to gains in Vietnam (+2.2%).
In line with our expectation of a higher month-on-month increase in domestic prices stemming from (1) limited bountiful food harvest, (2) lingering effects of border closure, and (3) currency depreciation, Nigeria’s headline inflation notched higher by 14.23% y/y (Cordros estimate: 14.21% y/y) in October compared to 13.71% y/y in the prior month. While food inflation firmed up in the review period by 72bps to 17.38% y/y due to price increase across farm produce (+48bps), processed food (+79bps), and imported food (+6bps) compared to the corresponding period of last year, we highlight that core inflation resumed its ascent as it advanced by 56bps to 11.14% y/y – the highest since March 2018 (11.18% y/y). On a month-on-month basis, headline inflation increased by 6bps to 1.54% – tracking significantly above the 2020 average of 1.15%. We now see m/m headline CPI at 1.67% in November and 1.68% in December, translating to y/y readings of 14.95% y/y and 15.89% y/y, respectively, majorly influenced by higher energy costs.
According to the CBN Purchasing Managers’ Index survey, Nigeria’s manufacturing PMI leapt above an expansionary territory for the first time since March, as it printed 50.2 points in November (October: 49.4 points). The Non-manufacturing PMI (47.6 points vs. October: 46.8 points), however, continues to grapple with the impact of the COVID-19 pandemic as it remained in the contractionary zone for the eighth consecutive month. We highlight that although employment level (+1.3 points to 47.3 points) and raw materials inventories (+2.3 points to 48.5 points) remain in the contractionary territory, supplier delivery time (+0.4 points to 52.2 points) was faster and new orders (-0.7 points to 50.5 points) as well as production level (+1.7 points to 51.7 points) increased. Despite the improved readings of the manufacturing PMI in November, the sub-50 reading of the non-manufacturing PMI implies business activities are yet to return to the pre-pandemic levels. With the elevated inflationary pressure and lingering liquidity constraints in the FX market, we expect the overall recovery to be elongated.
After eight weeks of hiatus from the local bourse, the bears staged a comeback dominating the market on three of the five trading days of the week. Activity level was mixed, as volume grew strongly by 153.8% w/w while value declined 38.7% w/w. The All-Share Index settled below the 35,000 psychological mark breached in the prior week, closing at 34,136.82 points. Notably, investors’ sell down in UBA (-10.9%), DANGSUGAR (-7.7%), FLOURMILL (-7.4%), STANBIC (-6.5%), ZENITH (-5.7%), and DANGCEM (-3.4%) drove the benchmark index 2.6% lower, its first weekly loss in eight weeks. The MTD return moderated to 27.2% while the YTD return for index declined to 27.2%. Performance across sectors was all broadly negative. Save for the Insurance (+0.5%) index that closed marginally positive, the Banking (-6.0%), Oil and Gas (-4.4%), Consumer Goods (-4.3%), and Industrial (-0.7%) indices closed in the red.
In the short to medium term, we still see scope for expansion in valuation multiples as the depressed yield environment remains compelling for yield-seeking investors to rebalance their portfolio towards equities. In the week ahead, we expect a mixed market performance due to continued profit-taking activities and positioning by early birds in dividend-paying stocks ahead of FY 2020 dividend declarations. We reiterate the need for positioning in only fundamentally sound stocks as the weak macro environment remains a significant headwind for corporate earnings.
Money market and fixed income
The overnight (OVN) rate expanded by 370 bps w/w, to 4.3% as debits late in the week for CRR, CBN’s weekly OMO and FX auctions and FGN bond auction (NGN80.00 billion) outweighed inflows from FAAC allocations (NGN363.25 billion), OMO maturities (NGN281.45 billion), FGN bond coupon payments (NGN8.45 billion) and FX retail refunds.
We expect system liquidity to remain strained at the end of next week, as inflows worth a combined NGN80.55 billion – OMO maturities (NGN65.56 billion) and FGN bond coupon payment (NGN14.99 billion) – may not be sufficient to offset next week’s outflows for CBN’s auctions.
Just as we envisaged, activity levels remained subdued in the Treasury bills market, as investors remained wary of the low yields on offer. Nonetheless, the average yield across both segments of the market pared by 3bps to 0.1%. The contraction in the overall yield was driven by the OMO secondary market (average yield declined by 6bps to 0.1%), as local banks reinvested maturities in mid and long tenor instruments. Average yield at the NTB segment was unchanged at 0.1%, as the market traded quietly through all trading sessions of the week.
With the still unimpressive yields in the T-bills market, we continue to expect muted activity in the space. At the NTB segment, we expect market participants’ focus to be on the PMA next week, where the CBN is expected to roll over NGN130.60 billion worth of maturities.
The bulls dominated the Treasury bonds secondary market this week as the average yield across instruments declined by 11bps to 4.0%. We attribute the bullish sentiment to the ample liquidity in the system, and as market participants covered for lost bids at the PMA. At the PMA, the DMO offered instruments worth NGN80.00 billion to investors through re-openings of the 12.50% MAR 2035 (Bid-to-offer: 2.2x; Stop rate: 5.00%) and 9.80% JUL 2045 (Bid-to-offer: 2.4x; Stop rate: 5.7850%) bonds. Despite a total subscription of NGN184.74 billion, the DMO eventually allotted instruments worth NGN80.00 billion, resulting in a bid-cover ratio of 2.3x.
In the coming week, we retain our expectation for bullish trading in the Treasury bonds secondary market, as FGN bonds represent the only preferable alternative for fixed income investing.
Nigeria’s FX reserves decreased by USD95.82 million w/w to USD35.51 billion, as the CBN maintained its support for the currency via its weekly interventions across the various FX windows. Across the windows, the naira closed flat at NGN385.83/USD at the I&E window (YTD: -5.5%), while it further weakened by 2.1% to NGN480.00/USD in the parallel market (YTD: -24.6%). In the Forwards market, the naira strengthened in the 1-month (+0.1% to NGN385.59/USD), 3-month (+0.2% to NGN386.08/USD) and 6-month (+0.2% to NGN386.11/USD) contracts, while it depreciated in the 1-year (-0.2% to NGN388.12/USD) contract.
Going forward, we expect CBN’s FX management strategies to continue supporting the naira at its current level at the official and I&E windows. However, we believe the parallel market rate will remain volatile and continue to trade above the CBN’s Relative Purchasing Power Parity (RPPP) of NGN433.64/USD and our REER fair value estimate of NGN453.67/USD at the current level of intervention in the FX market.