Nigeria exits pandemic-induced recession

What shaped the past week?

Global: Sentiment across global markets was largely mixed last week, with Asian markets closing in the green, while U.S and European markets ended the week as a mixed bag of red and green closes. In Asia, the latest GDP report for Japan, which showed a 12.7% rise in the value of goods and services, boosted sentiment at the start of the week; the surprising rise in GDP growth beat investor expectations, sending stocks higher at the start of the week. Meanwhile, in Europe fears of the virus continued to persist across the region, amid governments’ continuous battle against the pandemic. In addition, investors kept their eyes on key earnings and economic data releases, as they continued to assess the pace of the recovery in the region. According to Markit Economics, manufacturing PMI for the EU rose to 57.5 points, with Germany’s PMI printing at 60.6 points for February - a 36-month high. Finally, in the U.S., the prolonged wait on the stimulus package from the Biden Administration, weighed on market sentiment in the region impacting heavily on tech stocks. Note-worthy is the 128bps w/w ease in the techheavy NASDAQ as at the time of writing. Progress on enacting the $1.9 trillion stimulus package in addition to global combative and vaccination measures across the world, will continue to drive sentiment in the coming weeks.

Domestic Economy:

On Tuesday, inflation figures were released by the National Bureau of Statistics. Headline inflation rose by 71bps to a new 45-month high of 16.47% y/y, representing continued pressures from the devaluation of the Naira and deregulation in the downstream sector. Those factors were also contributory to the build-up in core inflation, which rose to a 3-year high of 11.85% y/y. Likewise, food inflation ascended to an all-time high of 20.57% y/y, driven by conflict in food producing areas and higher logistics costs. Going forward, we expect headline inflation to continually trend higher, particularly as a result of expected uptick in PMS prices. Media reports suggest that PMS prices are already been adjusted by marketers, in line with the ascent in oil prices. However, we look forward to the outcome of a technical committee meeting next week - between the Federal Government, labour unions and stakeholders - for guidance on future pricing. Nonetheless, further adjustment in retail PMS prices looms as oil prices rise beyond $60. This could further stoke food prices, which is already at historic highs. While the reopening of the border should serve as a softener to food inflation, the presence of major food items in an exclusive list -under the AfCFTA arrangementcould keep food inflation elevated.

Equities:

The NSEASI closed in the red, down 63bps w/w to close at xxxxpts. Investors have largely taken profit over February as we approach the last trading week of the month; sector wise, the Banking sector gained 54bps despite losses in ZENITHBANK (-179bps w/w) and GUARANTY (-130bps) weighing on the sector. Moving to the Consumer Goods space, sellside activity in FLOURMILL (-267bps w/w), DANGSUGAR (-263bps w/w) and small-mid cap stocks, saw the sector sink 104bps w/w. Meanwhile, the Oil and Gas sector closed the week as the best performer rising 460bps w/w, thanks to gains in ARDOVA (+906bps w/w) and OANDO (+586bps w/w). Finally, in the Industrial Goods space, profit-taking by investors in BUACEMENT (-177bps w/w) and WAPCO (-385bps w/w) saw the sector dip 72bps w/w. For the week, volume and value traded decreased 42.57% and 22.93% respectively.

Fixed Income: On

Wednesday, the Central Bank of Nigeria (CBN) conducted a bond auction where it offered 150 billion and sold 200 billion across the 10-Year, 15-Year, and 25-Year tenors, at stop rates of 10.25%, 11.25% and 11.80% respectively. Meanwhile, it was a week of mixed trading activity in the fixed income space as investors took profit in the bond and NTB segments, while the OMO space witnessed a renewal in investor interest. The yield on benchmark bonds rose 45bps w/w, due to broad based sell-offs across the bond curve; notably, the yield on the 16.28% FGN-MAR-2027 bond rose 7bps w/w to settle at 9.96%, while the yield on the 16.29% FGN-APR-2037 bond rose 54bps to settle at 10.55% w/w. Meanwhile, an improvement in oil prices coupled with higher yields in the OMO space, saw investors return to the market, as yields dipped 45bps on average, due to buy-side interest across the market. Finally, in the NTB space, investors maintained their profit-taking stance in the market, as yields rose 25bps w/w on average.

Currency:

The Naira depreciated 6.33 w/w at the I&E FX Window to close at 410.00 and while depreciating 5.00 w/w to close at 475.00 against the dollar in the parallel market.

What will shape markets in the coming week?

Equity market: Despite the positive Q4’20 GDP report posted by National Bureau of Statistics on Thursday, investors’ sentiment at the domestic bourse remained weak, as a number of investors continued to adopt a cautious trading strategy. We expect a similar trading pattern in the coming week as the rising yields in the fixed income market is expected to continue to pose a threat in the short term. However, we believe that the current price levels of major fundamentally sound stocks remain attractive for investors willing to take medium to long term positions.

Fixed Income market: We expect investors to continue to monitor the pace of Nigeria’s recovery from the COVID-19-induced recession, while they also keep an eye on developments in the global macro space. As such we expect the market to open the week on a mixed note, with some investors cherry picking on attractive tenors across the space.

Currency: We expect the naira to remain largely stable across the various windows of the currency space as the CBN maintains interventions in the FX market.

Focus for the week

NIGERIA GROSS DOMESTIC PRODUCT - Nigeria exits pandemic-induced recession

Nigeria has joined China, Egypt and Ivory Coast on the path to economic recovery, exiting its pandemic-induced recession by a hair’s breadth in Q4’20. The National Bureau of Statistics (NBS) confirmed this in its latest Q4’20 GDP report, which showed that the country defied the disruptive impact of the protests to advance by 0.11% y/y in the last quarter of the year. However, the -1.92% y/y (Vetiva: -2.68% y/y) full year contraction was unavoidable due to the lockdowns in Q2’20 and a sluggish return to normalcy through the rest of the year.

Technology drives output growth

The surprising recovery in Q4’20 and subdued output gap for FY’20 is attributed to the telecommunications (ICT) sector, which contributed 12.18% to GDP. Considering the shift in business operations from physical offices to virtual environments, the increased adoption of digital services and investments boded well for the sector, which propelled a stellar 15.90% y/y growth in FY’20 (FY’19: 11.41% y/y). Alongside the ICT sector, gains in the Agricultural sector moderated the contraction in the non-oil sector to -1.25% y/y (FY’19 growth: 2.06% y/y) in 2020. The oil sector, on the other hand, recorded a deeper contraction of -8.89% y/y in FY’20 (FY’19 growth: 4.59% y/y). More specifically, the sector tanked by -19.76% y/y (Q3’20: -13.89% y/y) in Q4’20, driven by OPEC production cuts and production downtime at export terminals (Qua Iboe and Brass River terminals). As a result, production levels averaged 1.78mb/d in FY’20, compared with FY’16 (1.81 mb/d), when the country experienced a similar recessionary episode. Thus, the sector’s contribution to GDP fell from 8.78% in FY’19 to 8.16% in FY’20.

The global disruption in supply chains contributed to the slump in trade (FY’20: -8.49% y/y) for the fifth consecutive year, as the sector continued to reel from an exacerbated impact of restrictive trade policies. Also directly impacted by the pandemic is the transport sector, which fell sharply by 22.26% y/y in FY’20 (Q4’20: -5.95% y/y), due to movement restrictions, curfews and higher fuel prices. Elsewhere, the real estate sector (FY’20: -9.22% y/y) remained in the woods, as the pandemic and its butterfly effects further pressured income levels limiting consumers’ abilities to spend on big ticket items. Meanwhile, the financial services sector maintained its resilience, growing by 9.37% y/y in FY’20. Notably, the financial services sector - unlike other sectors - has grown at a faster pace every year, since the 2016 recession. However, due to the previous year’s high base effect, the sector slipped by -3.63% y/y in Q4’20.

Base effect supports recovery

Following a bumpy 2020, the economy is on course to recover in 2021, riding on the previous year’s low base. Barring the return of hard lockdown measures, we expect higher growth outcomes in 2021 especially in the midquarters (Q2 & Q3), that were the most hit by the pandemic in the previous year. Consequently, we expect the economy to bounce back by 3.47% y/y in FY’21. However, an unfavourable base from Q1’20 could limit the pace of recovery in the quarter to 0.75% y/y. The agricultural sector could maintain its positive performance despite the reopening of the borders. The inclusion of key agricultural products in the exclusive list - under the AfCFTA arrangement – could support investments within the sector. However, adequate measures are required to prevent herder-farmer clashes, ethnic conflicts, and adverse weather conditions from underwhelming agriculture output.

Meanwhile, the ICT sector could continually drive overall GDP growth in years to come. With a rising demand for technology solutions, the ICT sector could sustain the growth momentum. We recall media reports of the acquisition of Paystack in Q4’20, which showed the potentials of the sector as a hub of foreign direct investments. However, we note the possible downside risks posed by wanton regulations, which could delay the influx of investments into the sector. In the financial services sector, we anticipate milder growth outcome, given the spate of loan restructurings in 2020. A gradual return to business activity could spur the creation of risk assets. However, a cautious lending approach may be prevalent, as banks consider the operating environment of businesses, given the country’s FX conundrum and energy situation.

Whilst reasonable care has been taken in preparing this document to ensure the accuracy of facts stated herein and that the ratings, forecasts, estimates and opinions also contained herein are objective, reasonable and fair, no responsibility or liability is accepted either by Vetiva Capital Management Limited or any of its employees for any error of fact or opinion expressed herein.