Bellwether Stocks Drives Nigerian Equities Market to +0.8% Weekly Gain

Although the local bourse kicked off the week on a sluggish note, positive sentiments resurfaced later in the week as investors cherry-picked attractive dividend-paying stocks. Accordingly, the All-Share Index notched a 0.8% gain to close at 41,763.26 points.

Nigerian Stock Exchange Trading Floor. Image Credit: NGX

October 22, 2021/Cordros Report

Global economy
 
China’s economy continues to grow slower, following the dissipating impact of the base effects from the prior year. According to the Chinese National Bureau of Statistics (NBS), China’s economy grew by 4.9% y/y in Q3-21 (Q2-21: +7.9% y/y) – the slowest since Q3-20 (+4.9% y/y). Beyond the waning impact of the low base from the prior year, we highlight that the slower growth reflects the real estate wobbles, power supply restrictions, and supply chain constraints. Accordingly, the Real estate (-1.6% y/y vs Q2-21: +7.1% y/y) and Construction (-1.8% y/y vs Q2-21: +1.8% y/y) sectors reversed the growth recorded in the previous quarter while the Manufacturing (+4.6% y/y vs Q2-21: +9.2% y/y) sector’s growth slowed. On a quarter-on-quarter basis, the economy grew slower by 0.2% in Q3-21 (Q2-21: +1.3% q/q). We expect the GDP growth to decelerate further over the last quarter of the year. The growth expectation is premised on (1) subdued impact of the low base effects from the prior year, (2) electricity-induced disruptions to production and (3) sustained impact of supply-chain constraints.
 
According to the Office for National Statistics (ONS), headline inflation in the United Kingdom (U.K) moderated to 3.1% y/y in September from a 9-year high of 3.2% y/y in August. The moderation in domestic prices was driven by a slowdown in the cost of Restaurants and Hotels (+5.1% y/y vs August: +8.6% y/y) which partially offset the upward pressures seen in the prices of transport (+8.4% y/y vs August: +7.8% y/y), Food & non-alcoholic beverages (+0.8% y/y vs August: +0.3% y/y) and Recreation & Culture (+2.7% y/y vs August: +2.4% y/y). We understand that the moderation in the restaurants and hotels sub-basket was primarily due to the high base effect in the prior year as restaurant and café prices recovered in September 2020 after the Eat Out to Help Out Scheme induced a price slump in August. On a month-on-month basis, the headline inflation declined by 4bps to 0.3% (August: 0.7%). In the coming months, we expect inflation to remain elevated as the (1) lifting of the energy price cap in response to the soaring global gas prices and (2) persistent supply chain disruptions continue to stoke upward pressures on the CPI.
 
Global markets
 
Global stocks posted broadly positive performances as China Evergrande Group dodged a default with last-minute bond payment, thus lifting investors sentiments at the end of a week dominated by corporate earnings reports and inflation concerns. Accordingly, US (DJIA; +0.9% and S&P; +1.8%) rallied as better than expected third-quarter corporate earnings helped counter worries stemming from rising inflation expectations. In Europe, the STOXX Europe (+0.3%) was set to close in green as a surprise interest payment by China’s Evergrande buoyed sentiments. Elsewhere, the FTSE 100 (-0.4%) negative performance was driven by disappointing earnings earlier in the week, even as investors fretted about prospects of rate-hike from the Bank of England (BOE). Asian markets posted mixed performances, as the Nikkei 225: (-0.9%) declined following a rout in tech stocks. Conversely, the SSE (+0.3%) gained marginally after the banking industry regulator pledged to support first-time homebuyers with more accessible mortgage financing. Emerging (MSCI EM: +0.7%) market stocks closed higher consequent upon gains in China (+0.3%), while Frontier (MSCI FM: -0.2%) market stocks declined following selloffs in Vietnamese (-0.4%) markets.
 
Nigeria
 
Economy
 
In the October edition of its World Economic Outlook (WEO), the IMF expects Nigeria to grow by 2.7% y/y in 2022FY (2021E: +2.6% y/y) – 0.1ppt higher than the July forecast (+2.6% y/y). We believe the revised growth forecast was underpinned by the sustained rally in crude oil prices. For us, the combined impact of (1) unrelenting demand for gas in the face of limited supply and (2) increased demand that emanated from the global economic recovery have continued to push oil prices higher. Accordingly, the IMF expects African oil-exporting countries to grow by 2.5% y/y in 2022FY (2021E: +2.1% y/y) in line with their growth expectations for Nigeria and Angola (2022FY: +2.4% y/y vs 2021E: -0.7% y/y). Nonetheless, the risks to the outlook include the emergence of more transmissible variants of the virus, inflationary pressures, financial market volatility and greater social unrest. We expect Nigeria to grow albeit below the IMF’s forecast given the (1) uncertainties that characterise a pre-election year, (2) fading impact of government stimulus, and (3) normalisation of growth outcomes as base effects wane.

At a foreign investors’ meeting held in New York, the CBN Governor stated that the commencement of the Dangote refinery would be a significant saver of foreign exchange for Nigeria. He noted that the importation of petroleum products comes close to about 30.0% of the total FX Nigeria spends on imported items. The Governor further stated that he expects the Refinery and a petrochemical plant to be launched in Mid-2022. We think the eventual commencement of activities at the Dangote refinery could pave the way for the removal of fuel subsidy in the medium term as PMS pump prices may reduce given the (1) savings from landing costs and (2) crude oil sale agreement between the FGN and Dangote refinery. The subsidy removal could also support the FGN’s medium-term plan to increase the revenue to GDP ratio from 8.0% to 15.0% of GDP by 2025. 
 
Capital markets
 
Equities
 
Although the local bourse kicked off the week on a sluggish note, positive sentiments resurfaced later in the week as investors cherry-picked attractive dividend-paying stocks. Accordingly, the All-Share Index notched a 0.8% gain to close at 41,763.26 points. As a result, the MTD and YTD return increased to +3.8% and +3.7%, respectively. Specifically, bargain-hunting activities in NB (+7.4%), BUACEMENT (+6.7%), TOTAL (+6.2%), and STANBIC (+5.1%) drove the weekly gain. However, the activity levels were weaker than the prior week, as trading volumes and value declined by 45.6% w/w and 42.9% w/w, respectively. Analysing by sectors, the Industrial Goods (+2.6%), Oil and Gas (+1.4%) and Banking (+0.7%) indices posted gains. While the Insurance (-1.3%) and Consumer Goods (-1.1%) indices declined.         
 
In the week ahead, we expect NGX’s floor to be flooded with results as the Q3-2021 earnings season commences in full swing. We believe investors will be focused on gauging the extent to which recovery in economic activities has supported corporate earnings. Thus, the local bourse is likely to close positive as we expect decent earnings releases across board to temper selling activities. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the unimpressive macro story remains a significant headwind for corporate earnings.
 
Money market and fixed income
 
Money market
 
The overnight (OVN) rate remained elevated in the double-digit region this week amid funding pressures for the monthly bond auction (NGN192.76 billion), CBN’s weekly OMO (NGN30.00 billion) and FX auctions. However, it contracted slightly by 75bps w/w to 19.3%, following inflows from FGN bond coupon payments (NGN32.67 billion).

In the coming week, we except the OVN rate to trend northwards as the CBN should mop up the pent-up liquidity emanating from FAAC disbursements, FGN bond coupon payments (NGN160.32 billion) and OMO maturities (NGN91.00 billion).

Treasury bills                                         
 
Trading in the Treasury bills secondary market turned bearish as most local banks sold off instruments to fund their bids at the bond auction. Consequently, the average yield across all instruments expanded by 8bps to 5.9%. Across the market segments, the average yield expanded by 18bps to 5.4% at the NTB segment. Conversely, average yield contracted by 3bps to 6.4% at the OMO segment. On Thursday, the CBN sold NGN30.00 billion worth of OMO bills to market participants and maintained the stop rates across the three tenors, as with prior auctions (103-day: 7.0%, 180-day: 8.5%, and 348-day: 10.1%).

Considering the expected strain on system liquidity and the prevailing bearish sentiments in the FI market, we expect average yields on T-bills to trend higher in the coming week. Also, we expect quiet trading at the NTB segment in the first few days of the week, as participants position for the mid-week PMA, with the CBN set to roll over NGN150.05 billion worth of maturities.

 Bonds
 
Proceedings in the Treasury bonds secondary market closed the week on a bearish note, as the average yield expanded by 6bps to 11.4%. We attribute the expansion in yields to investors’ reaction to the higher stop rates at the mid-week FGN bond auction albeit there were bids at the secondary market to fill unmet auction demand. At the bond auction, the DMO offered instruments worth NGN150.00 billion to investors through re-openings of the 12.50% FGN JAN 2026 (Bid-to-offer: 1.0x; Stop rate: 11.65%, previously: 11.60%), 16.2499% FGN APR 2037 (Bid-to-offer: 1.6x; Stop rate: 12.95%, previously: 12.75%) and 12.98% FGN MAR 2050 (Bid-to-offer: 2.4x; Stop rate: 13.20%, previously: 13.00%) bonds. As expected, demand was high (subscription: NGN250.71 billion; bid-to-offer: 1.7x) and the DMO eventually over-allotted instruments worth NGN192.76 billion, resulting in a bid-to-cover ratio of 1.3x.
 
In the short term, we expect yields to hover around current levels, given our expectations of limited supply in Q4-21 and deliberate efforts by the DMO to reduce the government’s domestic borrowing cost.
 
Foreign Exchange
 
Nigeria’s FX reserves continues to reflect the inflows from IMF SDR and FCY borrowings as it sustained its weekly accretion and closed higher by USD943.48 million w/w to USD40.76 billion (20th October 2021). Meanwhile, the naira was flat at NGN415.07/USD at the I&E window (IEW) but appreciated by 0.2% w/w to NGN571.00/USD at the parallel market. At the IEW, total turnover (as of 21st October 2021) declined by 47.6% WTD to USD610.13 million, with trades consummated within the NGN405.00 – 444.00/USD band. In the Forwards market, the rate was flat at the 1-month (NGN415.91/USD) contract, while the 3-month (+0.3% to NGN421.10/USD), 6-month (+0.4% to NGN429.82/USD), and 1-year (+1.0% to NGN446.28/USD) contracts reflected the appreciation of the naira to the greenback.
 
We expect improved liquidity in the IEW over the medium term, given our expectation of (1) increased oil receipts in line with the rise in crude oil prices and (2) inflows from FCY borrowings (USD6.18 billion) and IMF SDR (USD3.50 billion). Accordingly, we expect the naira to remain relatively range-bound (NGN410.00/USD – NGN415.00/USD) at the IEW.

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