Tuesday, March 30,
2021 / 08:30 AM / by Coronation Research/ Header Image
Last week the fixed income markets received two important
indicators as to the likely direction of market interest rates. One was the fact that a few members of the
Central Bank of Nigeria's (CBN) Monetary Policy Committee voted to raise the
Monetary Policy Rate, even though a majority voted to keep it at 11.50%. The second was that the Debt Management
Office's auction of bonds achieved slightly higher rates than what the market
had priced in earlier. We think that
1-year T-bill rates are on course to reach around 10.00% by mid-year.
Last week the exchange rate in the Investors and Exporters Window
(I&E Window) closed at N410.00/US$1 with no change from the previous week.
In the parallel, or street market, the Naira also closed flat, at N485.00/US$1.
Although restoring FX liquidity to the levels achieved before the pandemic
might seem herculean, the CBN is said to be recording some success in its bid
to attract foreign remittances. According to sources within the CBN, it
received circa $40 million last week in remittances, up from about $6 million
before the policy was introduced. At $40 million a week the CBN could be
attracting $1.9 billion per annum. When
it comes to sales of foreign exchange, the CBN has charged Nigerians to report
any bank withholding forex, saying the country has not changed from its foreign
exchange management policies, whereby Nigeria remains on a managed float.
Our view is that foreign exchange turnover in the I&E Window
and NAFEX rates remain well below pre-crisis (i.e. pre-March 2020) levels and
that, as such, the gap between the I&E and NAFEX rates and the parallel
market is likely to remain for some time. This suggests to us continued
pressure on the I&E Window and NAFEX rates.
Bonds & T-bills
Last week, the secondary market yield for an FGN Naira bond with
10 years to maturity increased by 13bps to 10.72%, the 7-year bond yield
increased by 37bps to 10.50%, and the 3-year bond yield decreased by 49bps to
7.51%. After the conclusion of the monthly bond auction, the market ended the
week on a mixed note as we saw rotation from the long end of the curve to the
short end of the curve. This week we expect the market to trade range-bound.
By contrast, last week the annualised yield on a 335-day T-bill
increased by 249bps to 6.65% in the secondary market while the yield on a
340-day OMO bill fell by 51bps to 8.06%. We continue to think that T-bill rates
are on an upward trend.
The price of Brent crude rose by 0.06% last week, closing at
US$64.57/bbl, a 24.65% increase year-to-date. The average price to year-to-date
is US$61.17/bbl, 41.55% higher than the average of US$43.22/bbl in 2020. It
appears the unease in the market about the fresh Covid-19 related restrictions
is not going away for a while. Poland has joined the list of European
countries, such as France and Germany, that are imposing tough measures to curb
the increasing number of cases. This is likely to stifle demand and the impact
was felt as oil prices fell during the early part of the week. Prices picked up
by about 6.00% on Wednesday after a large container vessel blocked the Suez
Canal, creating a traffic jam.
The Organization of the Petroleum Exporting Countries (OPEC) will
meet on 1 April 2021 and it is expected that the cartel will hold production
steady in its bid to keep output and prices at optimal levels. We see Brent
crude prices holding up above US$60.00/bbl for several weeks.
The Nigerian Stock Exchange All-Share Index (NSE-ASI) rose by
2.17% last week with a loss of 2.62% year-to-date. Stanbic IBTC (+30.00%),
Guinness Nigeria (+18.58%), and Sterling Bank (+13.42%) closed positive last
week, while MRS (-9.70%), UBA (-4.90%), and Lafarge Africa (-4.87%) closed
negative. The Banking sub-index (+0.21%), however, was left behind by the rest
of the market and would have fallen had it not been for the exceptional
performance of Stanbic IBTC. Last week also saw advances in MTN Nigeria
(+1.91%), Dangote Cement (+2.27%) and BUA Cement (+5.08%). As these three are index heavyweights it
seems that market sentiment is improving.
See Model Equity Portfolio on page 4 for our reaction.
The CBN and Interest Rates
It is one thing to say that interest rates should go up and
another thing to predict that they will go up. In general, we ban the word
'should' from our published research, because we are not in the business of
giving instructions. We are in the
business of managing our clients' liquidity and advising on the likely direction
of market interest rates (among other things).
Last week the market received two indicators as to the likely
direction of market interest rates. The
first came from the Monetary Policy Council (MPC) of the CBN, about which more
later. The second came from the monthly bond auction by the Debt Management
Office (DM0). These were auctions of 6-year, 14-year and 24-year Federal
Government of Nigeria (FGN) bonds.
The background to these auctions was that the FGN bond yield
curve, which measures secondary market yields, had barely moved since
mid-February. Therefore, this year's average 345 basis points (bps) expansion
in the average yield of 10 bonds (with durations of 2-years to 15-years, see
chart) took place mainly during the first six weeks of the year. But how well
does the secondary market reflect investor demand?
We found out last Wednesday. The auction of the March 2027 bond
was sold at 10.50%, 50bps higher than the secondary market yield on the
day. The March 2035 bond was sold at
11.50%, 18bps higher than the secondary market yield on the day. And the July 2045 bond was sold at 11.29%,
71bps higher than the secondary market yield on the day. In other words, secondary market bond yields
(at least, for these durations) were a fairly good guide to the market but,
when tested with volumes at auction, understated the required yield. The secondary market prices of all three
bonds corrected after the auction.
At the short end of the yield curve (i.e. durations of less than
one year) the regular auctions of FGN T-bills give a clear picture. The stop
rates for 364-day maturities increased from 4.0% on 10 February to 7.0% on 17
March, representing a steep increase in short-term market interest rates (at
least, those achieved at auction: secondary market yields can be lower). For a while now we have been pointing to the
T-bill market reaching rates of around 10.0% by mid-year, but how do we reach
At this point we need to discuss the MPC of the CBN. We do not
envy its job. One the one hand, it needs to have low market interest rates to
prevent a sustained recession (and it can argue, with considerable
justification, that it achieved this last year): on the other hand, it needs to
set interest rates that act, in conjunction with several other factors (e.g.
structural factors, foreign exchange rates, commodity rates and government
spending) to contain inflation. In
February inflation was 17.33% y/y, with food inflation at 21.79% y/y, far above
its upper target of 9.00% y/y. Clearly,
and given that several other emerging markets - Russia, Brazil and Turkey -
have raised rates in the direction of inflation this year, there is an argument
for putting rates up.
However, it is as well to remember that we are in the hands of the
CBN and its MPC. If they want to lower
market interest rates (as they did towards the end of 2019 and throughout 2020)
then, in all probability, they will make this happen. So, it is significant
that some members of the MPC are voting to raise rates in 2021. At January's meeting of the MPC all members
voted to keep the Monetary Policy Rate (MPR) at 11.50%: but at last week's
meeting three members voted to raise it. Against this, we believe, the CBN will
have to balance the threat posed by rising rates to the economic recovery. This
is why we think the CBN will allow the market to reprice interest rates this
year, but not so fast as to reach the rate of inflation within a few months.
Last week the Model Equity Portfolio rose by 1.94% compared with a
rise in the Nigerian Stock Exchange All-Share Index (NSE-ASI) of 2.17%,
therefore underperforming it by 23 basis points. Year to date it has lost 1.70% against a loss
in the NSE-ASI of 2.62%, outperforming it by 91bps.
As often published on these pages - though in fact we do not
always follow this principle - we do not try to predict the direction of the
market (it is very difficult) but instead buy stocks that we like (which have
good RoE, sales momentum and earnings momentum) when their valuations are low.
However, at the beginning of this year we started selling the market as a
whole, sensing that it would be weak. To an extent, we were right.
What has been the result? A simple back-test our performance
attribution model provides the answer. In the first quarter of 2021 the
portfolio would have been down 2.72% y-t-d against a market down by 2.62%
y-t-d, therefore underperforming it by 10bps, if we had made no notional sales.
In the event, and thanks to our notional sales (which took the notional cash
position from 1.1% to 30.7%) the portfolio only fell by 1.70% y-t-d,
outperforming the index by 91bps. We made notional sales into a strong market
during January and were repaid as the market corrected in February and early
However, a 30.7% notional cash position
carries with it risks, and last week taught us a lesson. The market turned upwards. If it had not been
for our large (5.2%) notional position in Stanbic IBTC we would have lost all
our outperformance so far this year. So,
we will re-set the model equity
portfolio to a more neutral position by making notional purchases in selected
stocks, notably MTN Nigeria and Dangote Cement, this week in order to make our
exposure to them neutral relative to their index weights. There is sufficient
notional liquidity to do this.
Stanbic IBTC is a perfect example of the
kind of stock in which we should have a significant overweight positions, given
its high long-term RoE and earnings momentum.
We wish there were more stocks like it.
Policy Rate Decision
and Interest Rates
The US 10-Year Bond and
T-Bill Rates Heading
2020 GDP and the Implications for Markets
and Foreign Financing
Inflation is Important
GDP Better Than Thought
Naira Crawling Peg?
10. A Year in Two Charts
Interest Rates on the Rise
12. Oil Above US$50.00 per Barrel
13. Saving Interest Rate?
14. Where is the Money Going?
15. CBN Likely to Leave MPR at 11.50%
16. Second-best Equity Market in the World
18. US Dollar Eurobond Yields Now Higher
Than Naira Yields?
19. Fiscal and Monetary Response to
20. Winners and Losers in Africa
21. The Return of the Equity Market
22. Which Way for Interest Rates?
23. Coronation Research Releases Report Themed: From Savings to
24. A Case of Eurobond Market
25. In the Hands of OPECplus
26. The Policy Mix and The Markets
27. The Oil Price and Production
28. Cracks In The Bond Market?
29. No Big Change in FX Policy
30. Coronation Research Releases Outlook for Insurance Sector -
From Lagoon To The Blue Ocean
31. Micro-Insurance, Tech, Key to
Deepening Nigeria's Insurance Sector - Coronation Research
32. Navigating the Capital Market:
The Investors' Dilemma
33. Market Interest Rates Back Up
- Coronation Research
Nigeria Should Deploy
Privatization as a Macro-Economic Tool to Stabilize Its Economy
A Rise in Domestic Debt
Service in Q4 2020
38.60% of Nigeria's
Total Public Debt Was External in Q4 2020 - NBS
Q4 2020 External Debt
Data: World Bank Heads the FGN's External Creditor List
N619.34bn in January 2021 - NBS
Squeeze; An Unfolding Tale of Monetary Trauma
Nigeria Needs Pragmatic
Economic Policies to Address A Troubling Misery Index
as a Constraint to Economic Development
Q4 2020 Unemployment
Data: Pulling Away from Quicksand
10. NBS Publishes COVID-19
Impact Monitoring Survey Report for January 2021