Monday, October 16, 2023
Last week, we wrote about Nigeria’s financial markets six months on from general elections. We featured currency, FGN bond and equity markets. But what about the humble Naira depositor and the humble Treasury bill holder? It has not been an easy year for T-bill buyers, but the good news is that things are getting better.
Last week, the exchange rate at the Investors and Exporters Window (I&E Window) lost 3.01% to close at ₦764.86/US$1. Similarly, in the parallel market, the Naira fell by 4.67% to close at ₦1,049.00/US$1. Currently, the gap between the I&E Window and the parallel market stands at 37.15%. Gross foreign exchange (FX) reserves of the Central Bank of Nigeria (CBN) slipped by 0.01% to US$33.22bn.
The Central Bank of Nigeria (CBN) lifted the restriction on the 43 items earlier prohibited in 2015 from sourcing FX from the Nigerian Foreign Exchange Market; it also reinstated its commitment to ensure supply interventions from time to time until there is stability and liquidity in the market.
We believe this move attempts to reduce the current pressure on the parallel market and mitigate the continuous fall of the Naira, creating a window for arbitrage gains, which were among the challenges the CBN sought to address with the liberalization policy. The concern, however, is the ability of the CBN to provide enough liquidity to meet the backlog of demand.
Over the weekend, the Minister of Finance, Wale Edun, disclosed that the Federal Government is currently in talks with the International Monetary Fund (IMF) to issue a fresh loan of US$1.5bn. If approved, this loan may offer a short-term cushion for the CBN to address its FX liquidity issues; it is short-term because the size of the backlog is currently unknown.
BONDS & T-BILLS
Last week, at the primary market auction for treasury bills, the Central Bank of Nigeria (CBN) offered ₦321.1bn across 91-day, 182-day and 364-day maturities. Demand at the auction was higher than at the previous auction with a bid to offer of 8.78x (versus 4.44x at the previous auction). Consequently, stop rates at the auction declined across the trio of instruments to 3.67%, 5.11% and 9.25% (versus 4.99%, 6.55% and 11.37% at the last auction). Total allotment at the auction was equal to the amount offered.
In the secondary market for Treasury bills, performance was largely bullish as average yields declined by 147bps to 6.52% pa (versus 8.00% last week). Yields across the short, mid, and long end of the curve declined by 24 basis points, 92 basis points and 184 basis points to 2.96%, 5.03% and 8.58% respectively.
In contrast, at the secondary market for FGN bonds, average yield rose by 4 basis points to 14.46%. While yields rose at the mid and long-end of the curve by 20bps and 2bps respectively, the yield on the short end of the curve declined by 14bps to 12.23%.
As noted, several times already over the past few weeks, we await guidance on the interest rate policy of the new management team at the CBN.
Last week, Brent oil prices gained 7.46% to settle at US$90.89/bbl. Year-to-date, the price of Brent crude is up by 5.80% and it has been trading at an average of US$82.24/bbl year-to-date which is 17.01% lower than the average of US$99.09/bbl in 2022.
Benchmark oil prices returned to their pre-conflict levels after worries about geopolitical tensions in the Middle East subsided in the middle of the week. However, on Friday, new worries about a potentially expanding theatre of war sent prices soaring once more.
We maintain our view that, for most of the year, prices are likely to remain above the US$75.00/bbl mark set in Nigeria’s government budget.
Last week, the NGX All-Share Index increased by 1.12% to settle at 67,200.69 points. Its year-to-date return rose to 31.12%. BUA Cement (+12.55%), Nigeria Breweries (+9.09%), and Dangote Sugar (+7.43%) closed positive while Presco (-9.54%), Ecobank Transnational (-5.31%), and Sterling Bank (-5.14%) closed negative.
Performances across the NGX sub-indices were mostly positive as the NGX Industrial Goods (+5.03%) topped the list, followed by, NGX Consumer Goods (+1.39%), NGX Pension (+1.37%), NGX-30 (+1.09%), NGX Insurance (+0.92%) and NGX Oil and Gas (+0.33%) indices. However, the NGX Banking (-0.78%) index closed in the red.
Savings rates holding up
2023 is proving a frustrating year for the saver who simply holds a T-bill or a Naira deposit. It goes without saying that most banks offer unexciting deposit rates. And 1-year T-bill rates crashed during February and March to below 4.00% per annum and, although they swiftly recovered, they dipped to around 6.00% per annum again in July. February’s crash was due to the short-lived policy to change most of Nigeria’s bank notes for new ones.
People were forced to deposit their soon-to-be-worthless notes, swelling the coffers of banks that went on to buy T-bills, forcing the yields down. The abandonment of the policy saw banks lose liquidity again in the form of banknotes and T-bill yields moved back up.
For some classes of investors, notably companies and institutions with a lot of cash at hand, there is a silver lining. This is the deposit market available to large depositors (such as financial institutions – FI) and arranged by asset management companies. Asset management companies typically gather a number of large deposits from different customers and place them with banks. And these banks give those asset management companies preferential rates for placing large amounts of money with them in one go. These can be double the rates paid to most of their deposit accounts.
The reason? Taking large chunks of deposits helps banks’ own liquidity as they contend with the Cash Reserve
Requirement (CRR) imposed by the CBN. The CRR is the percentage of customer deposits, set at 32.5%, that commercial banks must deposit with the CBN. Although there has been a loosening of CRR restriction for some banks over the past few months, it seems to us that the policy remains substantially in place today. A 90-day deposit available through this route last week yielded close to 10.00% annualised. A 90-day T-bill at that time yielded 3.19% annualised.
So, the managing of Naira deposits and T-bills this year has been less about predicting the trajectory of interest rates (who could have predicted the enormous swings created by the new bank note policy?) and more about familiarity with the available instruments. As we argued in Coronation Research, How to Manage Short-term Naira, 02 May it makes sense to set a minimum target of a double-digit yield; see how close one can get; and not to accept low yields if at all possible. These simple rules-of-thumb would have worked well this year.
How about the future? As the yield curve chart below shows, there has been little overall direction in FGN bond rates this year. And we have yet to learn of the new CBN management’s plans for market interest rates. So, in the absence of guidance on interest rates investors may continue to keep their funds liquid and obtain the best short-term rate, whether T-bill or deposit, on offer.
Model Equity Portfolio
Last week, the Model Equity Portfolio rose by 1.04% compared with a rise in the NGX All-Share Index of 1.12%,
underperforming it by 8bps. Year-to-date it has risen by 34.93% compared with a rise of 31.12% in the NGX All-Share
Index, outperforming it by 381bps.
Last week’s extraordinary performance by BUA Cement was the driver of the market. We had a neutral notional position and so were protected from underperformance on this front. It was noticeable that there was no price change, week-on-week, in index heavyweights MTN Nigeria, Airtel Africa and Dangote Cement. It is also clear that there was very high turnover in bank stocks.
We think that there is plenty of profit-taking going on in banks but that institutional investors (note that pension funds were until recently underweight equities) are taking up the slack. Taking everything together we might have performed in line with the market had it not been for a 9-basis point loss from our notional position in Custodian Investment.
Last week, and as we advised, we made notional purchases in MTN Nigeria to bring it up to a small overweight and
notional purchases in Seplat Energy in order to bring it up to a double overweight. We considered the wisdom of our small underweight position in banks (the NGX Banking Index fell by just 0.78% last week) and concluded to stick with it for now. But we will re-balance bank holdings within our small underweight to better reflect their relative weights in the index.
We will also make small alterations to our notional holdings in the biggest stocks by index weight to ensure that, with the exception of MTN Nigeria in which we intend to remain overweight, we are in line with index-neutral positions.
In addition, we will begin to take profits in Total Energies Nigeria, liquidity permitting.
Disclosure and Disclaimer
The analysts and Head of Research have prepared the report independently, using publicly available information. The information is believed to be accurate but not independently verified. The report is intended for the use of clients and should not be considered as a solicitation to buy or sell securities.
No liability is accepted for errors or omissions, and readers should conduct their own evaluations and consult with financial advisers before making investment decisions.
This report is not intended for individual investors and should not be distributed where prohibited by law or regulations.