Economic Recovery is Gaining Momentum Globally - Comercio March 2021 Report


Friday, April 16, 2021 / 03:14 PM / By Comercio Partners Asset Mgt / Header Image Credit: Comercio Partners Asset Mgt

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Report Summary

The Macroeconomy

  • IMF raised Nigeria's 2021 GDP growth outlook.
  • Headline inflation inched up further in February 2021.
  • The Naira depreciated against the U.S. Dollar on the I&E FX Window.

The Financial Markets

  • Sell pressure persisted in equity market.
  • Fixed income market remained bearish.


Our Expectation for the Coming Quarter

  • GDP growth is expected to rebound further, albeit at a slow pace.
  • Inflation is expected to further worsen.
  • The equity market should remain dominated by the market bears.

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Global Economy On Track For Post-Covid Recovery 

Economic recovery is gaining momentum globally. Forward-looking composite purchasing manager indices for major regions are indicating a strong ongoing expansion with manufacturing still offsetting weak services. Labour markets are also healing gradually in the US, UK and Australia and are stabilizing in Europe. However, strong goods demand is putting pressure on global supply chains with worldwide shortages and bottlenecks across a range of industries. Also, weather disruptions earlier in the year, port backlogs, a fire in a major Japanese chip factory, and a large vessel blocking Suez Canal for almost a week, exacerbated supply problems. The Baltic Dry Index which measures global shipping rates reached a two-year high in the month of March 2021.


Overall, the OECD has upgraded its forecast for global growth for 2021 by a significant degree, but the recovery remains uneven. While the US economy held up reasonably well in Q4 2020, growth in the UK and Japan slowed, and was negative for the Eurozone. Growth prospects are still driven by the COVID-19 situation in different regions, which increasingly hinges on vaccination rollouts to accelerate herd immunity and allow a sustained full reopening. The US and UK have been doing a stellar job with herd immunity expected in early summer. The EU has more catch-up to do while emerging markets are far behind. Restrictions were eased in several US states with Texas carrying the torch by fully reopening. The UK started tentatively reopening in late March, but lockdowns across continental Europe were extended while Brazil and India continue to struggle with the disease.


The US-China relationship showed no signs of improving after an unproductive meeting between both countries in Alaska and a US-Japan summit where reining in China was the focus. The US passed another large fiscal package of $1.9 trillion, and the Biden administration proposed a $3 trillion infrastructure program. The Federal Reserve reaffirmed its commitment to keep easy monetary policy in place for the foreseeable future with short-dated rates not forecasted to rise until 2024 and asset purchases to continue, although there is no indication that the Fed will move to rein in the rise in longerdated yields. In the Eurozone, however, asset purchases were stepped up and soft yield control was announced. The steepening yield curve and inflationary pressure forced Turkey, Russia and Brazil to raise rates.


The MSCI All Country World Index returned 2.7% for the month and 4.6% year to date. After a weak start at the beginning of the month, the index rose, wobbled again in the second half, but regained its momentum and ended the month in the positive. Optimism over the unfolding recovery was tempered by the continued rise in longer dated bonds yields and associated fear of tightening in financial conditions. The dividend yield for the S&P 500 reached a 15-year low and is now below the 10-year US Treasury yield. Towards month end, Archegos Capital, a large family office, ran into problems with overleveraged exposure to several individual stocks. While the event drove down the prices of those individual stocks and caused significant losses for some banks, it seemed to be an isolated incident that was relatively well contained. This did not lead to materially higher volatility as measured by the VIX index, which had been declining throughout the month of March and ended the month below 20 for the first time in more than a year. Sectoral performance reflected developments in bond yields with value stocks beating growth stocks by a wide margin again as rising yields suggested strong economic growth which was better for value stocks than growth stocks. Value sectors such as energy and financials are also expected to benefit more from the recovery and a return to social interactions than technology driven growth stocks.


In developed markets, the US outperformed most major countries except Germany and Italy in March. Emerging markets were the weakest region, returning -1.5% in March which was driven by the ongoing market correction in China. China's tech stocks were hit by the rotation to value and increasing regulatory pressure. Concerns over credit tightening weighed on Chinese equity markets in general.


On the home front, the Monetary Policy Committee (MPC) met for the second time this year, and committee members casted a 6/3 ballot to keep the Monetary Policy Rate and other policy parameters unchanged. As intimated by Godwin Emefiele, Chairman of the Committee and Governor of the Central Bank of Nigeria (CBN), the committee arrived at this choice in the wake of the different macroeconomic factors like the high rate of unemployment (33%), upward inflationary pressure (17.33%), and the sluggish economic growth (0.11%) the country recorded in Q4 2020.


Finally, the National Bureau of Statistics (NBS) released its foreign and domestic debt report for Q4 2020, noting that the nation's gross public debt stood at N32.92 trillion as of 31st December 2020. Contrasted with the N27.40 trillion figure as of 31st December, 2019, this nation's total debt size grew by 20.1% over the year. The overall domestic debt represented 61.40% of the total public debt (in contrast to the 67.10% recorded in 2019). The gross public debt is projected to extend to N37.61 trillion by 31st December 2021 after considering the estimated borrowings of N4.69 trillion needed to finance the deficiency in the Nigeria's 2021 budget.

The Macro Economy


GDP Growth & Oil Production

Following a narrow recovery from the second economic recession in 4 years, Nigeria's growth trajectory has seen improved expectations for 2021. A recently released report by the International Monetary Fund (IMF) pointed to an improved outlook for the Nigerian economy, as the Bretton Wood establishment increased the GDP growth forecast for 2021 from 1.5% in its Janaury 2021's forecast to 2.5%. The IMF however expects growth to moderate in 2022, ticking up by just 2.3%.


Nigeria's revised growth rests against a backdrop of improved global outlook, as the IMF increased its global economic growth forecast to 6.0% from a 5.2% projection embedded in the October 2020 IMF World Economic Outlook. Likewise, the IMF lifted its earlier Sub-Saharan Africa growth forecast for 2021 by 0.2% to 3.4%. Nevertheless, the anticipated growth across Sub-Saharan Africa masks various contours, as recovery in tourism-reliant economies is expected to be slower. Downside risks to recovery in commodity-export reliant economies like Nigeria are equally predominant, hence, rationalising a lower growth projection for Nigeria relative to that of the Sub-Saharan African region.


Elsewhere, OPEC, in its monthly oil market report noted that Nigeria's oil production improved slightly by 4.63% in February 2021 to 1.42mbpd from 1.36mbpd in January 2020. This evidenced the positive impact from the ease of the local production limit following the additional output cuts implemented in the past months to compensate for non-compliance in the earlier months of 2020. In addition, OPEC marginally improved its world oil demand forecast for 2021 by 0.20mbpd to average 96.30mbpd relative to the preceding month's estimate, on the back of improved economic expectations for the second quarter of the year, as the world records improvements in Covid-19 innoculation. On the supply side, OPEC revised its world oil supply estimate for 2021 up by 0.50mbpd to average 63.30mbpd relative to the preceding month's estimate, buoyed by improved production in Canada, the US, Norway, Brazil and Russia. 


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Headline inflation grew by 17.33% YoY in February 2021, 0.86% higher than 16.47% recorded in January 2021; food inflation grew by 21.79% YoY in February 2021, 1.22% higher than 20.57% recorded in January 2021; while core inflation stood at 12.38% YoY in February 2021; 0.53% higher than 11.85% recorded in January 2021.


In February 2021, headline inflation rose by 1.54% MoM, representing a 0.05% increase from the rate of 1.49% that was recorded in the previous month. The yearly average rate rose to 14.05%, 0.43% greater than 13.62% recorded in the previous month. The monthly headline increase was driven by the rise in food prices in February 2021, as there were several disruptions to food supply during the month. There were also other lingering concerns, such as the dollar shortage and the increased cost of energy and fuel, which all jointly raised the general price level in the economy.


The food subindex rose by 1.89% MoM, reflecting a 0.06% increase from the rate of 1.83% that was recorded in January 2021. The yearly average rate rose to 17.25%, 0.59% greater than 16.66% recorded in January 2021. The monthly food subindex rose due to supply disruptions.

Core inflation stood at 1.21% MoM, down 0.05% from 1.26% recorded in January 2021. The yearly average rate also rose to 10.77% last month, 0.25% greater than 10.52% recorded in the previous month. The highest increases were recorded in prices of passenger transport by air, medical services, miscellaneous services relating to dwelling, hospital services, passenger transport by road, pharmaceutical products, paramedical services, repair of furniture, vehicle spare parts, maintenance and repair of personal transport equipment, motor cars, dental services and hairdressing salons and personal grooming establishments.


Headline inflation index just reached a grim milestone, hitting a 4-year high as the last time inflation exceeded this level was in February 2017, when it printed at 17.78%. We now have inflation rate fast approaching the 12-year peak of 18.70%, hence, heightening concerns about the toll on the purchasing power of consumers. Both the food and core segments pushed the headline number higher, as the existing inflationary drivers worsened during the month. Notably, we witnessed further disruptions to food supply, as there were increased incidences of banditry, farmer-herdsmen clash, and a rift between northern and south-western traders. The impact of a depreciating naira, higher energy cost and an increase in the pump price of PMS to an average of N170 per litre from a price band of N163.36 - N166.36 per litre, all jointly buoyed the rise in prices. Medical services, transportation and pharmaceuticals are some of the major areas of concern in the core segment, as the increased demand for medical services and pharmaceutical products and services were exacerbated by Covid-19 and by adverse weather conditions, while air travel remained impacted by Covid-19, with other transport mediums under the influence of rising PMS cost.


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Capital Importation and Foreign Exchange Reserves 

Despite the significant improvement witnessed in inflow from FPI, other foreign sources, and the Apex Bank, we witnessed a marginal declined in total inflows into the I&E FX Window in March 2021 largely driven by the decline in inflows from local sources, which has been a major contributor in recent months. Total inflows into the I&E FX Window declined by 2.6% in March 2021 to $551.4 million.


We witnessed some significant improvement in foreign investors' sentiment as foreign inflows from other sources apart from Foreign Portfolio Investments (FPIs) advanced by 130.4% in March from $16.8 million to $38.7 million. Similarly, FPIs which is the common gauge of foreign investors' sentiment, grew by 878.8% by the end of the month to $175.2 million. We also saw improved inflow from the Apex Bank, which grew by 120.7% in March from $2.9 million to $6.4 million. Nevertheless, these improvements are significantly lower relative to the high inflow numbers last seen in March 2020 before the impact of the coronavirus pandemic. In addition, the improvements were overshadowed by the decline in inflows from other local sources, which reduced by 37.3% to $331.1 million, and remained a major contributor to foreign inflows in the I&E window, contributing 60.05% to total inflow during the month.


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Purchasing Managers' Indices 

As at print time, the CBN had not released any PMI Report in 2021. Business activities in Nigeria continued to trail the part of recovery, as IHS Markit-Stanbic IBTC PMI report revealed that headline PMI rose to 52.9 points in March 2021 from 52.0 points in the preceding month. A further probe of the report revealed that the improved economic activities in the country spurred improvements in new orders and output in the review month, which supported the increase in the headline PMI. In contrast, raw material shortage persisted in March 2021, due in part to supply disruptions and dollar scarcity for externally sourced materials. Consequently, this added to the multiple inflationary drivers in the economy.


Recall that the CBN's PMI data put the overall economy in contractionary region as at its last report in December 2020. The manufacturing PMI printed at 49.6 in December 2020, while the non-manufacturing PMI stood at 45.70.


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Financial Markets


Fixed Income Market 

The fixed income market halted its bullish run in Q1 2021 as weak liquidity expectation coupled with the rise in rates at the NTB auctions, dampened investors' appetite. Monthly yields for the benchmark securities monitored expanded across all maturities on a month-on-month basis, as average yields of the sovereign bonds with 3-year, 5-year, 10-year and 20-year maturities rose by 55 bps, 117 bps, 38 bps and 87 bps, respectively.

The Bond auction, which held on 24th March 2021, closed relatively strong with a bid-to-cover ratio of 2.2x and stop rates for the 7-year, 15-year and 25-year maturities printing at 10.50%, 11.50% and 12.00% respectively. Compared to the previous auction, 7-year, 15-year and 25-year maturities closed higher by 25 bps, 25 bps, and 20 bps, respectively. The bond auction calendar for Q2 2021 which was released during the period signaled an increase in offer size.


The Central Bank of Nigeria left its monetary policy rate unchanged at 11.5% during its March 2021 meeting, to help to consolidate the country's recovery process despite intensifying inflationary pressures. Headline inflation hit a four-year high of 17.33% in February, due to the persistent insecurity coupled with the upward foreign exchange adjustments. 


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Foreign Exchange Market

On a quarterly basis, the average monthly value of the Naira depreciated significantly by N14.93 in Q1 2021 at the I&E FX Window with the average exchange rate of the currency to a unit of the Dollar climbing to N409.85 in March 2021 from N394.92 in December 2020. Total monthly turnover traded on the I&E FX Window was up at $1.5 billion in March 2021 from $1.3 billion in February 2021, a 15.3% increase. During the quarter, I&E FX rate touched N420 levels regardless of the pick up in oil prices as the external reserves continued to fall rapidly. The 30-day moving average of Nigeria's external reserves declined by 1.6% YTD to close at $34.82 billion on 31st March 2021. This decline was on the back of dwindling foreign exchange supply from foreign investors, exports and other sources.

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Equities Market 

The outlook for the local bourse in Q1 2021 was generally bearish as it was anticipated that fixed income yields would gradually pick up given that they had remained at low levels for quite some time. However, market participants did not foresee the hike in yields happening so quickly with the 1-year NTB moving from c. 1% in January to c. 8% in March. The major perpetrators behind the sell pressure were domestic institutional accounts who did not hesitate to de-risk their portfolios. The negative sentiments in the market lingered for most of March and as a result, trade metrics turned shallow while market activity remained tepid, with the local bourse printing an RSI (Relative Strength Index) value of 30.1 in the month of March, its lowest since the COVID-19 sell offs of March 2020.


In the midst of the sell-offs, 2020 full-year financials for listed equities were released. However, the record-high dividends could not prevent the broad-based pullback in the equities market. Some of the released financials were impressive with listed corporates maintaining their prior-year dividend levels despite the impact of COVID-19 and recession in Nigeria. DANGCEM reported an outstanding 2020 performance with a revenue of over ₦1 trillion, a 16% growth, and a 38% growth in a profit after tax (PAT) to ₦276 billion. However, there were a few outliers like UBA, which proposed a lower dividend of ₦0.35, compared to ₦0.80 declared for 2019, indicating a decline of 56.3% YoY. This was despite the double-digit growth (27.7%) in its PAT to ₦113.8 billion. This triggered sharp sell-offs in the ticker and other lenders who were yet to publish their results at the time. The earnings season typically presents the issue of dividend cash repatriation for foreign majority shareholders given the illiquidity issues on the FX front. This should ideally translate to positive momentum for the local bourse as the other option would be to acquire more shares of their current holdings.

Foreign investors pulled a bit of weight in the market by reinvesting some portions of their dividends in the equity market. They were known to bid for tickers like SEPLAT, NESTLE, GUINNESS and GUARANTY. SEPLAT enjoyed a lot of interest from foreign portfolios given the rally in crude oil prices seen in Q1 2020. The Oil and Gas ticker booked a 37% YTD growth at the end of the quarter. Regarding new inflows from foreign funds, the huge gap between the NAFEX rate and Parallel market rate still caused offshore players to be weary.


The local bourse found reprieve towards the last weeks in March after raking in 9 weekly losses out of 11 weeks since the start of the year and depleting all year-to-date returns. This could be attributed to market participants responding to the decelerating pace of interest rate growth at the NTB auction. Activity in tickers such as GUARANTY, ZENITH, SEPLAT, NESTLE and GUINNESS kept the bourse afloat.


The sectoral indices performance at the end of the quarter were as follows: both the Oil & Gas sector and Insurance sector posted growth of 18% and 8% respectively. All other sectors were in the red with the Industrial sector recording a decline of 8% followed by the Banking sector and Consumer goods sector at 6% and 5% respectively.

By the end of the first quarter, the benchmark ASI settle at 39,045.13 points, recording a month-on-month loss of 1.90% for the month of March. Year-to-date and Q1 returns came in at negative 3.04%.


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Our Expectations For The Coming Quarters 

We expect the MPC to keep playing down the current inflationary pressure, which to a great extent, remains supply-side driven, since tightening would expand the costs of capital and hinder venture and individual investments expected to support recuperation of the debilitated economy. Additionally, we consider a dovish decision both unrealistic and far-fetched in the short to medium term as this might be terrible for the country's currency. We however do not totally preclude tightening in the short to medium term as any hit to the exchange rate could lead to a frantic move to draw in more greenback.


The quicker than expected availability of Covid-19 vaccines in Nigeria, as well as the sustained uptick in oil prices, brightens the GDP growth outlook for 2021. The 2.5% growth projection by the IMF sits slightly above out earlier posited GDP growth range of 1.5% and 2.4%, but remains shy of the 3% growth target embedded in the 2021 Appropriation Act. Nevertheless, we maintain tepid expectations on Nigerian's economic growth for 2021, as we foresee a shift in policy posture to curb inflation, and we also remain concerned about the pre-existing structural issues.


Inflations is expected to maintain a northward trajectory, as the drivers remain active. Food supply remains a key concern, but the reduced tension between the northern and south-western traders should marginally temper a monthly rise. Nevertheless, the insufficiency and disruptions to food supply will continue to have a notable effect on prices, as well as the pass-through effect of increased energy and PMS prices on the production cost of businesses and the pockets of individual consumers. While the monetary and fiscal authorities have maintained a dovish tone in a bid to stimulate growth, we believe that inflation has now risen to levels that cannot be ignored anymore. Hence, we anticipate deliberate responses particularly from the fiscal side, to cap the upsurge. We also anticipate a knee-jerk reaction in the fixed income market as participants re-price their risks.


The manufacturing and service PMIs for Nigeria are expected to sustain their expansionary trajectory into the coming quarter largely due to improved vaccine rollout across developed nations and in Nigeria. Concerns around the virus continues to be alleviated by the vaccine distribution, hence, we see no imminent deterrent to improved PMI performance in the coming quarter. It is however imperative to note that the Covid-19 pandemic and rising inflation continue to be a downside risk to the aforementioned recovery.


We expect yields to trend further upward this month on the back of the low liquidity expectation coupled with the increase in bond offering.

In the near term, we may see a further devaluation of the Naira at the I&E FX window till more flows come in to further stabilize the reserves.


The earnings season has come to an end and it is difficult to pinpoint what could propel positive sentiments in the market in the near term. A key factor to watch will be the trend of the 1-year bill as we know there is an inverse relationship between fixed income yields and equity prices. We expect positive macros and corporate disclosures to steer the sentiments in the market.

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