Excerpt from my dairy (21/10/2020)
“Hmm! How did we get here? What did I miss? How did we go from a historical peaceful protest to reports of
violence and looting? 2020, haven’t you done enough already? Oh lord, I know I don’t normally pray for
Nigeria, but please protect everyone stranded in Lekki. The night started on Twitter. Pictures of the cameras
being taken down was shared. Theories of conspiracy, the unsafe location and ‘get out of there’ tweets were being tweeted all at once, but no one saw this coming. I couldn’t believe it was daybreak when I looked outside the window as my eyes were still wide open and my heart still kept beating fast as if I had just come back from a morning jog. I took some time out, talked to some of my loved ones I couldn’t reach before and it gave me some level of comfort and ease. I decided I had to keep it cool and focus on work. Then it hit me like a ton of bricks. The first gunshot I heard this year. I heard it once, twice, thrice, and then I couldn’t keep count anymore.
Survival instincts set in; I shut all windows and doors and then the typical Nigerian in me came alive and I
started praying. I have never prayed so hard in years, even whilst executing clients’ trade orders. This will surely
be a day to remember.”
In spite of all the unrest and violence we all witnessed in most part of the country especially Lagos, the commercial hub of Nigeria, markets still witnessed a positive showing in the Bonds and Equities space WoW. This begets the question, “Is Nigeria’s financial market defying all rules of logic?”
Before I delve into this, we should let you all know that our heart is heavy and goes out to everyone who lost a
loved one or got injured during this traumatic period of unrest and also to all SMEs, corporate and government,
whose properties were vandalized and looted. I must say, it was extremely exhausting and heart-breaking to
watch people’s sweat go down the drain especially with how challenging this year has been already. Amidst the current unrest happening in our dear country, we would like to encourage everyone to keep staying safe and pray for our dear country.
Market defying logic…
The equities market managed to close in positive territory last week despite the insecurity and unrest seen in
the country. The Nigerian Stock Exchange All Share Index (NSEASI) advanced by 0.13% WoW to close at
28,697.06 points as it witnessed gains on three (3) out of five (5) trading days of the week. The NSEASI YtD
improved further, climbing up to 6.91% YTD from 6.77% YTD in the prior week. However, we saw weakness
in investors sentiment, as market breadth closed at 0.80x (vs. 1.52x recorded last week) as the market recorded
twenty-eight (28) advancers against thirty-five (35) decliners in the week. The hunt for yield (Particularly from
a dividend perspective) coupled with the unattractive fixed-income yields and fairly robust system liquidity
continues to provide support in the equities market as the dip witnessed in the middle of the trading week was
met with sizeable bargain hunting activities across most sectors of the market.
The Bond market also sustained its bullish momentum last week on the back of the liquidity improvement
coupled with the unmet bid at the monthly FGN bond auction. The Bond auction which held on October 21,
2020 (I know, right? I didn’t think it was going to hold too but I guess we still have a budget deficit to fund)
was relatively strong with a bid to cover of 5.24x as DMO sold NGN45 billion(as against NGN30 billion
offered) across the 15-Year and 25-Year papers, at stop rates of 4.97% and 6.00% respectively. Consequently,
yields declined by 69 basis points on average across the curve. By the way, speaking of defying the odds, did
you notice that even with everything happening the local sovereign bond yields remained lower than the
Nigerian Sovereign Eurobonds? (Not sure they teach this in school).
Three major hypothesis that have been confirmed this week are:
H1: Market liquidity has a significant impact on financial market performance in Nigeria
H2: Fundamentals may not necessarily impact financial markets as anticipated in Nigeria
H3: The market can stay irrational longer than you can stay liquid.
Nevertheless, we expect the impact of largely felt disruption and looting seen in the past week to put downward
pressure on the already depressed economy, with Lagos State alone estimating the cost of its damage to be
about a N1 trillion, although figures are yet to be confirmed (That is slightly above the entire state’s revised
budget at N920.469bn). As we continue to face economic challenges, with inflation on the rise, mounting
pressure on our reserves, weaker crude prices and declining FDIs and FPIs, the road to recovery seems more
distance than ever.
Where is the money?
The recent volatility seen across all dollar underlying assets coupled with the security crises-driven sell-off has
created entry point in the Nigeria Eurobond market which currently yield higher than the local FGN bonds.
The equities market has been on a rally this October 2020 as local investors resumed bargain-hunting as yields
remain depressed in the fixed income market. The NSEASI finally crossed into positive territory YTD this month
after suffering a major blow from the Covid-19 induced sell-off. NSEASI is currently up 6.91% YTD. We expect
the bullish trend to persist in coming weeks as investors will be looking to position themselves ahead of Q3
earnings as yields remain depressed in the fixed income market. Dividend yield remains the major play.
Recession; proactive measures not cyclical factors can resuscitate economy
The National Bureau of Statistics (NBS) released the GDP report for Q3 2020 which officially confirmed the economy has slipped into a recession.
Earlier this week, the Minister of Finance, Budget & National Planning, Zainab Ahmed attended the 26th Nigerian Economic Summit and in her presentation highlighted some of the steps and investments the government is making to bring the economy out of a recession. Some of the points she highlighted were; stimulating the economy by preventing business collapse through ensuring liquidity, retaining and create jobs through support to labour intensive sectors such as agriculture, undertake growth-enhancing and job-creating infrastructural investments in roads, rails, solar power and communications technologies, promoting manufacturing and local production across all levels as well as advocating the use of made in Nigeria goods & services. She also highlighted focus on pro-poor spending as a strategy to mitigate the impact of covid-19 on poor households.
We recall that during the weekend, the National Bureau of Statistics (NBS) released the GDP report for Q3 2020 which officially confirmed the economy has slipped into a recession. Following the 6.10% contraction recorded in Q2 2020, the economy further contracted though at a decelerating rate of 3.62% in Q3 2020. We reckon that prior to the covid-19 crisis, economic growth had began to slow with Q1 2020 GDP growth of 1.87% trailing prior 5-quarter average of 2.29% (excluding Q1 2020). The economy has largely survived on an oil-led recovery which we consider cyclical with other core sectors lagging and reeling from the fallout of the impacts of the 2016/17 recession.
In our view, the government needs to be proactive and strategic about policies it intends to adopt to resuscitate the economy. The focus on social welfare, fiat-led interventions in agriculture, emphasis on infrastructure development and advocacy for local manufacturing is reminiscent of prior strategies that can’t be really be considered successful. In our opinion, the economy is in dire need of influx of investments and adequate skill pool to spearhead resource allocation, which we believe can be provided by the private sector. Thus, the public sector should in our view invest in tackling structural issues around ease of business operations (borrowing costs, regulatory & licensing bureacracies/inconsistencies, public agency corruption & FX policies etc.) as well as strengthening regulatory & legal frameworks while the private sector drives the investments for accelerated growth in manufacturing, infrastructural development, agriculture and other core sectors.
In our view, supporting a free market-led economy (given the more organised nature of the private sector than the public sector) would see a return of foreign direct investments into the Nigerian economy while local entrepreneurs would be motivated to take more risks to develop businesses. The outlook for oil prices remain weak and production levels may remain below historical levels as OPEC attempts to keep price stable. Thus, the possibility of a cyclical recovery is limited, only proactive measures to correct long term structural issues would restore the economy on the path of accelerated inclusive growth.
CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.
Understanding T.I.N.A. in the Nigerian financial system
As investors face an environment where uncertainty persists, the alternative left will be to park their excess funds in a safe place until Covid-19 passes.
This week, I want to talk about T.I.N.A….(no not the girl)
T.I.N.A. is an acronym for There Is No Alternative. It is used to describe a situation where the markets have excess liquidity and have no outlet to invest, so they invest in low yielding government securities because there is simply no alternative out there.
The financial markets today are awash with liquidity.
In the US for example, the CARES Act 1 cost an estimated $2.3t (11% of US GDP) including $510b to prevent bankruptcies and $349b in Small Business Administration Loan.
All this cash simply increases the liquidity of the financial system. The US Federal Reserve further lowered rates to a band of 0-0.25% in March 2020, the effect? Rates offered by banks on deposits have crashed.
Thus investors face an environment where the economy is shut because of Covid-19, and uncertainty persists. The only alternative left to the market is to park their excess funds in a safe place until Covid-19 passes, that safe place being US Treasuries and Bonds.
Thus the Fed and US Treasury can offer the low yielding paper to the market because the market is chasing safety, the investors buy because there is no other safe alternative out there, safety first.
It’s the same in Nigeria, the economy has contracted due to the COVID-19 mandated shut down and also exchange rate and land border closures.
These issues have strained the economy and have been amplified by falling economic output. As a result, investors are very risk-averse and are not willing to expose their capital to risk, thus they are seeking the safety of the sovereign paper.
The Central Bank of Nigeria (CBN) faced with a glut of liquidity has done what any prudent banker will do, it has dropped the fees it pays to lenders when it borrows money from them.
Thus the Nigeria Treasury bill rate which is the cost of the CBN borrowing at the short end of the market, (less than 365 days) has fallen.
Take the latest auction of Treasury Bills dates 11/11/2020, the rate now being offered by the CBN for 91day and 364-day paper is 0.0350% and .300% respectfully.
The low rates to my mind is not a surprise, but consider that the CBN offered to borrow N19b from the market, but received subscriptions from the markets to place N99b, this at 0.0350%.
Why are investors flooding the Sovereign Debt market with money? Because there is no alternative viz a viz risk and reward.
The Nigerian Stock Exchange All Share Index for instance has fallen from a recent high of 42, 624 in January 2018 to 32, 990 as of the Week ending Friday 20th, 2020.
In essence, the Nigerian investors prefer to book negative real return by holding risk free government paper than take any investment risk by exposing their capital to commercial lending.
Again this is a normal consequence when there is uncertainty in the markets but the lack for a better word “greed” in the markets has offered the CBN a rare chance to drop rates even in an inflationary environment.
The consequences of T.I.N.A. in the Nigerian financial system is clear.
Low rates will discourage savings, already the Pension Fund Administrators have a decision to make if they will continue to hold a full 8% of their portfolio in a negative-yielding but safe investments. T.I.N.A. also supports the Central Bank of Nigeria’s strategy to force banks to lend to the real sectors.
By dropping the risk-free rates in the economy, the CBN is making a point that there is no more free lunch, rather yield will have to be generated from creating risk assets and earning a return.
This sounds good on paper but the investing environment in Nigeria is yet unchanged positively, new taxes are being proposed, land borders are still shut, wages are still low and falling due to inflation.
In general, the Nigerian consumer is in a weak state with very low buying power, as evidenced by the sachetization of the consumer space. It will take a brave investor to commit funds, but then again, fortune, they say, favors the brave.
Traders’ Voice… A recession, for how long?
With the oil sector likely to remain depressed in Q4 2020, expectations of recovery will rest mainly on the future performance of the non-oil sector.
Recession! I think we all saw this coming. The Nigerian economy declined for the second consecutive quarter by 3.6% YoY in the third quarter of 2020, following a 6.1% drop in the preceding quarter. It marks the 2nd recession in the country in four years amid a significant decline in the oil sector, coupled with the rippling effects of the restrictions implemented across the country in early Q2 in response to the COVID-19 pandemic.
During the Sunday sermon, my pastor made a spirit-filled statement. He said, “it is hard to create sustainable wealth with a shaky foundation.” This statement did not only resonate with me spiritually, but it also did economically. In the case of Nigeria, ever since we shifted all attention to crude oil, it has been one economic struggle or the other. If I start talking about the macro-economic and sociocultural headwinds that watered down the effect of the fiscal and monetary stimulus packages, I would be forced to ‘off my mic’. At the end of the sermon, we were all asked to say this short prayer “Oh Lord, heal my foundation.” I also made the same prayer for Nigeria. However, deep down, I know we will need just more than prayers to address the fundamental issues hindering growth in the economy. The question remains, how long will it take to diversify the economy?
Over the years, huge amounts of investment have gone into the Agricultural sector in a bid to diversify the economy from crude oil. However, the agricultural sector remains underdeveloped and unable to sustain the economy (maybe we need to decide on what sector can really take us to the promised land). Although Nigeria is not the only country that has been gravely affected by the Covid-19 pandemic, I think it is safe to say that the Nigerian economy was already showing signs of weakness following a steady decline in crude oil prices and external reserves.
Just thinking out loud, for a country that is so rich in natural recourses, has a youthful population, favorable weather and fertile land, why do we struggle to generate multiple revenue streams? I guess it is true what they say, “one man’s trash is another man’s treasure.”
The oil sector recorded a real growth rate of -13.89 percent YoY, driven by the depressed price of crude oil this year. We also witnessed a significant drop in oil production, which declined by 18.13% YoY to 1.67 Mbps, representing its lowest level since the third quarter of 2016, due to compliance with OPEC+ cut agreements.
ICT remains the outperformer in the non-oil sector
The non-oil sector recorded a real growth rate of -2.51 percent YoY in Q3 2020, which is down by 4.36 percent relative to the rate recorded in Q3 2019, but represents an improvement of 3.54 percent when compared to the 6.05 percent contraction recorded in the preceding quarter. The gradual economic reopening pursued during the third quarter aided the improvement. The underlying subsectors that supported the non-oil sector include Information and Communication (14.56%), Agriculture (1.39%), Construction (2.84%), Financial and Insurance (3.21%), and Public Administration (3.58%).
For how long?
With the oil sector likely to remain depressed in Q4 2020, expectations of recovery will rest mainly on the future performance of the non-oil sector. We expect that the N2.3 trillion stimulus package contained in the economic sustainability plan will play a major role in supporting the recovery of the non-oil sector.
Nevertheless, the economic impact of the #EndSARS protest remains a concern as well.
All eyes are on the MPC meeting…
The MPC will be holding its last meeting for the year and with the recent macro-economic data (GDP and inflation), market participants will be anticipating the outcome of the meeting more than ever. The MPC will have to decide between further supporting economic recovery or taming inflation. The Central Bank of Nigeria unexpectedly slashed its monetary policy rate by 100 bps to 11.5% during its September 2020 meeting, bringing anchor to the lowest since 2016.
Inflation vs Interest rate (2015-2020)
*White line… inflation
*Blue line…. MPR benchmark rate
Where is the money?…….
The decision of the MPC will be a major determinant of market direction for the rest of the year. We face three
1. Bull case (rate cut): A further rate cut at the MPC will most likely renew interest on the long end of the
curve in the bond market as the short to mid end have received most of the traction in weeks. We will
also witness renewed interest in the equities market after last week’s pullback created possible entry
2. Base case (maintain status quo): The relatively quiet trend will persist in the bond and equities market.
Participants will be looking forward to the PMA on Wednesday where stop rates could print negative.
3. Bear case (rate hike): Although least likely, this would lead to a sharp knee jerk negative reaction
across all financial assets especially in the fixed income market.