2021 /01:24 PM / By
Comercio Partners Asset Mgt / Header Image Credit: Harmony
The Financial Markets
Our Expectation for the Coming Months
Major Economies Ease Restrictions, Following Improved Vaccine Roll-Out
Economic data continued to be mixed and driven by the impact of lockdowns in different countries. U.S. initial jobless claims rose early in February, but fell back later in the month, with retail spending increasing the most in almost half a year. UK retail spending saw its largest drop since spring of 2020 due to the lockdown, but forward-looking PMI indicators skewed surprisingly to the upside. In Q4 2020, U.S. GDP recorded a solid growth of 4.1%, while the U.K.'s GDP growth was also positive at 1.0%. However, the Eurozone contracted by -0.6%.
Among major developed countries, the UK continued to lead on vaccine roll-out, with a majority of the most vulnerable population having received their first shot by the end of February 2021. The US was catching up fast, while the EU remained far behind. Interestingly, new studies provided evidence of high levels of protection against severe cases after just a single dose of the vaccine.
Global COVID-19 cases saw a massive decline over the month, which led to tentative easing of restrictions in some U.S. states, while the UK announced a cautious phased-in reopening plan starting in March 2021. Likewise, Japan started to lift the state of emergency in some prefectures.
The U.S. experienced devastating winter storms that led to power outages in several states, most notably in Texas, and these negatively impacted economic activity in these states. A global shortage in semiconductors exacerbated disruptions in the U.S. manufacturing sector. A protectionist stance by President Biden who kept tariffs on aluminum from the United Arab Emirates added to the supply chain worries, but a U.K. push to join trade agreements such as Trans-Pacific Partnership successor was encouraging for global trade. In other news, renewed political turmoil in Italy ended with Mario Draghi being appointed as the new Prime Minister.
Monetary policy in the U.S. remained unchanged, apart from Central Bank's commitment to continue to provide support for the recovery. The $1.9 trillion fiscal stimulus package was passed by the Senate despite fears of throwing more borrowed money at an economy that is expected to be running hot in summer. The proposed federal minimum wage increase seems increasingly less likely to be passed by the Senate, after the parliamentarians ruled that it cannot be included in a budget reconciliation bill.
In Nigeria, the Federal government approved a new Medium Term Debt Management Strategy for the period 2020-2023. In line with the Debt Management Office's previous practice, the new strategy reflects the global and local economic impact of the COVID-19 pandemic and incorporates data from the revised 2020 Appropriation Act and the Medium-Term Expenditure Framework (2021-2023). The Debt Management Office also hinted at the possibility of exploring funding from the Eurobond market. However, this will only be done after all the other concessionary sources have been exhausted. Also, in the month under review, Nigeria established its infrastructure company, InfraCo. The board of InfraCo will be chaired by the Governor, Central Bank of Nigeria (CBN) and will include the Managing Director, Nigeria Sovereign Investment Authority (NSIA); President, Africa Finance Corporation (AFC); representatives of the Nigerian Governors Forum; Ministry of Finance, Budgets and National Planning, and 3 independent directors from the private sector.
The Macro Economy
GDP Growth & Oil Production
Fourth quarter GDP data from the National Bureau of Statistics revealed that the economy exited the technical recession it slipped into in the third quarter of 2020. The economy recorded a real growth of 0.11% y/y in Q4'2020, which represents an improvement of 3.74% when compared to the preceding quarter (-3.62%), but down by -2.44% relative to the growth rate recorded Q4'2019 which stood at 2.55%. However, the impact of the preceding contractions caused the cumulative growth rate for 2020 to print at -1.92%. This aggregate growth for 2020 reflects a decline of -4.20% relative to the growth rate recorded in FY'2019 (2.27%).
The fourth quarter performance was buoyed by improvements in the non-oil sector, as increased economic activities helped support a real growth rate of 1.69% y/y in the sector. The non-oil performance represents an improvement of 4.20% when compared to the -2.51% contraction recorded in the preceding quarter. The contribution of the non-oil sector to aggregate GDP also improved to 94.13% in the review period, relative to 92.68% and 91.27% recorded in the fourth quarter of 2019 and in the preceding quarter, respectively. The oil segment however worsened in the review period, as a real growth rate of -19.76% was recorded, relative to the -13.89% recorded in the second quarter of the year. This poor oil performance rode on the back of lower production levels, as we recorded a y/y production decline of 22.00%, with oil production averaging 1.56mbpd in the review quarter as against 2.00mbpd recorded in the corresponding quarter of 2019. The dip in oil production can be traced to domestic production disruptions, as well as output limitation by OPEC+.
A further probe of the GDP data elucidates the activity sectors from which the recorded growth stemmed from. Of the three major activity sectors in the review quarter, Agriculture and Services sectors grew by 3.42% and 1.31%, respectively, and these two sectors jointly contribute 81.23% to the GDP of the country, hence, driving the overall GDP growth. However, the Industrial sector contracted by -7.30% in the fourth quarter of 2020.
Elsewhere, OPEC, in its monthly oil market, reported that Nigeria's oil production improved by 17.72% in January 2021 to 1.38mbpd from 1.17mbpd in December 2020. This evidences the positive impact of the slight increase in the block's output by 500,000bpd from January 2021, as well as the ease on the local production limit following the additional output cuts implemented in the final quarter of 2020 to compensate for non-compliance in the earlier months of the year. In addition, OPEC marginally weakened its world oil demand forecast for 2021 by 0.01mbpd to average 96.10mbpd relative to the preceding month's estimate, on the back of extended lockdowns and the re-introduction of partial lockdowns in several countries. On the supply side, OPEC revised its world oil supply estimate for 2021 down by 0.20mbpd to average 63.30mbpd, buoyed by production contractions in US and some parts of Asia.
Headline inflation grew by 16.47% YoY in January 2021, 0.71% higher than 15.75% recorded in December 2020; food inflation grew by 20.57% YoY in January 2021, 1.01% higher than 19.56% recorded in December 2020; while core inflation stood at 11.85% YoY in January 2021, 0.48% higher than 11.37% recorded in December 2020.
In January 2021, headline inflation increased by 1.49% MoM, a 0.12% decline from the rate of 1.61% that was recorded in the previous month. The yearly average rate rose to 13.62%, 0.37% greater than 13.25% recorded in the previous month. Both the food and core sub-indexes contributed to the uptick, but we saw an increased magnitude from the core segment relative to the change seen in previous months, reflecting the rise in energy prices. The persistent rise in the food inflation metric continues to serve as a concern, as well as the exchange rate crisis that the economy is faced with. However, there was a noticeable slowdown in the month on month increase in the headline index, as the economy slightly eased out of the high year-end spending in December 2020.
The food index rose by 1.83% MoM, a 0.22% decline from the rate of 2.05% that was recorded in the previous month. The yearly average rate rose to 16.66%, 0.49% greater than 16.17% recorded in the previous month. The decline in the food index on a month-on-month basis largely reflects the impact of the slowdown in food demand following the sharp uptick in food purchases in December 2020.
In January 2021 core inflation stood at 1.26% MoM, up 0.16% from 1.10% recorded in the previous month. The yearly average rate rose to 10.52% last month, 0.21% greater than 10.31% recorded in the preceding month. The highest increases were recorded in prices of Passenger transport by air, Medical services, Hospital services, Passenger transport by road, Pharmaceutical products, Paramedical services, Repair of furniture, Vehicle spare parts, Motor cars, Miscellaneous services relating to the dwelling, Maintenance, and repair of personal transport equipment.
The year-on-year rate of inflation continues to reflect the grim economic reality of Nigeria as we saw a further uptick in the headline index as well as in the food and core categories. Most of the drivers that supported and sustained the inflationary pressure in 2020 have persisted in the new year. Notably, we are still faced with declining food supply, increasing energy prices, a COVID-19 induced strain on our healthcare sector, and an exchange rate dilemma. These factors have pushed up the cost of production, worsened the cost of transportation, caused medical services to be luxuriously priced, and left food prices on a northward trajectory. While we noticed the slowdown in the month-on-month inflation rates for the headline index and the food sub-index, this trails our expectation of a slight moderation in demand and monthly inflation following December's buy frenzy, but does not signify any meaningful improvement in the price trajectory for the economy.
Capital Importation and Foreign Exchange Reserves
Total foreign capital inflow into the Nigerian economy through the I&E FX Window sustained its downward trajectory in the month of February 2021, as we witnessed declines in all sources of foreign inflow on the I&E window, safe for inflows from other domestic sources which subsumes inflows from exporters, individuals, and non-bank corporates. Inflows from the Apex Bank recorded the most decline, with foreign inflows from the CBN falling by 96.1% in February 2021, from $74.1 million in the preceding month to $2.9 million (data as at print time). We also witnessed significant declines in inflow from FPIs which worsened by 84.6% in February 2021 from $116.1 million in the previous month to $17.9 million. Likewise, foreign inflows from other sources, which consists of FDIs and inflows from Other Corporates, dipped by 80.7% from $87.1 million in January 2021 to $16.8 million in February 2021. Foreign inflows from other local sources however improved, as it rose to $528.3 million in February 2021 from $457.6 million in January 2021.
On the outflow front, outflows from other local sources dominated total outflow in the I&E Window, as it accounted for 96.3% of the total outflows. Overall, total I&E FX outflows reduced by 12.0%, underpinned by declines in other foreign and local sources, as outflow to these sources fell by 51.1% and 13.1%, respectively. FX outflows to other foreign sources dipped to $4.6 million in February 2021 from $9.4 million in January 2021. Similarly, FX outflows to other domestic sources dropped to $563.8 million in January 2021 from $648.7 million in the preceding month. However, FPI FX outflows inched up by 140.0% to $16.8 million from $$7.0 million.
Accordingly, the total I&E FX NetFlow settled at -$19.3 million in February 2021.
Purchasing Managers' Indices
As at print time, the CBN had not released its PMI Report for January and February 2021. However, FBN's February Manufacturing PMI report for the Nigerian economy revealed impressive improvements in the index, as it printed at 53.0 from 44.5 in January 2021. This uptick was driven by improvements in medium sized and small companies which was buoyed by increased demand and easing of Covid-19 related restrictions. Of the underlying subindexes, output, new orders, and stocks of purchases all improved. The improvement in output was supported by increased pharmaceutical demand given the adverse weather condition, new order rode on the back of improved consumption and demand, while stock of purchases was helped by the increase in business operations in February 2021.
Recall that the CBN's PMI data put the overall economy in the 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.
Fixed Income Market
The fixed income market sustained its relatively weak trend last month, as we witnessed significant spikes in rates at the primary markets. Average monthly yields for the benchmark securities monitored rose across all maturities on a month-on-month basis, with average yields of the sovereign bonds with 3-year, 5-year, 10-year and 20-year maturities increasing by 218 bps, 207 bps, 213 bps and 198 bps, respectively.
The Bond market started the month on a relatively quiet note, with minimal volumes traded across board, as market participants traded with a cautious note following the weak market sentiment witnessed in January 2021. However, the journey north for yields started after the Apex Bank increased rates at the first OMO auction held on 4th February 2021. The OMO auction closed relatively weak with a bid to cover ratio of 0.81x, as the Apex Bank sold N71.66 billion as against N100 billion offered. We also witnessed a significant spike in stop rates to the highest levels since April 2020. The 89-day, 180-day & 362-day notes were allotted at 7.00%, 8.50% and 10.10% respectively. Compared to the preceding auction, stop rates rose by 549 bps, 416 bps and 436 bps, respectively.
The upward trend was sustained by a similar spike in rates at the NTB auction. The Spot rate on the 91-day, 182-day & 364-day notes increased by 145 bps, 220 bps and 350 bps, respectively, in February 2021, compared the spot rate at the last January NTB auction. This led to a relatively weak Bond auction held on 17th February 2021. The DMO sold N80.53 billion worth of bonds as against N150 billion offered. We also witnessed an additional non-competitive allotment from the debt office, valued at N122 billion. The 10-year, 15-year & 25-year bonds were allotted at 10.25%, 11.25%, & 11.80%, respectively. Compared to the previous auction held in January 2021, stop rates rose by 227bps, 251bps and 285bps, respectively.
Foreign Exchange Market
The Naira depreciated in February 2021 at the I&E FX Window, with the average exchange rate of the currency to a unit of the Dollar climbing to N403.80, a N9.77 increment from last month's figure. Total monthly turnover traded on the I&E FX Window equally surged, closing at $1.3 billion in February 2021, a 16% increase from the $1.1 billion turnover recorded in January 2021. During the month, the CBN adjusted its NDF exchange rate due, on February 23rd, to N412.14, hinting that the CBN may accommodate further depreciation despite the rising price of crude oil. Also, the consistent decline in Nigeria's external reserves does not bode well for the Naira. In the month of February, the external reserves declined by 3.3% to close at $35.1 billion.
The month of February is historically termed a bearish month, as investors typically book profits based on expectations for full year earnings report of listed entities. A few unaudited full year results were released in January 2021, while others had to release audited results in February 2021. Most results were relatively impressive, but market participants were on the lookout for results from banking tickers and other bellwether names.
The month started on a good note, albeit with some profit-taking. The sudden recovery in rates in the fixed income space worsened the broad-based pullback in the equities market. The OMO auction results in the first week of February 2021 saw the 1-year paper print at 10.10%, gaining over 400 bps from previous auction level. Similarly, the rate on the 1-year Nigerian treasury bill went up considerably. Expectations were that rates will improve this year, but not with so much gusto within the first two months of the year. The improvement in fixed income rates triggered the re-pricing of a long list of tickers, as speculators and retail accounts intensified their sell pressure.
Sentiments seemed to have improved minimally after this, as yields in the treasury bill space became stable, giving room for appreciation in some tickers. SEPLAT is an ideal example of such, as the recent increase in oil price translated to both local and offshore bids pursuing the Oil & Gas Major. In one session alone, the ticker clocked its biggest daily value traded in twelve months at N1.19 billion. However, the last bond auction result for the month further dampened the hope for a revival of positive sentiments in the market. As market participants suspected, the bond auction yields moved upwards with closing rates inching up by c.250bps on average. This upward movement in fixed income yields pushed the year-to-date return of the local bourse into negative territory for the first time in 2021.
The full year reports had essentially taken the back seat in the minds of local investors as their focus shifted to the fast-rising fixed income yields so much so that impressive dividend payments from tickers like ZENITH, UCAP and MTNN, after a financial year of recession and Covid-19 disturbances, could not muster up long lasting buy sentiments. The last NTB auction for the month provided support to this notion, as the 1-year paper closed at 5.50%, its highest point since March 2020, causing more bearish sentiments to flood the local bourse.
Foreign investors were largely on the selling end for banking tickers, whilst continuously seeking value in NEWGOLD and SEPLAT. These two securities remained a very much explored avenue to repatriate funds.
As for the sectorial indices performance, the Oil & Gas sector was the only sector that recorded a month-on-month gain, as it was up by 4%, propelled by gains in SEPLAT. All other sectors were in the red, with the Insurance sector recording the steepest decline of 18% month-on-month. The Banking sector, Industrial sector and Consumer goods sector were down 10%, 9% and 8% month-on-month, respectively. The month of February broke the 7-month gaining streak of the NGSE as the benchmark ASI index settled at 39,799.89 points, recording a month-on-month loss of 6.16%. The index's Year-to-date positive gain was completely depleted as it settled at negative 1.17%.
Our Expectations For The Coming Quarters
We expect expansionary policies to form the bedrock of the monetary and fiscal responses, with spending from the fiscal body directed strategically towards infrastructure. Nevertheless, the downside risks are still predominant, as the virus remains largely untamed, and the availability of adequate vaccines for the country is not achievable in the near term. The structural problems of the economy also remain burdensome, as the economy remains unhealthily dependent on crude oil for revenue and foreign earnings. Accordingly, the GDP growth recovery seen is expected to remain sustained through 2021, albeit at a tepid rate.
Going forward, we maintain gloomy expectations for the trajectory of inflation, given the existing active drivers and other factors that could exacerbate the price increase. Notably, the continuous rise in the price of crude oil continues to be burdensome, given the federal government's reluctance to walk back on the deregulation of the downstream oil sector. As at print time, brent crude was priced at $67.56 per barrel, which would translate into a PMS price that is north of N200 per litre. Should the federal government fail to reintroduce subsidy, the pass-through effect of such a price increase would gravely impact the headline rate. Also, the increased fiscal spending planned for 2021 would further inflate the economy in a bid to stimulate growth, and that would worsen inflation rate in coming months.
The better-than-expected vaccine distribution is expected to help improve economic activities and stimulate demand, as tackling the health risks that the Covid-19 pandemic presents will help significantly set both the manufacturing and non-manufacturing PMIs on an expansionary path. However, the inadequacy of vaccine supply and the difficulties associated with vaccine distribution, poses a significant downside risk to the PMI growth of the Nigerian economy.
We expect a relative quiet in the Bond market this month, albeit with cherry picking by local fund managers following the sharp spike in yields.
In the near term, a further devaluation of the Naira at the I&E FX window is likely to happen, given that the exchange rate has crossed over to the $/N400 levels and the CBN is comfortable with that. It is also instrumental to note that regardless of the upsurge in fixed income yields and oil prices, the external reserves will continue to dwindle.
It is safe to say that the equity market has benefitted immensely from the low-yield environment in the fixed income market over the last 7 months. Although Market participants knew that these low rates would pick up in 2021, it was expected that the increment will be gradual and not abrupt. As fixed income yields trend north, sentiments for local equities will trend south as investors always lean towards the less risky option. As the earnings season gradually moves to a close, it is expected that what would essentially drive the market is the movement of these fixed income yields in the near term.