Domestic Macroeconomic Update
Nigeria’s Gross Domestic Product (a measure of the output of an economy) grew by 0.51% year-on-year in the first quarter of 2021. The growth recorded in the economy resulted from an improvement of 0.79% year-on-year from the non-oil sector of the economy. The improvement in the non-oil sector came from changes recorded in ICT (+6.3%), Manufacturing (+3.4%) and Agriculture (+2.28%) sectors, respectively.
Despite the growth recorded in the economy, the oil sector of the economy declined by -2.21% year-on-year, implying the fourth consecutive quarter that the oil sector has declined. This decline results from a lower oil production volume of 1.72mbpd compared with 2.17mbpd in the first quarter of 2020.
Headline inflation (general rise in the economy’s price level) for April declined for the first time in twenty (20) months to 18.12% year-on-year from 18.17% year-on-year in March 2021. This resulted from the decline in food inflation, which reflects the cost of food items to 22.72% YoY from 22.95% YoY in March 2021. However, core inflation, which reflects all other things apart from food, increased to 12.74% YoY from 12.67% in March 2021.
Financial Markets Update
The equities market recorded a loss of 3.52% in May as investors booked profits on their holdings and continue to exercise caution because of the rising yields in the fixed income market. The loss in the market was primarily because of the decline of 4.5% in the industrial sector. However, the oil & gas index recorded a gain of 14.9%, driven by gains in Seplat (+20.7%) and other small-cap names within the industry, such as Eterna Oil (+26.7%).
The market’s performance for the month was impacted by losses in Airtel Africa (-10.0%) and MTNN (-7.1%), BUACEMENT (-5.0%) and DANGCEM (-2.1%) despite gains recorded in Seplat (+20.7%), Access (+12.3%) and ZENITHBANK (+3.4%) respectively.
Fixed Income Market:
The yields on fixed-income securities continued to rise (while prices declined) in May. This is even as the average yields on fixed-income securities rose to 12.39% from 11.84% the previous month. The rise in yields is because investors continue to sell their fixed income securities to fund obligations due to the tight liquidity within the financial system.
At the treasury bill auctions held by the government within the month, the total amount of treasury bills sold was N290billion compared to N288billion sold in April. Also, the average stop rates across the 91,180 and 364-day accounts rose to 5.23% from 4.96% in the previous month.
Similarly, average stop rates at the monthly bond auctions increased to 13.77% from 13.15% in April across 2027, 2035 and 2045 bond maturities. The yields on the 2035 and 2045 bonds crossed the 14% mark at the auction, respectively. The 2027 bond had the highest rise in yield at the auction, rising to 13.10% from 12.25% the prior month.
Financial Markets Outlook
We expect activities in the equities market to be quiet as investors remain cautious due to the attractive fixed-income yields. The retail investors are likely to be the most active market participants while the institutional investors remain quiet. However, if the yields on fixed-income securities begin to decline due to aggressive purchases, we may see investors increase their participation in the equities market.
Although we expect buying interest to improve in the Fixed Income market given the attractive yield levels, we expect fixed income yields to remain at current levels as financial system liquidity remains tight and investors continue to demand higher yields due to concerns around the high inflation numbers.