Domestic Macroeconomic Update
Headline inflation declined by 19bps to 17.93% in May for the second consecutive month. Food inflation being the primary driver, fell 44bps to 22.28%, likely due to base effects. Despite the decline in food inflation, Core inflation continued to climb, rising by 41bps to 13.15%. Core inflation remains pressured by pandemic-induced disruptions, insecurity, as well as weaker currency impacting commodity prices.
Purchasing Manager’s Index (PMI) for June stood at 53.6, although slightly lower than the 54.4 recorded in May, but still reflects improvement in business conditions and extending the period of expansion to 12 consecutive months. The reading was underpinned by new orders reaching a 17-month high, slight moderation in output and a steep rise in purchase costs.
Financial Markets Update
The NSE ASI maintained bearish sentiments within the quarter and closed the month of June in the red, with an MTD performance of -1.38%, QTD performance of -2.91% and Year To Date performance printing -5.87%.
The market was largely quiet and dominated by speculative investors who took profit on positions and reinvested in the relatively attractive fixed-income yields. Institutional investors remain cautious and continue to stay on the sidelines.
The market recorded a gain in April (+2.02%) as investors reacted to the impressive first-quarter financial performance. However, the rising yields in the fixed income market soon sparked profit-taking as it recorded losses after that.
The negative performance resulted from losses in the Banking index (-0.87%) and Industrial goods index (-0.11%) despite the gains recorded by the Consumer goods (+10.67%) and Oil & Gas (+17.76%) indices, respectively.
Specifically, the negative performance drivers were Airtel (-28.20%), Stanbic (-21.46%), Guinness (-14.45%) and BUA (-2.72%) while names like Seplat (+25.45%), Okomuoil (+22.22%), NB (+23.71%) and Nestle (+12%) supported the index.
Fixed Income Market
The fixed income market took a break from its bearishness in June after rising to a YTD peak in late May, as demand drove yields downwards both at the primary and secondary markets for FGN Bonds and Treasury Bills. Despite the May inflation figure, which moderated YoY, remained high, and the tight system liquidity was witnessed within the month, which would ordinarily have led to a bearish outcome.
Average secondary market bond yield rose by 340pbs in Q2 over Q1, with higher increments seen at the short (+379bps) and long (+327bps) ends of the yield curve compared with the mid-end (+317bps). Similarly, average yield at the secondary market for NTB rose by a significant 377bps QoQ to 5.42%, driven mostly by higher yields on longer maturing instruments.
Over the quarter, the average stop rate at the FGN Bond auction rose significantly in May (13.77% vs 11.10% in April) but declined to 13.32% in June as the subscription rate improved by almost 50%. Similarly, at the NTB primary auction, the stop rate on the 364-day instrument declined to 9.15% from a peak of 9.75% in early May as demand for a 1-year instrument increased.
Financial Markets Outlook
We expect to see improved activity in the equities market in the coming month, particularly as we approach the earnings season; investors are likely to react positively to stocks with impressive first-half financial scorecards and interim dividends. Also, improving macros and crude oil revenue bodes well for equities. However, the high yield on fixed income instruments remains a significant risk.
The buying interest witnessed in June is expected to persist in the coming months, given the expectation of increased liquidity from FGN 2021 Bond maturity, coupons, NTB and OMO maturities in July as investors seek to reinvest their proceeds. A further but moderate decline in yield is anticipated from the increased demand, but we expect rates to remain elevated.
In the Eurobond space, the approved external borrowing is expected to increase the supply of sovereign issues, possibly leading to a repricing of existing instruments. In addition, crude oil price movement, US inflation rate and Fed’s decision on policy rate are expected to drive further volatility in the market.