Tuesday, September 29, 2020 / 12:06 PM / ByCoronation Research / Header Image Credit: Invest Data

Clients who listen to our macroeconomic presentationsknow that we  consider Eurobonds issued by the Federal Government ofNigeria (FGN) to  present a sweet spot. Yields are above their long-termaverage and yet the Eurobond market seems likely to welcome a issue nextyear, given Nigeria's absence from the market in 2019 and early 2020. Soit was a Surprise to see  yields rise quite sharply last week. To our mindit seems like a case of  contagion from elsewhere in Africa.

FX

Last week the foreign exchange rate in the NAFEXmarket (also know as the I&E Window and the interbank market) hardly moved,weakening by 0.05% to  N386.04/USSI1. In the parallel, or street market,the Naira lost 0.43% to close the week at an offer rate of N4G7.00/USS1. Suchmovements conform to our view of lack of turnover in the NAFEX markettranslating into demand for US dollars in the parallel market. The NAFEX andparallel rate are 21% apart and we think there will be continued, but moderate,pressure on the parallel rate until the time comes when NAFEX liquidityimproves substantially.

Bonds & T-bills

Last week the secondary market yield for an FGN Nairabond with 10 years to maturity decreased by 3 basis points (bps) to 9.00%, andat 7 years fell by 87bps to 6.76%, while at 3 years it remained flat at 3.93%.The annualised yield on 335-day T-bill increased by stayed flat at 2.72% whilethe yield on a CBN Open Market Operation (OMO) bill with similar tenuredecreased by 29bps to 2.28%. In a N25.00bn (US$64.10m) primary market auctionof an FGN Naira bond of 5 years and 4 months duration subscriptions wasoversubscribed and N66.97bn was allotted with a yield of 6.00%. Our sense isthat the market continues to be liquid and we see moderate downward pressure onrates over the coming week.

Oil

The price of Brent crude fell by 2.85% last week toUS$41.92/bbl. The average price, year-to-date, is US$42.55/bbl, 33.72% lowerthan the average of  USS64.20/bbl in 2019. The market understands that thesupply disruptions caused by several hurricane storms on the east coast ofAmerica have passed, while the recent OPEC+ (OPEC plus Russia) meeting onlyreaffirmed the 7.7 million barrels per day (mbpd) production cuts rather thandeepening them. As  we wrote last week, we think OPEC+ may tolerate oilprices under US$50.00/bbI for a few months, until its objective of winning backat least some market share from US shale producers has been reached.

Equities

The Nigerian Stock Exchange All-Share Index (NSE-ASI)rose by 2.92% last week. The year-to-date return is negative 1.95%. Last weekNigerian Breweries ; (+25.12%), Lafarge Africa (+15.77%) and InternationalBreweries (+9.09%) closed positive, while Oando (-11.74%), Unilever Nigeria(-5.56%) and Cadbury Nigeria (-5.41%) closed down.

A Case of EurobondMarket Contagion

Last week there was a flurry of news stories aboutAfrican nations wanting to restructure private-sector debt, includingEurobonds. Zambia stated that it wished to defer interest payments on itsEurobonds until April next year. Chad asked oil trader Glencore to suspendpayments on its cash loans this year. Angola's public-sector debt restructuringwas reported not to be going according to plan.

The result was a rise in Eurobond yields. Zambia's2027 Eurobond yield rose from 21.53% to 21.64%, Angola's 2025 Eurobond yieldrose from 11.87% to 12.52%. And Nigeria's 2025 Eurobond yield rose from 5.91%to 6.58%.

This looks like a case of market contagion, or riskby association. Nigeria's public finances are very different to those of Zambiaand Angola. For example, Zambia's fiscal problem pre-date the Covid-19 crisis.Yet the market still read-across from Angola's and Zambia's problems toNigeria.

In fact, Nigeria has been conspicuous by not askingfor either bilateral or private-sector (which includes Eurobonds) debt relief.The Minister of Finance, Budget & Planning, Zainab Ahmed, has been clear onthis point. And, with the Central Bank of Nigeria's foreign exchange reservesat US$35.8bn, Nigeria's position looks much better than those of many otherAfrican countries.

In our view, Eurobonds are a sweet spot amongNigerian investments. From the investor's point of view, Nigerian Eurobondscurrently yield rather more than their average 5.8% yieldover the period2010-2019. From the issuer's point of view, Nigeria did not issue in 2019 andseems unlikely to issue in 2020, leaving the way clear for an issue in 2021.

Of course, markets are fickle. As the charts show,there was a certain amount of panic selling in March and April, which generatedexcellent buying opportunities for bold investors. And some of the last week'sbad news was already priced in (so, markets can be fickle but alsounderstanding at times). The market already knew that Zambia and Angola havetheir problems, hence their high yields. However, in the case of Nigeria therecent sell-off seems unwarranted.

Model Equity Portfolio

Last week the Model Equity Portfolio rose by 2.56%compared with rise in the Nigerian Stock Exchange All-Share Index (NSE-ASI) of2.92%, therefore underperforming it by 36 basis points. Year-to-date it hasgained 2.24% against a loss of 1.95% in the NSE-ASI, outperforming it by419bps.

The market was in an extraordinarily bullish moodlast week. Our underperformance can be attributed to the fact that we do nothave a notional position in Nigerian Breweries, which accounts for 3.08% of theindex and which rallied 25.1% on news that its parent company was buying itsshares on the open market - this accounting for some 70bps of marketperformance. At the same time there was a 15.8% rally in Lafarge Africa, inwhich we hold no notional position and which accounts for 1.78% of the index -this accounting for some 20bps of market performance.

Enough excuses! We wrote, three weeks ago, that welike banks but only hold a total notional position in them of 20.2% comparedwith their 19.2% position in the index. We need to have a much stronger weightin the banks if we truly to expect to benefit from their potentialoutperformance. We are putting our mealy-mouthed assessment from last weekbehind us and this week will take our notional position in the banks from atotal 20.2% to just under 30.0% with notional purchases.

And, since this may take more cash than we have (wehave not yet accounted for dividend year - this will feature in a separateTotal Return portfolio later) then we will trim our notional holdings in NestleNigeria, Dangote Cement and Airtel Africa in order to free up a little notionalcash.

Related to Eurobonds

1. SSA Eurobond Market in H2-2020: Monetary Stimulus to Spur Market Recovery
2. Angola Lead The Sub-Saharan Africa Eurobonds With Nigeria Strengthening In The Shadows
3. Increase in Crude Oil Price Ignites More Interest in Nigerian Eurobond Market
4. Sub-Saharan Eurobonds Rallied Following Further Oil Production Cuts By Saudi Arabia
5. Nigerian Eurobonds Sustain Rally Momentum As Global Oil Prices Continue To Gain
6. DMO Request for EOI for the Appointment of the Transaction Parties for the Issuance of FGN Eurobonds
7. Planned External Capital Raising Is to Part Finance Budget 2020 Deficit and Maturing Eurobond
8. African Countries and Eurobond Market: The Lovefest Continues in 2020?
9. African Countries Scramble for the Eurobond Market

Related to Coronation

1. In the Hands of OPECplus
2. The Policy Mix and The Markets
3. The Oil Price and Production Paradox
4. Cracks In The Bond Market?
5. No Big Change in FX Policy

Related News

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4. FAAC Disburses N696.18bn in July 2020 - NBS
5. Nigeria Needs a Clear And Single Policy Anchor to Drive Growth and Competitiveness - Biodun Adedipe
6. Comercio Partners - Leveraging Bright Investment Prospects Despite COVID-19 Disruptions
7. NLC Communicates the Decision of Its CWC on Hike in PMS Pump Price and Electricity Tariff
8. External Debt Service Under Control
9. Tackling the Infrastructural Deficit in Nigeria
10. A COVID-Driven Sharp Fall in FGN Revenue
11. Emefiele, Olugbemi, Akinwuntan Insist Banks Must Play a Critical Role to Restore Stability
12. President Buhari Justifies Borrowing to Fund Infrastructure
13. The Structural Origins of Rising Inflation
14. Headline Inflation Climbed to a 29-month High of 13.22% in August 2020
15. New Issuance, New Debt Service
16. The Policy Mix and The Markets
17. Assessing Nigeria as a Failed (Failing) State - OpEd
18. External Debt Almost Two-thirds Concessionary
19. Headline Inflation Increases By 13.22% YoY In August 2020; 0.40% Higher Than July 2020 Rate
20. Nigeria's Total Public Debt Stood At N31.01trn in Q2 2020 - NB