Welcome back! Welcome back!! Welcome back!!!
(Mase – Welcome Back)
We are back!!! Did you miss us? We hope you did because we sure did miss you. We hope you had a fantastic Christmas and New Year break? Let me start by wishing all our readers a Happy New Year from the Comercio Partners team. We wish you all a very eventful and prosperous 2021 and please, continue to stay safe because Covid-19 is very real.
Welcome to the 2021 maiden edition of Trader’s Voice. We thank everyone who journeyed with us in 2020 and hopes you continue to journey with us this year. The year 2020 just as we have mentioned in some of our previous write-ups, will go down in history as one of the most unforgettable and challenging years of all time. While we lost many lives, businesses shattered, industries destroyed, our way of life-changing drastically and more, hope was not lost as it gave birth to an array of opportunities, innovations, and new ideas.
Although the Covid-19 pandemic continues to spread even faster as we have hit the second wave as predicted by most medical experts, there is light at the end of the tunnel, as various countries across the world have begun to administer vaccines to their citizens. Nevertheless, while factoring the hopes of a very high percentage of people around the world getting vaccinated this year, we would like to share our economic outlook for the year with you.
Things you should know coming into 2021.
Land borders are open!! Nigeria closed its land borders last year to curb smuggling of goods and arms, which it says threatens efforts to boost local production and security and to generate state revenues through import duties. The announcement on the reopening of the border was made on the 16th of December 2020. The government at a cabinet meeting, approved the reopening of Seme border to the South West, Illela and Maigatari border in the North West and Mfun in the South.
It is no coincidence that the announcement came a month after the government ratified its membership of the African free-trade zone due to be launched this month. Nevertheless, the effect of the border reopening remains to be seen, as the Nigerian government maintains restrictions on importation of rice and some other products. We expect the upward trend in inflation to persist in Q1 2021 as further developments on the border and FX illiquidity will remain key drivers.
Table 1: Inflation
Yields are finally looking up…
After being on a downward trend for the most part of 2020 due to the excess liquidity created from the CBN restriction, that excluded local market participants from participating in the OMO market, we finally witnessed a spike in yields in December 2020. This knee jerk reaction seen in December was on the back of the introduction of a “Special Bill” which market participants called the “Special OMO”.
The Central Bank released a circular dated December 1, 2020, announcing the introduction of a new “Special Bill”. The new bill is a part of the Apex Bank’s effort at deepening the financial markets and availing the monetary authority with an additional liquidity management tool. However, the uncertainty around the rates of the Special Bill created uncertainty in the market which led to the knee jerk bearish reaction in December.
Liquidity to the rescue or not??
Table 2: OMO Outstanding value (2020 vs 2021)
Liquidity was the keyword last year with an OMO maturity inflow of N10 trillion between January and October 2020. Some of these funds which could not be reinvested into the OMO market due to the CBN policy found their way to the fixed income market (NTB and Bonds) and the equities market.
However, the liquidity projections for this year paints an entirely different picture with only N3 trillion OMO maturity inflow expected within the same period, meaning an estimated N7 trillion reduction compared to last year’s figures. We expect the rise in yields to be sustained in Q1 2021 as demand will be significantly depressed, with a spike also expected in supply given the size of the budget deficit for the 2021 budget (N5.60tn vs N4.97tn 2020 deficit)
Spray the Dollars…
After the strong recovery seen in the SSA Eurobond market in 2020 following the significant recovery in crude prices and the liquidity boost from global central banks through rate cuts and quantitative easing to reduce the economic impact of the covid-19 pandemic. We think the Central Banks are not done printing money yet.
The US Congress’ deal on a $900 billion coronavirus relief plan includes additional small business aid, another round of direct payments to Americans, an additional unemployment supplement and funding to streamline Covid-19 vaccine distribution.
Table 3: Angola Sovereign Yield Curve
Table 4: Nigeria Sovereign Yield Curve
Table 5: Ghana Sovereign Yield Curve
With crude oil prices trading well above $50/bl and the renewed stimulus package from the US Fed, we expect a sustained rally in the Eurobond market. Angola remains our top pick given that yields are still trading at pre-covid levels. On Nigeria front, we will most likely see a Eurobond issuance given the maturity we have this year ($500 million). We also expect other SSA countries like Kenya and Ghana to issue new Eurobonds.
When I give my attack o, you defend
Reset o your defense o
O get o, then forget na (yeah)
(Davido – The Best)
Who would believe an index that was down 23% in April, would end up becoming the best performing index in the world according to Bloomberg world equity index ranking? The Nigerian Stock Exchange All Share Index (NSEASI) outperformed all expectations by gaining 50.03% YoY to close at 40,270.72 points (vs. 26,842.07 points at the end of FY’19). Also, the NSE’s market capitalization hit an all-time high of ₦21.06tn in the year 2020.
The last time the market rallied in a similar fashion in 2017/18, it was followed by a long bear market, which bottomed out in March 2020. This begets the question “Are we going to witness a reoccurrence this year?”
Technical analysis tells us there is room for a further appreciation as the ASI approaches 2018 high of 45,000pts. While based on relative valuation, the Nigerian market PE of 15.2x remains undervalued compared to Emerging market peers (25.5x) but slightly overvalued relative to Frontier market’s (14.3x) average PE. Nevertheless, we expect policy uncertainty and potential reversal of rates in the fixed income market despite the possibility of economic recovery to significantly impact the performance of the equities market this year.