In our recently published H2-21 Global macroeconomic outlook (see report: Navigating the Uneven Path of Recovery), we reviewed global macroeconomic activities in H1-21 and discussed our views on what we expect in the second half of the year. The global economy appears to be decoupling itself from the havoc caused by the pandemic as the administration of vaccines has paved the way for economies to be reopened despite the resurgence of new strains of the virus. Our baseline expectation is that the general administration of vaccines will preserve the reopening of economies. We are also inclined with the view that prominent global central bankers expressed that the surge in inflation is transitory. Hence, tightening of monetary policy is unlikely to happen anytime soon. Against this backdrop, the global economy is projected to expand by 6.0% in 2021, a remarkable improvement from the negative growth of 3.3% in 2020 – based on the IMF’s estimates. We also expect Brent price to sustain its rebound for the rest of the year. Accordingly, we forecast that Brent crude price will average between USD68.00 and USD73.00/bbl. in 2021.
Supply chain challenges continue to affect factory activity in China. According to the Chinese National Bureau of Statistics (NBS), China’s manufacturing PMI slowed for the second consecutive month to 50.9 points in June (vs May: 51.0 points) – the lowest since February (50.6 points). The preceding largely reflects the impact of (1) disruptions to the supply chain and (2) resurgence in the COVID-19 outbreak in the major export province of Guandong. Similarly, the recent COVID-19 virus outbreaks in some parts of the country led the non-manufacturing PMI to slowdown (53.5 points vs May: 55.2 points) to its lowest level since February (51.4 points). Although the construction PMI held steady at 60.1 points, the services PMI declined by 2.0 points to 52.3 points in June. Although China has accelerated its vaccination progress, we expect the (1) persistent shortage of semiconductors and chips and (2) rising cases of a new strain of COVID-19 to limit the scope of factory and business activity in the short term.
Global stocks posted mixed performances this week as investors traded cautiously ahead of U.S. nonfarm payroll data (released on Friday) to determine when the Federal Reserve will start tapering its asset purchase programme. In the U.S, the DJIA (+0.6%) and S&P (+0.9%) were poised for a weekly gain as rapid vaccination alongside government stimulus and rising commodity prices supported investors buying interest in consumer staples industrials and energy stocks. European markets (STOXX Europe: +0.1% and FTSE 100: +0.3%) posted marginal gains as investors awaited a closely watched U.S monthly jobs report amid growing optimism around a steady economic recovery in the Eurozone. In Asia, the Nikkei 225: (-1.0%) and SSE: (-2.5%) ended the week in the red as investors grew cautious about the possibility of a tightening of China’s monetary policy amid concerns about the reintroduction of lockdowns in the region following the rise in Covid-19 infections. Similarly, the Emerging (MSCI EM: -0.8%) market stocks declined marginally, primarily driven by the sell-off in China (-2.5%), while Frontier (MSCI FM: +1.2%) market stocks recorded gains, primarily driven by the market rally in Vietnam (+2.1%).
In our H2-21 Domestic Macroeconomic Outlook, we analysed the economy and financial market within this context and make recommendations for investments. We are optimistic that the economy would sustain the early recovery that kicked off in Q4-20. We also expect the headline inflation to moderate in H2-21, driven primarily by the high base effect from the prior year. Furthermore, we see scope for improvement in liquidity conditions in the FX market given the knock-on effects of the rally in oil prices and the proposed Eurobond issuance on the FX reserves. In addition, we see a 50bps hike in the MPR at the November meeting as the MPC shifts to a tightening phase. Finally, we do not envisage any significant divergence from historical trends in the spending pattern of the government. We believe a substantial revenue generated would be directed towards recurrent expenditure and debt servicing, while capital expenditure will be financed mainly by borrowings.
After about 13 years since it was first presented to the National Assembly, the Petroleum Industry Bill (PIB) was finally passed on 1st July 2021. The PIB is a law that seeks to overhaul the regulatory framework and introduce reforms across the entire value chain of the oil and gas industry in order to enhance private sector investment and boost the sector’s output. The key objectives of the bill include (1) to create efficient and effective governing institutions, with clear and separate roles for the petroleum industry, (2) to establish transparency, good governance, and accountability in the administration of the petroleum resources of the country, (3) to establish a framework for the creation of a commercially-oriented and profit-driven national petroleum company, and (4) to foster a business environment conducive for petroleum operations. Although the separation of powers between the Ministry of Petroleum Resources and the NNPC would help in reducing government interference in the sector, we do not think the bill would significantly bring foreign investments into the sector, given the (1) energy transition currently at play across the globe and (2) weak infrastructure in the business environment.
Capital markets –Equities
The bulls returned strongly to the local bourse after defeating the bears in three of the week’s five trading sessions, as investors cherry-picked stocks following H1-21 closure activities. Based on the preceding, the All-Share Index advanced by 1.5% w/w to close at 38,212.01 points. As a result, the MTD return printed 0.8%, while the YTD loss moderated to -5.1%. Notably, proprietary traders’ buying interest in NESTLE (+10.0%) and bargain hunting in OKOMUOIL (+4.3%), DANGCEM (+4.0%), ACCESS (+2.4) and DANGSUGAR (+2.2%) drove the weekly gain. Activity levels mirrored the market’s broad gauge as trading volume and value rose by 1.5% w/w and 36.9% w/w, respectively. Sectoral performance was broadly positive, as the Consumer Goods (+5.1%), Industrial Goods (+2.1%), Insurance (+2.0 %), and Banking (+1.3%) indices recorded gains. However, the Insurance (-1.0%) index emerged as the week’s sole loser.
With the H1- 21 earnings season on the horizon, we believe investors will be looking for clues on the sustainability of the decent corporate earnings released for Q1-21. However, we expect mixed market performance in the week ahead as bargain hunting in dividend-paying stocks will be matched by intermittent profit-taking activities. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the unimpressive macro story remains a significant headwind for corporate earnings.
Money market and fixed income
The overnight (OVN) rate declined by 10.50ppts w/w to 12.5%. The contraction was due to improved system liquidity as inflows from FAAC disbursements (NGN363.86 billion) outweighed outflows for NTB net issuances (NGN81.87 billion) CBN’s weekly FX auctions.
We expect tighter liquidity in the system next week, as funding pressures from CBN’s weekly auctions are likely to outweigh expected inflows from OMO (NGN30.00 billion) maturities.
Trading in the Treasury bills secondary market turned bullish, following the boost to system liquidity. Consequently, the average yield across all instruments declined by 5bps to 8.4%. Across the curve, we witnessed sell-offs of OMO instruments as local banks exited positions following the dearth of liquidity at the start of the week. Thus, the average yield at the OMO segment expanded by 18bps to 9.9%. We highlight that the CBN did not float an auction this week. Elsewhere, demand was stronger in the NTB secondary market (average yield contracted by 32bps to 6.6%) as market participants took to the secondary markets to cover lost bids. At the auction, The CBN offered NGN81.74 billion – NGN2.88 billion of the 91-day, NGN20.00 billion of the 182-day, and NGN58/86 billion of the 364-day bills, and ultimately allotted NGN163.61 billion. The auction stop rates were 2.50% (unchanged), 3.50% (unchanged), and 9.15% (previously 9.40%) on the 91D, 182D and 364D bills, respectively. We highlight that the auction was oversubscribed with a subscription level of NGN446.01 billion, translating to a bid-to-cover ratio of 2.7x.
In the week ahead, we expect the yields on T-bills to inch higher, as we believe the respite to system illiquidity that ensued this week is unlikely to persist. Hence, we expect sell pressures to resurface.
The Treasury bonds secondary market remained bullish, as the average yield declined by 36bps to 11.6%. We attribute the decline to the improved system liquidity and cherry-picking activities of investors. Across the curve, average yield at the short (-50bps) and mid (-35bps) and long (-33bps) segments contracted, following demand for the JAN-2026 (-80bps), MAR-2027 (-55bps) and JUL-2034 (-60bps) bonds, respectively.
We maintain our expectation of increased demand for bonds in the near term and expect yields to continue to moderate as investors leverage the increased market supply and take positions ahead of the maturing JUL-2021 bond.
Nigeria’s FX reserves sustained its decline, dipping USD196.31 million w/w to USD33.32 billion (30th June 2021). Meanwhile, the naira appreciated by 0.1% to NGN411.25/USD at the I&E window (IEW) but depreciated by 0.6% to NGN503.00/USD at the parallel market. At the IEW, total turnover (as of 1st July 2021) decreased by 22.7% WTD to USD537.85 million, with trades consummated within the NGN400.00 – 420.95/USD band. In the Forwards market, the rate depreciated across the 1-month (-0.1% to NGN413.43/USD), 3-month (-0.2% to NGN418.11/USD), 6-month (-0.5% to NGN424.09/USD) and 1-year (-0.5% to NGN435.74/USD) contracts.
We expect improved liquidity in the IEW over the medium term, given our expectation of (1) increased oil inflows in line with the rise in crude oil prices, and (2) inflows from FCY borrowings. Accordingly, we expect the naira to remain relatively range-bound (NGN410.00/USD – NGN415.00/USD) at the IEW.
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