Tuesday, January 19, 2021 / 9:13 AM / by Coronation Research / Header Image Credit: iStock

When the World Bank recently published its GlobalEconomics Prospects, we were surprised to see a 4.1% recession estimated forNigeria in 2020. In our view, the Nigerian economy is somewhat stronger thanthat. Even though the World Bank and the IMF have enviable track records inforecasting the Nigerian economy, we think that 2020's recession will prove tobe close to negative 3.0%.

FX

Last week the exchange rate in the Investors andExporters Window (I&E Window) weakened by 0.21% to N393.52/US$1 compared tothe 1.91% strengthening to 392.68/US$1 witnessed two weeks ago. In theparallel, or street market, the Naira depreciated by 0.43% to close atN472.00/US$1 two weeks ago and a further 0.64% to close last week atN475.00/US$1. The difference between the I&E Window and the parallel marketrate has been close to 20% for some time and we expect this difference to bemaintained for several weeks, if not months.

Bonds & T-bills

Last week, the secondary market yield for an FGN Nairabond with 10 years to maturity rose by 12 basis points (bps) to 7.70% and at 7years rose by 143bps to 8.26% while at 3 years the yield declined by 5bps to4.37%. The annualized yield on a 286-day T-bill rose by 20bps to 0.84%, whilethe yield on a 284-day OMO bill declined by 5bps to 1.55%. On the TreasuryBills (T-bills) side, the average benchmark yield rose by 4bps, the bearishtrend continuing throughout the week although on a less aggressive note thanbefore. In the FGN bond market it seems that investors' expectations are forrates to increase. We expect the market to be bearish this week as investorsawait the Q1 bond issuance calendar.

Oil

The price of Brent crude fell by 1.01% last week toUS$51.10/bbl, compared with the 9.59% increase witnessed two weeks ago. Crudeoil prices recovered during the final quarter of last year, and they jumpedsharply earlier this month as Covid-19 vaccine rollouts advanced in the UnitedStates and Europe. At the same time, Saudi Arabia served a pleasant surprise tooil markets by declaring it would cut an additional one million barrels per day(1.0mbpd) on top of cuts agreed with OPEC+ (OPEC plus Russia). Bolstering oilprices is the hope that the incoming Biden administration in the US willquickly push through another round of stimulus measures. Crude oil inventoriesin the United States were down for the second week in a row, the EIA reportedon Wednesday. We believe that the recently-obtained $50.00/bbl handle is likelyto be a floor price for at least several weeks.

Equities

The Nigerian Stock Exchange All-Share Index (NSE-ASI)rose by 2.63% last week with a gain of 2.25% year-to-date. Flour Mills ofNigeria (+22.85%), Ardova Oil (+20.49%), and Mobil (+9.43%) closed positivelast week while International Breweries (-1.45%), Oando (-1.41%) and SterlingBank (-0.99%) closed negative. The NSE-ASI set a level of 41,176.14 points onFriday, its highest level in almost three years, as investors sought to extendlast year 50.03% rally.

Nigerian GDP Better ThanThought

The World Bank recently published its Global EconomicProspects for January 2021, and we were surprised to find an estimate thatNigerian GDP had declined by 4.1%, year-on-year, during 2020. We think thatthis is too pessimistic. Recent data suggests that the Nigerian economy isstronger than this.

One factor that impresses us is the reduction in therate of economic decline during Q3 2020. The headline GDP rate slowed tonegative 3.62% y/y in Q3 from 6.10% y/y in Q2. And the rate of contraction inthe non-oil economy slowed to negative 2.51% in Q3 from 6.05% in Q2. In fact,the headline rate improved despite the inclusion of the Oil & Gas sectorwhose development worsened from negative 6.63% y/y in Q2 to negative 13.89% inQ3.

The rate of contraction were lower in Q3 than they hadbeen for Q2 in the following three sectors (among the major sectors): Trade;Manufacturing; Real Estates. These account for 28.4% of GDP. Two large sectorswere still growing (and in fact did not go into recession last year). Thesewere Agriculture (30.8% of GDP) and Telecoms (11.2% of GDP). They were notgrowing quite as quickly as they had been in Q2 but were growing nevertheless(Telecoms by 17.4% y/y/).

In our model of Nigerian Q4 2020e GDP growth we havemade estimates for the top six sectors (Agriculture, Trade, Telecoms,Manufacturing, Oil & Gas and Real Estate) which together account for 79.1%of GDP. In essence we expect the year-on-year performance of the economy in Q4(NB 27.0% of annual economic activity takes place in Q4) to be close to thatachieved in Q3.

The implied full-year performance of the economy in2020 then comes to 2.9% lower than in 2019. A recession of 2.9% (or, at least,close to 3.0%) seems a reasonable outcome for 2020. This would contrast withthe International Monetary Fund's estimate of negative 4.3% y/y (though thisestimate was published back in October) and the current World Bank's estimateof 4.1%. Both institutions have an excellent track record of forecastingNigerian GDP but, on this occasion, we believe they may be too gloomy. 

Model Equity Portfolio

We often write on this page that we try not to predictthe direction of the market, rather that we buy the stocks we like whenvaluations are low. As if to demonstrate that our main skill is not to call thedirection of the market we wrote, two weeks ago: "Our current concern isthat the market is getting carried away." The market then rallied evenmore, the NSEASI closing at 41,176.14 points last Friday, its highest level inalmost three years and up 2.25% year-to-date.

Last week the Model Equity Portfolio rose by 1.91%compared with a rise in the NSE-ASI of 2.63%, thereby underperforming it by72bps. Year-to-date it has risen by 0.93% compared with a rise in the market of2.25% underperforming it by 132bps. This is a not a good start to the year,needless to say.

The equity market is still buoyant, but investors areunwilling to buy the large-cap stocks which they were buying towards the end oflast year. (Our decision, in the last week of last year, to lighten ournotional holdings of the four largest index weights has only cost us 4bps inunderperformance.) Investors are 'filling in' the market by buying midcapstocks, some which (like Ardova) are rising on the news of takeover activity.

Over the coming weeks we will consider our response,hoping to find some mid-cap stocks that fit our criteria. Meanwhile, we willcontinue to lighten our positions in the largest index weights.

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