Market News

What is the rational response to Naira interest rates that are well below inflation? The answer is both to take risk and to avoid it. Investors are taking risk by buying Nigerian equities, which performed very well last year and continue to perform this year. But they are also buying US dollar Mutual Funds to protect themselves from potential Naira devaluation.

FX

Last week, the exchange rate at the Investors and Exporters Window (I&E Window) weakened by 0.01% to N415.10/US$1. In the meantime, the Central Bank of Nigeria's (CBN) foreign exchange (FX) reserves rose by 2.13% to US$41.83bn, the highest level since 30 September 2019 and marking their tenth consecutive weekly accretion. FX turnover on the official markets has been rising recently, contributing to a degree of stability in the I&E Window rate, but it still remains low in comparison with levels seen in previous years. Therefore, our view remains that there may be continued pressure on the official and parallel exchange rates if the CBN does not further increase supply.

Bonds & T-bills

Last week, activity in the Federal Government of Nigeria (FGN) bond secondary market was bullish. Consequently, the average benchmark yield for bonds fell marginally (- 11bps) to 11.28%. On benchmark notes, the yield of the 10-year (-31bps to 11.76%), 7- year (-15bps to11.56%) and 3-year (-1bp to 9.21%) FGN Naira-denominated bonds contracted. We maintain our expectation that a future rise in bond yields, if any, is unlikely to be sharp over the rest of the year due to unaggressive borrowing as the DMO manages its debt service costs.

Trading in the Treasury Bill (T-Bill) secondary market was bullish following improved system liquidity from FGN bond coupon payments and OMO maturities. Consequently, the average benchmark yield for T-bills fell by 5bps to 5.33%. The annualised yield on a 349-day T-bill settled at 7.16%. At the T-bill PMA, the DMO allotted N235.05bn (US$571.89m) worth of bills across all tenors. The stop rate on the 364-day bill dropped by 26bps to 6.99% (annualised yield: 7.51%), while the rates on the 91-day (2.50%) and 182-day (3.50%) remained unchanged. Demand was strong with a total subscription of N431.12bn, implying a bid-to-offer ratio of 2.87x (versus an average of 1.56x at the last four auctions). Elsewhere, the average yield for OMO bills fell by 7bps to 6.37%, while the yield on a 340-day OMO bill settled at 7.09%.     

Oil

Last week, the price of Brent fell by -1.34% to settle at US$84.38/bbl, marking its first weekly decline in eight weeks. Year-to-date, Brent is up 62.90% and has traded at an average price of US$69.55/bbl, 60.92% higher than the average of US$43.22/bbl in 2020.

The decline in oil prices followed Iran's announcement that talks with world powers on its nuclear programme would resume by the end of November, bringing the prospect of a significant volume of Iranian oil reaching global markets. In addition, according to the U.S Energy Department, U.S. crude stocks rose by 4.3m barrels last week, more than double the 1.9m barrel gain expected by analysts, suggesting that demand is currently weak.

On 4 November, the Organization of the Petroleum Exporting Countries and its allies (OPEC+) are scheduled to meet, with analysts expecting them to maintain the plan to add 400,000 b/d of supply in December, a slow return to normal levels of production that may contribute to keeping prices strong in the medium term. We reiterate our view that the price of Brent oil is likely to remain well above the US$60.00/bbl mark over the rest of the year

Equities

The Nigerian equities market recorded its seventh consecutive weekly gain, advancing by 0.66% to close at 42,038.60 points, its highest level since 2 February 2021. Consequently, the year-to-date return rose to +4.39%. Guinness Nigeria +23.05%, Cadbury Nigeria +18.13%, PZ Cussons Nigeria +8.47% and International Breweries +8.25% closed positive last week, while FBN Holdings -9.80%, Dangote Sugar Refinery - 5.56%, Stanbic IBTC Holdings -4.88% and Ardova -3.31% dropped points. Sectoral performances were bullish as the NGX Insurance index led the gainers, rising by +5.28%, followed by NGX Oil & Gas +4.04%, NGX Banking +2.43%, NGX Consumer Goods +1.52% and NGX Industrial +0.49% indices.

The Rise of US Dollar Mutual Funds

Early in October, we explained that spreads in the Naira fixed income markets have widened since the collapse of rates during 2020 (see Coronation Research, "Nigerian Fixed Income still a tough sell", 4 October). As a result, we saw 1-year T-bill rates expand to as high as 10.70% in May 2021, as investors continued to demand higher yields at auctions. However, by the end of October 1-year T-bill rates had settled at 7.66%. This compared with annual inflation of 16.63% (as of September).

In 2020 the reaction of Nigerian investors was to seek risk assets such as equities. As a result, the NGX All-Share Index returned 50.03% that year. This year the equity has enjoyed moderate support as a company, and bank earnings have increased. The first-half (H1) results impressed across the major non-bank stocks, while bank stocks were mixed. So far, the season for 9-Month 2021 results is underway, with decent performance across the board. As a result, the NGX ASI is up 4.39% year-to-date. In our report (see Coronation Research: Nigerian Stocks in 2021, 27 September), we showed that equities have begun to look attractive, with a few stocks generating higher dividend yields than the 1-year T-bill. Certain stocks like Zenith Bank, Guaranty Trust Holdco, UBA and MTN Nigeria have expected dividend yields between 6% and 14%.

Many individual investors gain exposure to Nigeria's financial markets by buying mutual funds. In Nigeria today, there are seven categories of publicly-listed mutual funds: Money Market funds, Ethical Funds, Mixed Funds, Fixed Income Funds, Equity Funds, Real Estate Funds and Bond Funds. However, between 31 December 2020 and 15 October 2021, the combined Net Asset Value of all the regulated mutual funds declined by 13.62% from N1.49trn (US$3.63bn) to N1.29trn (US$3.14bn). This decline was primarily driven by an exodus of N201.45bn from Money Market funds, whose performance is dependent on the returns of instruments like T-bills, promissory notes and commercial paper. These have not been able to compensate for inflation, leaving investors to look elsewhere.

We have seen a significant rise in US dollar-denominated funds growing by 48% from N167.77bn to N248.16bn between 31 December 2020 and 15 October. These are typically invested in sovereign Eurobonds, corporate Eurobonds, money market instruments, and foreign equities, as the Securities and Exchange Commission permits.

With Naira inflation stubbornly in double digits and sub-inflation returns on Naira T-bill and Fixed Income investments, it appears that many investors are pursuing currency diversification and a guard against potential Naira devaluation.

Model Equity Portfolio

Last week the Model Equity Portfolio rose by 0.29% compared with a rise in the NGX Exchange All-Share Index (NGX-ASI) of 0.66%, therefore underperforming by 37 basis points. Year to date, it has gained 6.79% against again in the NGX-ASI of 4.39%, outperforming it by 240bps.

The problem last week was our notional overweight position in Stanbic IBTC, a stock in which we have a lot of conviction but whose 9-Month 2021 fell some short of our expectations. It fell 4.9% last week and cost us 23bps in performance. Our loss in FBN Holdings was to be expected, and as earlier advised, we had cut our notional position in it. Our next problem was not participating in the rise of two brewing stocks, Nigerian Breweries and Guinness Nigeria. We do not yet have conviction in these stocks, so their rise presents us with relative performance costs.

Going forward will continue to build our notional position in Custodian Investment. We will measure the positions of our significant holdings to make sure they are not too far out of line with the big-four index weights (MTN Nigeria, Airtel Africa, Dangote Cement and BUA Cement), and we will examine our overweight position in banks.