Week ended –24th Dec 2020
In line with market expectations, the People’s Bank of China (PBoC) voted to keep key interest rates unchanged for the eighth consecutive month. Specifically, the one-year Loan Prime Rate (LPR) was kept steady at 3.85% while the five-year LPR was also retained at 4.65%. The decision is in line with the forward guidance from the Bank on the need to maintain accommodative policy as the economy continues to recover from the impact of the COVID-19 pandemic. So far in 2020, we highlight that the one-year LPR and five-year LPR have been cut by 30bps and 15bps, respectively. With key macroeconomic indicators gravitating towards pre-COVID levels, we envisage the possibility of a rate hike in 2021. However, we think this would be done gradually to avoid a sudden halt in recovery process and transmitting waves of shock to the financial markets.
In the U.S, orders for durable goods rose in November on the back of a surge in the demand for transport equipment and electrical appliances, indicating factories could support economic output in Q4-20. Data from the U.S Census Bureau showed that new orders for long-lasting manufactured goods, including transportation items grew by 0.9% m/m, after a 1.8% m/m jump in October. This was driven by demand for transportation equipment (+1.9% m/m) which has increased in six of the last seven months, and defence aircraft (+15.7% m/m). We highlight that orders for non-defence capital goods excluding aircraft rose modestly by 0.4% m/m. Despite weak consumer spending amid a renewed surge in COVID-19 infections, we believe the low-interest environment has continued to support investment in business equipment. Accordingly, we think business investment would provide some catalyst for growth in Q4-20 albeit the momentum will be capped by the rising spate of COVID infections.
Global stocks were broadly bearish as optimism over vaccines and Trump’s demand for an increment in the virus relief bill was outweighed by the emergence of a new variant of the COVID virus amid reinstatement of travel bans and lockdown measures. Consequently, US (DJIA: -0.2%; S&P: -0.5%) stocks were set to close the week in the red. Likewise, in Europe, the STOXX Europe (-0.1%) and FTSE 100 (-0.5%) on track for a weekly loss, as investors sentiment was dampened by news of a new strain of virus which offset optimism surrounding the impending Brexit deal before the yuletide celebrations. Asian (Nikkei 225: -0.4%; SSE: -0.9%) markets ended the week lower, as investors sentiment mirrored the trend on Wall Street. Emerging markets stocks (MSCI EM: +0.2%) recorded marginal gains driven largely by gains in South Korea (+1.3%) while Frontier (MSCI FM: +0.9%) market stocks were on track to close lower following losses in Kuwait (-1.5%) which outweighed the robust gain in Nigeria (+5.4%).
The fiscal operations of the Federal Government of Nigeria (FGN) continue to be marred by the lingering impact of COVID-19 on oil prices amid subdued economic activities. According to the Q3-20 economic report of the CBN, the retained revenue of the FGN declined by 35.7% y/y to NGN842.09 billion. On a q/q basis however, it grew marginally 4.7% q/q- we believe this was due to the relaxation of the COVID-19 lockdown measures which translated to improvement in economic activities during the review period. Juxtaposing the provisional expenditure of NGN2.13 trillion with the retained revenue in the quarter, the fiscal operations of the FGN resulted in an estimated deficit of N1.29 trillion. With economic activities and oil prices still below pre-pandemic levels amid compliance with OPEC production cuts, we expect revenue from both non-oil and oil sources to remain challenged. At a time, the government is spending its way out of the economic recession, the resulting effect would be widening in fiscal deficits which will require increased level of borrowings over 2021.
The National Assembly (NASS) during an emergency session, passed the National budget while raising the total estimates by c. NGN505.00 billion to NGN13.59 trillion. According to the NASS, the increase was necessitated by the need to upscale the National Social Investment Programme (NSIP) with NGN365.00 billion and a discovered under-projection of revenue by c. NGN100.00 billion. We highlight that this new estimate comprises (1) NGN5.64 trillion for recurrent (non-debt) expenditure, (2) NGN4.13 trillion for capital expenditure, (3) NGN3.32 trillion for debt service, and (4) NGN496.53 billion as statutory transfers. If assented to by the President, this would put the total estimated budget deficit (including GOEs and project-tied loans) at NGN5.60 trillion based on projected revenue of NGN7.99 trillion (inclusive of the NGN100.00 billion under-projection). Based on the revised budget, our base case scenario shows that the budget deficit will now print NGN6.78 trillion (Previously: NGN6.37 trillion) which is 21.1% ahead of the revised budget.
Investors flocked into the shares of Dangote Cement following the announcement of its much-awaited share buyback programme. Based on the preceding, the local bourse received a boost as the ASI rose by 5.4% w/w, the second consecutive weekly gains and closed at 38,800.01 points, the highest level since 28 May 2018. Activity level was strong, as volume grew significantly by 45.6% w/w while value spiked by 128.4% w/w. Although, foreign investor interest in AIRTELAFRI (+10.0%) dissipated compared to the prior week (+21.0%), bargain hunting in DANGCEM (+17.0%), BUACEMENT (+9.1%), and FLOURMILLS (+7.5%) buoyed market performance. Accordingly, MTD return rose to 10.7% while the YTD return for index improved to 44.5%, which in now ahead of the 42.3% gain recorded in 2017. Performance across sectors was broadly positive. Save for the Banking (-1.0%) index that closed in the red, the Industrial (+12.1%), Insurance (+6.0%), Oil and Gas (+1.4%), and Consumer Goods (+0.3%) indices closed in the green.
As the year draws to a close, we expect yield-seeking investors to take positions in stocks with attractive dividend yields, in the face of increasingly negative real returns in the fixed income market. 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
The overnight (OVN) rate contracted by 392bps w/w to 0.6%. We note that the rate stayed depressed through the week as inflows into the system for SWAP and OMO maturities (NGN250.51 billion) saturated system liquidity.
With another liquidity influx from OMO maturities (NGN481.28 billion), we expect the OVN rate to remain depressed in the coming week.
Trading activity in the Treasury bills secondary market was mixed, albeit with a bearish tilt, as average yield across all instruments expanded by 3bps to 0.5%. The overall market remained in a lull as investors maintain risk-off sentiments at current market yields. Across the segments, average yield expanded by 8bps to 0.5% at the OMO secondary market, but pared by 2bps to 0.4% at the NTB segment.
In the coming week, we maintain our view for quiet trading activities in the T-bills secondary market, as investors wrap up their books for year end. Also, we expect participants’ focus to be on the last NTB PMA for the year, where the CBN is expected to roll-over NGN74.84 billion worth of maturities.
The Treasury bonds secondary market remained bearish, following profit-taking across the benchmark curve for year-end activities. Consequently, the average yield expanded by 56bps to 5.9%. Across the benchmark curve, average yield expanded at the short (+72bps), mid (+62bps) and long (+49bps) segments, due to sell-offs of the MAR-2025 (+159bps), FEB-2028 (+128bps) and MAR-2050 (+122bps) bonds, respectively.
We maintain our view of sustained bearish sentiments in the Treasury bonds secondary market, as investors continue to book profit accumulated in the year.
Nigeria’s FX reserves recorded its first weekly accretion in eight weeks, as the gross reserves position increased by USD67.89 million w/w to USD34.91 billion. Across the windows, the naira appreciated against the US dollar by 0.5% to NGN392.00 In the I&E window (YTD: -7.0%), and by 2.6% to NGN465.00/USD in the parallel market (YTD: -22.2%). In the Forwards market, the naira was flat in the 1-month (NGN397.76/USD) contract, but strengthened at the 3-month (+0.3% to NGN403.86/USD), 6-month (+0.4% to NGN413.71/USD) and 1-year (+0.6% to NGN431.64/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.