Sentiments turned bearish as profit-taking activities dominated market performance throughout the week. Save for the mid-week session, the market posted marginal losses on the other trading days. Accordingly, the All-Share Index declined by 0.4% w/w to close at 41,001.99 points.
January 22, 2021/Cordros Report
According to the China’s National Bureau of Statistics (NBS), the economy grew by 6.5% y/y in Q4-20, higher than the consensus estimate of 6.1% y/y, signalling that the economy is poised for a V-shaped recovery. Overall, 2020FY growth stood at 2.3% (2019FY: 6.1%) – the lowest in more than four decades. We highlight that the positive GDP performance was largely aided by (1) the relatively successful containment of COVID-19 pandemic, (2) robust fiscal and monetary policy stimulus, and (3) strong external demand for medical and work-from-home devices. Fixed asset investment increased 2.9%, industrial production grew 2.8% but retail sales shrank 3.9%. China’s GDP is expected to accelerate this year, continuing to outpace global peers, given the low base from 2020 and the expectation that vaccines could slow down the spread of COVID and therefore provide some chance of faster recovery in external demand, helping manufacturing and exports.
The temporary easing of COVID-19 travel restrictions and gradual recovery in global economic activities underpinned the uptick in UK’s inflation rate for December. According to the Office for National Statistics (ONS), inflation rate rose by 0.6% y/y (November: 0.3% y/y) in December, with the biggest contribution coming from transport prices (1.9% y/y vs. November: 1.0% y/y), recreation & culture (2.6% y/y vs. November: 1.9% y/y), and prices of alcohol & tobacco (3.6% y/y vs. November: 2.0% y/y). We understand that the price increases also reflect possible changes in housing preference since the pandemic. On a month-on-month basis, inflation rate increased by 0.3% (November: -0.1% m/m). Over the medium term, we expect a sustained rise in the inflation rate due to (1) expiration of the temporary VAT cut in March 2021, (2) higher energy prices, and (3) lingering impact of Brexit on supply chains.
Global stocks edged higher as the appetite for risky assets strengthened on the back of an orderly transition of power in U.S and prospects of additional stimulus from the Biden administration. Consequently, US (DJIA: +1.2%; S&P: +2.3%) stocks rebounded from the losses recorded in the prior week. In Europe, the STOXX Europe (+0.7%) and FTSE 100 (-0.3%) posted mixed performances, as concerns over rising COVID-19 cases deflated investors optimism about the smooth transition of power in the U.S. In Asia, the Nikkei 225 (+0.4%) and SSE (+1.1%) were on course for weekly gains, as buying sentiment was buoyed by the rally on Wall Street. Emerging markets (MSCI EM: +2.6%) stocks were buoyed largely by gains in China (+1.1%) while Frontier (MSCI FM: +0.9%) market stocks were on track for their third consecutive weekly gains buoyed by robust gains in Kuwait (+0.3%).
The Federation Accounts Allocation Committee (FAAC) shared NGN619.34 billion amongst the three tiers of government in December 2020 (November: NGN601.11 billion). Of the total amount, the FGN got 35.2% or NGN218.30 billion (November: NGN215.60 billion), State Governments received NGN178.28 billion (November: 171.17 billion) while the Local Governments received NGN131.79 billion (November: NGN126.79 billion). We highlight that the amount shared among the three tiers of government has consistently been below NGN700.00 billion since March (NGN780.93 billion). We believe this reflects that the gains from devaluation on oil receipts have been limited given the compliance with the oil production cuts. Despite the rally in oil prices, we expect allocation to remain below pre-pandemic levels in the short term, due to lower crude oil production levels.
The Monetary Policy Committee (MPC) is expected to hold its first meetings of the year on the 25th and 26th of January 2021. We expect the Committee to assess the developments in the domestic and external macroeconomic and financial markets since its last meeting in November and provide guidance on the path of monetary policy in 2021. Although rising inflationary pressures alongside fragilities in the balance of payments present a strong case for monetary tightening, we believe it is rather too early for such a stance given the need to support economic recovery. More importantly, it would contradict previous heterodox policies targeted towards improving the flow of credit to the real sector of the economy and prolong the recovery phase. Monetary policy tightening will also create severe financial market turbulence and amplify deficit financing pressures for the government. On a balance of factors, we believe the Committee will keep policy rates unchanged and affirm the use of unorthodox measures such as CRR debits, Loan-to-Deposit Ratio (LDR), and direct intervention in employment-stimulating sectors to influence macroeconomic outcomes and ultimately attain macroeconomic stability.
Sentiments turned bearish as profit-taking activities dominated market performance throughout the week. Save for the mid-week session, the market posted marginal losses on the other trading days. Accordingly, the All-Share Index declined by 0.4% w/w to close at 41,001.99 points. Consequently, the YTD return moderated to 1.8%. Activity levels were mixed, as trading volumes rose by 5.2% w/w while value traded declined by 21.8% w/w. Notably, selloffs in UBA (-6.0%), ACCESS (-5.7%), FLOURMILL (-2.4%), DANGCEM (-1.3%) and BUACEMENT (-1.1%) drove the weekly loss. The performances across the sectors were broadly negative – the Banking (-17.5%) index led the losers’ chart followed by Insurance (-0.8%), Industrial Goods (-0.5%) Consumer Goods (-0.1%), and Oil and Gas (-0.1%) indices.
In the week ahead, we expect investors’ attention to be centered on the outcome of the first MPC meeting of the year. We believe consensus expectation for a HOLD decision if confirmed will engender positive market performance as investors cherry-pick stocks with attractive dividend yields amid negative real returns in the fixed income market. However, we advise investors to take positions in only fundamentally justified stocks as the fragility of the macroeconomic environment remains a significant headwind for corporate earnings.
Money market and fixed income
The overnight (OVN) rate expanded by 950bps w/w, to 10.5%. The rate was depressed for most of the week, as the system was awash with liquidity from FAAC disbursements (NGN341.90 billion), OMO maturities (NGN201.94 billion), FGN bond coupon payments (NGN110.98 billion) and FX Retail refunds. However, debits in the latter part of the week for CRR, FGN bond PMA (NGN170.36 billion) and CBN’s weekly auctions – OMO (NGN170.00 billion) and FX –triggered the eventual expansion in the funding rate.
Next week, barring any significant mopping-up activity from the CBN, we expect the rate to trend southwards following inflows from OMO maturities (NGN190.15 billion) and FGN bond coupon payments (NGN82.86 billion).
The Treasury bills secondary market remained bearish this week due to profit-taking at the tail end of the week on some mid and long-dated instruments. Thus, average yield across all instruments expanded by 8bps to 0.7%. We highlight that, the overall market was dragged by the OMO segment (+13bps to 0.9%), where offshore investors sold off auction bills at the secondary market. Elsewhere, trading in the NTB segment was mixed, with mostly retail trades consummated throughout the week. Average yield in the segment expanded slightly by 1bp to 0.5%. At the OMO auction, the CBN offered and fully allotted NGN170.00 billion to market participants across the 103, 180 and 362-day bills, with stop rates unchanged at 1.51%, 4.34% and 5.74%, respectively.
Considering the relatively lower inflows expected in the system next week, we expect low demand for T-bills and a slight expansion in yields from current levels. At the NTB segment, we expect market focus to be shifted to the PMA on Wednesday, where the CBN is expected to roll over NGN187.30 billion worth of instruments.
Activities in the Treasury bonds secondary market was largely influenced by the proceedings in the primary market, as investors focused on Wednesday’s FGN bond primary auction. The market ended on a bearish note, with average yield expanding by 36bps to 7.1%, as yields on the auction bonds adjusted to the stop rate level. At the auction, the DMO offered instruments worth NGN150.00 billion to investors through re-openings of the 16.2884% FGN MAR 2027 (Bid-to-offer: 1.8x; Stop rate: 7.98%), 12.50% MAR 2035 (Bid-to-offer: 2.1x; Stop rate: 8.74%) and 9.80% FGN JUL 2045 (Bid-to-offer: 0.8x; Stop rate: 8.95%) with a total subscription of NGN238.27 billion recorded. However, due to investors’ demand for high yields, the DMO allotted only NGN122.36 billion at the auction and issued an additional NGN48.00 billion as non-competitive allotment, thereby bringing the total sale to NGN170.36 billion. Stop rates rose by an average of 158bps compared to the previous auction.
For next week, investors will be keen on the Monetary Policy Committee meeting holding during the week. We expect the outcome of the meeting to influence the direction of the market. In the longer term, we maintain our view of tempered yields in the bonds secondary market at least through 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).
Nigeria’s FX reserves sustained its ascent for the fifth consecutive week, as it grew to its highest level since 10th June 2020. Specifically, the reserves grew by USD133.79 million w/w to USD36.48 billion (20th January 2021). Across the FX windows, the naira appreciated against the US dollar by 0.1% w/w, to NGN394.17/USD at the I&E window, and depreciated by 0.4% to NGN477.00/USD in the parallel market. At the I&E window, total turnover decreased by 29.3% WTD to USD262.37 million, with trades consummated within the NGN388.00 – 415.76/USD band. In the Forwards market, the rate weakened in the 1-month (-0.1% to NGN398.27/USD) contract, strengthened in the 6-month (+0.1% to NGN416.23/USD) contract and was flat in the 3-month (NGN405.61/USD) and 1-year (NGN435.28/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.