Sentiments remained broadly bullish in the second trading week of the year as investors continued to cherry-pick stocks with attractive dividend yields ahead of 2021FY dividend declarations. Accordingly, the All-Share Index rose by 1.4% w/w to close at 44,454.67 points.
January 14, 2022/Cordros Report
According to the Bureau of Labor Statistics (BLS), headline inflation rose by 20bps to 7.0% y/y in December 2021 (November: +6.8% y/y) – the highest since June 1982 (+7.1% y/y). Thus, the inflation rate averaged 4.7% y/y in 2021FY (2020FY: 1.2% y/y). Summarily, the upward pressure on domestic prices in 2021FY reflects the collision of robust consumer demand with pandemic-induced supply constraints amidst the low base effect from the prior year. Accordingly, pressures were most significant in the prices of used cars & trucks (37.3% y/y vs November: 31.4% y/y), shelter (4.1% y/y vs November: 3.8% y/y), and energy (29.3% y/y vs November: 33.3% y/y), gasoline (49.6% y/y vs November: 58.1% y/y). On a month-on-month basis, the headline inflation rose by 0.5% (November: 0.8% m/m). The inflation reading reinforces our view that some previously determined transitory price pressures may be here to stay for some time. Consequently, we think the Fed could be compelled to speed up its asset purchases tapering and potentially increase the pace of interest rate hike in 2022.
China’s domestic prices reversed the previous month’s uptrend in line with the slowdown in pork prices. According to China’s National Bureau of Statistics (NBS), the headline inflation settled at 1.5% y/y in December 2021 (November: 2.3% y/y). Analysing the breakdown, we highlight that food prices declined by 1.2% y/y (November: +1.6% y/y) in line with the faster decline in pork prices (-36.7% y/y vs November: -32.7% y/y) as the pig herds continue to recover from bad weather conditions. Similarly, the growth in the non-food basket slowed to 2.1% y/y (November: 2.5% y/y) given the slower increases across the transportation & communication (5.0% y/y vs November: 7.6% y/y) and housing (1.6% y/y vs November: 1.7% y/y) sub-baskets. On a month-on-month basis, consumer prices declined by 0.3% in December (November: +0.4% m/m) – the weakest since June 2021 (-0.4% m/m). We expect the inflationary pressures in 2022FY to be higher than the 2021FY average (+0.9% y/y), supported by the low base effect for pork prices. However, reduced demand occasioned by an intermittent rise in COVID-19 infections could slow down the pace of an increase in inflation.
Global stocks extended losses to the second week as investors’ sentiments for risk assets waned, following a fresh round of hawkish comments from Federal Reserve policymakers which signalled an impending policy tightening and faster interest rate hikes by March 2022 to match rising inflation. Accordingly, US. stocks (DJIA -0.3%; and S&P 500: -0.4%) faltered as expectations of higher interest rates following surging inflation and hawkish Fed stance drove selloffs in tech stocks. On the other hand, European equities (STOXX Europe: 0.0% and FTSE 100: +1.0%) swayed between gains and losses as investors weighed the course of monetary policy from the US Fed against positive growth data from the UK. Elsewhere, Asian markets (Nikkei 225: -1.2%; and SSE: -1.6%) mirrored the bearish sentiments on Wall Street as tech heavyweights led losses amid concerns over the impact of the Omicron coronavirus variant. On the other hand, the Emerging market (MSCI EM: +3.0%) stocks were buoyed mainly by gains in India (+2.2%) and Brazil (+2.7%), while the Frontier market (MSCI FM: 0.0%) stocks closed flat.
According to the data released by the National Bureau of Statistics (NBS), capital importation into Nigeria in Q3-21 increased by 18.5% y/y to USD1.73 billion (Q2-21: -32.4% y/y to USD875.62 million). For us, the increase reflects the favourable base from the prior year as the weak macro narrative and FX liquidity constraints continue to linger. Analysing the breakdown, Foreign Portfolio Investment (FPI) increased by 198.9% y/y to USD1.22 billion – we attribute this to the increase in global liquidity conditions, which has made investors search for higher yields in emerging and frontier markets. On the other hand, Other Investments (USD406.35 million) declined by 36.5% y/y while Foreign Direct Investment (-74.0% y/y to USD107.81 million) remained below its 12-quarter moving average (USD240.22 million). Over the medium term, we expect foreign investors to remain on the sidelines given (1) FX liquidity constraints, (2) increased political risk as the pre-election activities takes centre stage, and (3) inadequate structural reforms to reduce the economy’s vulnerability to external shocks.
The oil sector continues to weaken as the industry faced oil production challenges. According to the Nigerian National Petroleum Corporation (NNPC), Nigeria’s crude oil output losses averaged 167.07kb/d in 10M-21. The oil production losses witnessed during the period were due to the impact of (1) infrastructure decay and (2) complexities of operating the oil wells, both of which led to terminal shut-ins in some of the country’s major production facilities – Qua Iboe, Forcados, and Escravos. Accordingly, crude oil production excluding condensates in 10M-21 (1.39mb/d) was significantly below the 1.61mb/d recorded in 10M-20. If we exclude the impact of terminal shut-ins, our analysis shows that crude oil production (excluding condensates) would have averaged 1.56mb/d during the review period. If we include condensates, crude oil production would have averaged 1.80mb/d (9M-21 actual average: 1.63mb/d). Overall, we do not expect a material change to the current development over the short term, given the nature of challenges which mostly involve a dearth of infrastructure investment. Accordingly, we expect the government’s oil revenue to be constrained over the short term.
Sentiments remained broadly bullish in the second trading week of the year as investors continued to cherry-pick stocks with attractive dividend yields ahead of 2021FY dividend declarations. Accordingly, the All-Share Index rose by 1.4% w/w to close at 44,454.67 points. Pertinently, bargain hunting in BUAFOODS (+24.1%), DANGCEM (+8.0%), GUINNESS (+5.8%), and INTBREW (+5.1%) drove the weekly gain. Consequently, the YTD gain increased to 4.1%. Activity levels were weaker than in the prior week, as trading volume and value declined by 22.4% w/w and 44.8% w/w, respectively. Analysing by sectors, the Industrial Goods (+3.6%), Banking (+2.5%), and Oil and Gas (+1.7%) indices posted gains. On the flip side, the Consumer Goods (-4.4%) and Insurance (-1.5%) indices declined.
In the short term, we expect the bulls to retain dominance in the market given positioning for 2021FY dividends as institutional investors continue to search for clues on the direction of yields in the FI market. Notwithstanding, 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
This week, the overnight (OVN) rate remained elevated in the double-digit region but unchanged at 14.8% w/w, as funding pressures for CBN’s weekly OMO (NGN20.00 billion) and FX auctions offset inflows from OMO maturities (NGN59.50 billion).
In the coming week, we expect the OVN rate to trend northwards as the CBN would likely mop up the pent-up liquidity emanating from FGN bond coupon payments (NGN105.17 billion) and OMO maturities (NGN88.41 billion).
For the third consecutive week, mixed trading persisted in the Treasury bills secondary following the uncertainty in the direction of yields at recent primary market auctions. Specifically, the average yield pared by 1bp to 4.8% this week. Across the market segments, the average yield at the NTB segment contracted by 4bps to 4.4%. Elsewhere, the average yield at the OMO segment expanded by 11bps to 5.6%. At Wednesday’s NTB PMA, the CBN offered NGN77.61 billion for sale with a total subscription of NGN113.06 billion. Accordingly, the CBN allotted NGN2.19 billion for the 91-day, NGN1.46 billion for the 182-day, and NGN53.90 billion for the 364-day bills – at respective stop rates of 2.50% (previously 2.49%), 3.44% (previously 3.49%), and 5.50% (previously 4.90 %). Also, the CBN sold NGN20.00 billion worth of bills to market participants at this week’s OMO auction and maintained stop rates across the three tenors, as with previous auctions.
We expect the yield on T-bills to inch higher in the coming week as participants sell-off instruments to obtain liquidity for short-term obligations.
The Treasury bonds secondary market was bullish following improved demand from investors as they cherry-picked attractive instruments across the curve. Consequently, the average yield declined by 7bps to 11.5%. Buying activities was witnessed across the benchmark curve, as the average yield contracted at the short (-14bps), mid (-3bps), and long (-8bps) segments, mostly on the APR-2023 (-29bps), MAR-2027 (-7bps) and JUL-2034 (-41bps) bonds, respectively. Notably, the DMO published the Q1-22 bond issuance calendar on Wednesday, which showed the total volumes offered at c. NGN420.00 – 480.00 billion. Also, only the short (a JAN-2026 re-opening) and long (a JAN-2042 new issue) dated instruments are on offer.
In the short term, we expect frontloading of significant borrowings for the year to result in an uptick in bond yields as investors demand higher yields in the face of elevated supply.
Nigeria’s FX reserve recorded its first weekly accretion in the past two months, as it increased by USD13.19 million w/w to USD40.51 billion (12th January 2022). Meanwhile, the naira depreciated by 0.1% w/w and 0.3% w/w to NGN416.50/USD and NGN572.00/USD at the I&E window (IEW) and parallel market, respectively. In the Forwards market, the naira rate depreciated at the 1-month (-0.1% to NGN417.04/USD), 3-month (-0.1% to NGN422.92/USD), and at the 1-year (-1.0% to NGN447.12/USD) contracts, but appreciated at the 6-month (+0.1% to NGN432.10/USD) contract.
In our opinion, the CBN has enough supply to support the FX market over the short term, given inflows from the recently issued Eurobond and the IMF’s SDR. However, foreign inflows are paramount for sustained FX liquidity over the medium term, in line with our expectation that accretion to the reserves will be weak given that crude oil production levels remain quite low. Thus, FPIs which have historically supported supply levels in the IEW (53.8% of FX inflows to the IEW in 2019FY) will be needed to sustain FX liquidity levels. Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would be significant in attracting foreign inflows back to the market.