Sentiments remained broadly positive in the second trading week of the year, as investors continued to cherry-pick stocks with attractive dividend yields ahead of FY 2020 dividend declarations. Interestingly, the local bourse recorded gains in all the trading sessions of the week. Accordingly, the All-Share Index rose by 2.6% w/w to close at 41,176.14 points.
January 15, 2021/Cordros Report
China’s headline inflation rate increased by 0.2% y/y in December (November: -0.5% y/y), according to the National Bureau of Statistics (NBS). This brings the average inflation rate for 2020FY to 2.5% compared to 2.9% in 2019FY. The increase was primarily driven by food prices (+1.4% y/y vs. November: -0.7% y/y) which overturned its previous decline due to festive induced demand and adverse weather conditions. Meanwhile, pork prices (-1.3% y/y vs. November: -12.5% y/y) declined albeit at a slower pace, as the country’s pig herds continue to recover from the African swine fever. On a month-on-month basis, consumer prices rose by 0.70% (November: -0.6% m/m) – the sharpest monthly rise since February 2020. Over the short term, we think the domestic prices will dive back into the negative territory due to the high base effect from the corresponding period of 2020. However, further uptick in energy prices, coupled with an improved vaccine rollout, could help drive a rebound in the medium term.
According to the U.S. Bureau of Labour Statistics, the U.S. consumer price index rose 0.4% m/m in December (vs. November: 0.2% m/m), following the increase in gasoline prices (8.4% m/m vs. November: -0.4% m/m). Although clothing (+1.4% m/m vs. November: 0.9% m/m) and new vehicles (+0.4% m/m vs. November: -0.1% m/m) prices soared, this was partly offset by a 1.2% m/m decline in used vehicle prices and a 0.4% drop in prescription drugs prices. With the 1.4% y/y increase in the headline inflation in December, average inflation for 202FY came in at 1.2% compared to 1.8% in 2019FY, reflective of the impact of the pandemic on domestic demand. Given (1) the expectation for additional stimulus, (2) the relatively low base in 2020, and (3) a further increase in gasoline prices, we expect headline inflation to march on towards the Fed’s 2.0% target in the medium term.
Global stocks faltered as concerns over the impeachment of Donald Trump alongside surging virus infection rates outweighed the reaction to the USD1.90 trillion economic relief package announced by the President-elect Joe Biden. Consequently, US (DJIA: -0.3%; S&P: -0.8%) stocks were set to suffer their first weekly loss in the new year. In Europe, the STOXX Europe (+0.2%) and FTSE 100 (-1.0%) posted mixed performances, as re-introduction of new lockdowns amid rising COVID-19 cases dampened hopes for a V-shaped recovery. In Asia, the Nikkei 225: (+1.4%) was on course for a weekly gain, as stocks preserved gains accumulated earlier in the week underpinned by the additional stimulus package in the U.S, while SSE: (-0.1%) was dragged by bubble concerns given stretched valuations. Emerging markets (MSCI EM: +1.0%) stocks were buoyed largely by gains in India (+1.0%) while Frontier (MSCI FM: +0.7%) market stocks were on track for their second consecutive weekly gain following robust gains in Kuwait (+2.5%).
The Minister of Finance presented the budget implementation report for 2020FY during the public hearing of the 2021 budget. Based on the presentation, the fiscal deficit for 2020FY stood at NGN6.15 trillion, of which 46.5% or NGN2.86 trillion was financed by the CBN via Ways and Means. Given that the outstanding balance of CBN’s overdraft to the FGN stood at NGN9.04 trillion as of 2019FY, we estimate an outstanding balance of NGN11.91 trillion as of 2020FY after taking into account the drawdown from the CBN in 2020. We understand that the FGN is in talks to formalize the loans obtained from the CBN. This is positive given that it takes the burden off the apex bank, thereby helping to clean its balance sheet. However, based on the 2020 level of bond allotment, we estimate that it will take six years to securitize the total outstanding overdraft provided that the FGN does not issue any other bond during the six years.
According to the National Bureau of Statistics (NBS), headline inflation rose by 86bps to 15.75% y/y – broadly in line with our estimate of 15.74% y/y. In our view, this was largely driven by the festive induced demand and sustained impact of the poor harvest season – all of which widened the demand-supply gap. While the low-base effect added to the existing food supply issues, we highlight that the core inflation resumed its ascent as it advanced by 32bps to 11.37% y/y – the highest since February 2018 (11.71% y/y). On a month-on-month basis, headline inflation increased slightly by 1bp to 1.61% – significantly higher than the 2020FY average of 1.23%. For January 2021, we forecast headline inflation of 16.10% y/y on account of (1) pre-existing structural constraints, (2) continued impact of the marginal hike in electricity tariffs, and (3) a relatively low base in the prior year.
Sentiments remained broadly positive in the second trading week of the year, as investors continued to cherry-pick stocks with attractive dividend yields ahead of FY 2020 dividend declarations. Interestingly, the local bourse recorded gains in all the trading sessions of the week. Accordingly, the All-Share Index rose by 2.6% w/w to close at 41,176.14 points. Consequently, the YTD return swung into positive territory, settling at 2.2% compared to -0.4% in the prior week. Activity levels were decent, as trading volumes rose marginally by 1.5% w/w while value traded jumped by 64.7% w/w. Notably, bargain hunting in FLOURMILL (+22.9%), DANGSUGAR (+8.6%), DANGCEM (+5.3%), and ZENITHBANK (+2.5%) drove the weekly gain. The performances across the sectors were broadly positive as all sectors closed positive. The Insurance (+17.5%) index topped the gainers chart followed by Oil and Gas (+7.3%), Consumer Goods (+3.1%), Industrial Goods (+2.8%) and Banking (+2.5%) indices.
In the short term, we expect the bulls to retain dominance in the market given positioning for FY 2020 dividends amid negative real returns in the fixed income market even as we do not rule out intermittent profit-taking. However, we advise investors to take positions in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings.
Money market and fixed income
In line with our expectation, the overnight (OVN) rate dipped by 833bps w/w, to 1.0% as inflows from OMO (NGN211.25 billion) and NTB (NGN125.14 billion) maturities as well as FGN bond coupon payments (NGN40.68 billion) outweighed outflows for the Federal Government Cash Remittance provisioning by banks (c. NGN100.00 billion) as well as the CBN’s weekly OMO (NGN80.00 billion) and FX auctions.
We expect the OVN rate to remain depressed next week as inflows from OMO maturities (NGN226.31 billion) and FGN bond coupon payments (NGN40.68 billion) hit the system.
Trading in the Treasury bills secondary market was mixed as risk-off sentiments persisted amidst the low yields on offer. Specifically, average yield across all instruments pared by 1bp to 0.7%. At the NTB segment, average yield expanded by 8bps to 0.5%, as market participants sold off early in the week in anticipation of higher yields at the NTB PMA. At the PMA, the CBN offered NGN232.36 billion worth of instruments, but only allotted 46.1% of the amount on offer. Precisely, the allotment was split between NGN15.92 billion of the 91-day, NGN25.37 billion of the 182-day and NGN65.93 billion of the 364-day – at respective stop rates of 0.5000% (previously 0.0350%), 1.000% (previously 0.5000%), and 1.5000% (previously 1.2100%). Elsewhere, average yield at the OMO segment declined by 7bps to 0.8% as local banks reinvested OMO maturities.
We maintain our view that the T-bills market will continue to be thinly traded amidst the unattractive yields in the space.
Activities in the Treasury bonds secondary market remained bearish as investors (1) remained on the sidelines, awaiting clarity on the direction of monetary policy, and (2) reacted to the release of inflation data for December 2020 (15.75%). Consequently, average yield expanded by 30bps to 6.1%. Across the benchmark curve, upward repricing of mid (+75bps) and long (+38bps) dated instruments continued following major profit taking on the FEB-2028 (+143bps) and APR-2037 (+67bps) bonds. Conversely, average yield declined at the short (-5bps) end following demand for the JAN-2022 (-64bps) bond. Notably, the DMO released the FGN bond auction calendar for Q1-21, outlining its intentions to raise NGN450.00 billion (Q4-20: NGN220.00 billion) through re-openings of the MAR 2027, MAR 2035, and JUL 2045 bonds.
We expect yield direction to be determined by the stop rates at next week’s auction. Nevertheless, we expect yields in the bonds secondary market to temper in the first quarter of the year, given the limited supply amidst significant inflows from OMO maturities (c. NGN2.34 trillion) and FGN bond coupon payments (c. NGN500.00 billion) expected. At next week’s auction, the DMO is set to offer instruments worth NGN150.00 billion through re-openings of the 16.2884% FGN MAR 2027, 12.50% FGN MAR 2035 and 9.80% FGN JUL 2045 bonds.
Nigeria’s FX reserves maintained its accretion for the fourth consecutive week, as the gross reserve position grew by USD363.61 million w/w to USD35.72 billion (13th January 2021). Across the FX windows, the naira weakened against the US dollar by 0.3% w/w, to NGN394.67/USD at the I&E window, and by 0.6% to NGN475.00/USD in the parallel market. At the I&E window, total turnover at the I&E window increased by 59.9% WTD to USD330.67 million, with trades consummated within the NGN387.10 – 411.05/USD band. In the Forwards market, the rate was flat in the 1-month (NGN398.04/USD) contract, weakened in the 3-month (-0.5% to NGN403.33/USD) contract and appreciated in the 6-month (+0.3% to NGN416.62/USD) and 1-year (+0.2% to NGN435.10/USD) contracts.
Given the expected pressure on the external reserves amid weak portfolio inflows, we expect the naira to depreciate closer to its fair value implied by long-run REER (NGN453.67) in the medium term. Our baseline expectation is that the CBN will depreciate the naira by 5.3% to NGN400/USD in the interbank market and 5.1% to NGN415/USD at the IEW.