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Another Bull Market in Equities?

Oct 12, 2021   •   by   •   Source: Proshare   •   eye-icon 912 views

Tuesday, October 12,2021 / 10:42 AM / by Coronation Research / Header ImageCredit: iStock

 

Whatare the chances of a bull market in equities for the remainder of 2021? Themarket rose by 50.03% in 2020, and to have two consecutive positive years inthe NGX All-Share Index is rare. However, with market interest rates lookingfairly stable, and the possibility of earnings rising, the prospects lookreasonable.



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FX

Last week, the exchange rate at the Investors and Exporters Window(I&E Window) weakened by 0.22% to N414.30/US$1. Elsewhere, the Central Bankof Nigeria's FX reserves rose by 4.34% to US$38.18bn (7 October 2021) - thehighest level since 24 February 2020 and signifying its seventh consecutiveweekly accretion. The accretion partially reflects the US$3.50bn InternationalMonetary Fund's (IMF) Special Drawing Right (SDR) allocation to Nigeria. Inaddition, the FGN also successfully raised US$4.00bn in Eurobonds last month.We expect this to give the nation's foreign reserves a boost, and we expect tosee a rise to above US$40.00bn before the end this month. Nevertheless, FXturnover on the official markers remains relatively low. Thus, there may becontinued pressure on the official and parallel exchange rates if the CBN doesnot increase supply, in our view.

 

Bonds & T-bills    

Last week, the Federal Government of Nigeria (FGN) bond secondarymarket closed on a bearish note as weak sentiments, which set in following theincreased stop rate at the last T-bill primary auction, persisted. As a result,the average benchmark yield for bonds rose by 14bps to 11.34%. The yields onthe 7-year (+20bps to 11.75%) and 3-year (+39bps to 9.22%) bonds widened.However, the yield of an FGN Nairadenominated bond with 10-years to maturityfell by 2bps to 12.00%. On Wednesday, the Debt Management Office (DMO) releasedits Q4 2021 bond issuance calendar. It will be offering N400bn to N480bn(US$973.2mn to US$1.17bn) across the January 2026, April 2037 and March 2050bonds. We note that the 2026 and 2037 instruments will be substituted in as thebenchmark 10 and 20-year bonds during the quarter (previously the 2028 and 2036bonds), while the 2050 bond will be maintained as the 30-year tenor offering.We also highlight the marginal reduction in proposed issuances in Q4 (N440bnusing the midpoint of the range) relative to the N450bn offering in each of theprevious three quarters. Buttressed by the preceding, we reiterate ourexpectation that a future rise in bond yields, if any, is unlikely to be sharpover the coming months due to unaggressive borrowing as the DMO manages itsdebt service costs.

 

Trading in the Treasury Bill (T-Bill) secondary market was mixed,albeit with a bullish tilt, as local banks invested excess liquidity in liquidinstruments. Consequently, the average benchmark yield for T-bills fellmarginally (-1bp w/w) to 5.27%. Elsewhere, the average yield for OMO billsexpanded by 15bps in the week to close at 6.47%. Specifically, the annualisedyield on a 335-day T-bill fell by 51bps to 6.98%, while the yield on a 312-dayOMO bill fell by 20bps to 7.33%. At this week's T-bill PMA, we expect the DMOto roll over N121.67bn worth of maturities.


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Oil

The price of Brent hit a peak of US$82.56/bbl last week, itshighest level since 10 October 2018, before settling at US$82.39/bbl (+3.92%w/w) at the week's end. Last week's gain marked the fifth consecutive weeklygain for the commodity. Year-to-date, Brent is up 59.05% and has traded at anaverage price of US$68.40/bbl, 58.26% higher than the average of US$43.22/bblin 2020. The price has continued to rally amidst supply concerns aroundHurricane Ida's disruptions and the persisting energy crunch in parts of Europeand China. Elsewhere, the refusal of the Organisation of the PetroleumExporting Countries and its allies (OPEC+) to increase production by more thanthe agreed-upon 400,000 bpd this month further buoyed oil prices. Consequently,we reiterate our view that the price of Brent oil is likely to remain wellabove the US$60.00/bbl mark for several months.

 

Equities

The NGX All-Share Index (NGX-ASI) clinched its fourth consecutiveweekly gain, advancing by 1.61% last week to 40,868.36 points - its highestlevel since 11 February 2021. Consequently, the index erased all its losses forthe year, ending the week with a year-to-date return of +1.48%. FBN Holdings+21.74%, Airtel Africa +6.29%, Presco +5.92% and FCMB Group +5.88% closedpositive last week, while PZ Cussons -6.09%, Honeywell Flour Mills -5.23%,International Breweries -5.21% and Ardova -2.58% dropped points. Across thesector indices, the NGX Banking index rose by +4.53%, followed by NGX Oil &Gas +0.24% and NGX Industrial +0.11% indices. Conversely, the NGX Insurance-1.51% and Consumer Goods - 0.51% indices posted losses. The Model EquityPortfolio will resume next week.


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Another Bull Market in Equities?

Last week we argued that, given the likelihood that governmentborrowing will not be aggressive for the rest of this year, future rises inmarket interest rates are likely to be muted. While there was a massiveexpansion in FGN bond yields from January until mid-May (the average yieldexpanded by 658 basis points, according to our measure), these have contractedsince then (by 175bps), with the result that FGN bonds are now performing quitewell.

 

What are the implications for the equity market? There are nohard-and-fast rules (not even in the US government debt and equity markets) forthe relationship between market interest rates and equity market performance.However, it is often the case that a steep decline in interest rates (or a longperiod of low interest rates) coincides with a bull market in equities. Thepreceding was the case - very obviously - in Nigeria in 2020 when 1-year T-billrates fell from 5.93% pa in January to 0.59% pa in December, and the equitymarket rallied by 50.03% over the year (left-hand chart).

 

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More surprisingly, when rates rose during the first nine months of2021 (1-yr T-bill rates rose from 1.78% in January to 6.98% last Friday), theequity market gains from 2020 were not reversed. One can argue that this waspartly because the market was very cheap at the beginning of 2020, so a 50.03%gain did not make it expensive. Additionally, one can also argue that, as in2020, today's investors are happy to take risk (equities) because T-bill ratesin no way compensate for inflation, which stood at 17.01% y/y in September.

 

With the equity market up 1.48% year-to-date, is it possible thatwe will see a second consecutive year of positive performance in the NGXAll-Share Index? We think that it is, even though years of back-to-backpositive NGX All-Share Index performance are rare.

 

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In our view, we expect the equity market will remain strong, giventhat fixed income yields appear to have hit the ceiling or resistance atcurrent levels. With the monetary authorities still mainly concerned withdriving growth, it seems clear that they, for the time being, seem content tosee 1-year yields substantially below 10.0% and average bond yields below12.0%. Hence, a future rise in yields, if any, is unlikely to be sharp over therest of the year.

 

Elsewhere, we think earnings are likely to be quite good in H22021, especially for the top six banks and the telcos, which together make up43% of the index. On the former, most banks stated they were implementingchanges and repricing (e.g., making loans costlier for customers) at the end ofQ1 2021 or the beginning of Q2 2021. However, to a large degree, this did notseem to play out in H1 21. Hence, we expect to see the positive pass-through ofthese changes and stable interest rates on bank earnings in the second half ofthe year. See Coronation Research, "Nigerian Banks: ResilienceBuilt-In" 25 June 2021


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