The Federal Executive Council (FEC) announced that it has finally ratified Nigeria’s membership of the African Continental Free Trade Area (AfCFTA) ahead of the December 5, 2020 deadline. The agreement is set to create the largest trading bloc since the World Trade Organisation (WTO) in 1995. The AfCFTA which comes into effect on January 1st, 2021, is expected to expand intra-African trade through better harmonization and coordination of trade liberalization. We note that the AfCFTA agreement was initially expected to kick start in July 2020 but was extended to January 2021 due to the COVID-19 induced challenges faced by member nations.
Besides the low level of industrialisation in Nigeria compared to its regional peers, we note that protectionist measures such as border closures alongside internal crisis in member nations are key constraints that will limit the full realisation of the gains associated with the agreement. Over the long term, we believe the agreement provides the nation with opportunities in de-risking and broadening the scope of exports in the trade account and facilitating cross border investments.
The Petroleum Products Marketing Company (PPMC), in a new memo, increased the ex-depot price of PMS by 5.1% to NGN155.17/litre (September/October actual average: NGN147.67/litre) with effect from November 13. We note that unlike in September, the PPMC gave further guidance on the Expected Open Market Price (EOMP) at an estimated minimum amount of NGN161.36/litre inclusive of retailer margin (NGN6.19/litre).
However, using the distribution margin of NGN19.37 from the latest PPPRA product pricing template, we estimate the EOMP to be c. NGN174.54. With oil prices hovering between USD40/barrel and USD43/barrel, we expect the retail price of PMS to remain relatively rangebound (NGN170-175), barring any significant rise/fall in oil prices.
Equities
The bulls in the local bourse took the market to uncharted territory, as the rally on the penultimate trading day, when the ASI gained 6.23% triggered the market circuit breaker – the first time since its introduction in 2016. This led to the suspension of trading activities when the market first hit the 5.00% ceiling at 12:55 p.m, before reopening at 1:25 p.m.
Activity level mirrored the upbeat performance, as volume surged by 117.3% w/w while value spiked 158.5% w/w. Despite profit-taking activities on the final trading day, the All-Share Index remained above the 35,000 points psychological mark breached on Thursday, closing at 35,037.46 points. Notably, investors’ interest in DANGSUGAR (+34.5%), ZENITH (+21.8%), NB (+21.4%), AIRTELAFRI (+21.1%), BUACEMENT (+20.9%), and GUARANTY (+8.7%) drove the benchmark index 13.0% higher, its eighth-consecutive weekly gain. The MTD return stood at 30.6% while the YTD return for index surged to 30.5%. Performance across sectors was positive, as the Industrial (+17.0%), index led the chart closely followed by Banking (+14.4%) then Consumer Goods (+11.4%), Oil and Gas (+5.3%) and Insurance (+4.9%) indices.
In the short to medium term, we still see scope for expansion in valuation multiples as sub 1% yields on NTBs will continue to engender rejigging of portfolios towards equities. In the week ahead, we expect investors’ attention to be centred on Q3 earnings yet to be published from the big banks (FUGAZ). Considering the robust gains recorded across most counters over the past two months, we expect some profit-taking activities, albeit a short-lived one. We reiterate the need for positioning in only fundamentally sound stocks as the weak macro environment remains a significant headwind for corporate earnings.
Global economy
China’s inflation rate eased to 0.5% y/y in October (September: 1.7% y/y) – the lowest since November 2009 according to the Chinese National Bureau of Statistics. This was primarily driven by food prices (2.2% y/y vs. September: 7.9% y/y) which slowed down due to the increase in general food supply arising from the containment of the August flood crisis.
Pork prices (-2.8% y/y) also declined for the first time since April 2019, as the country’s pig herds recovered from the African swine fever. Compared to the previous month, CPI was down by 0.3% (September: +0.2% m/m), following the decline in food, tobacco and alcohol prices (-1.2% m/m) which impacted the CPI decrease by 0.39ppt.
Elsewhere, core inflation (0.5% y/y) was unchanged from September, suggesting domestic demand remained soft. Given the high base effect from last year when pork prices surged and as food supply continues to improve, we expect the headline inflation to drop further towards zero in the coming months.
Reflecting a favourable low base from the previous quarter (-19.8% q/q) as well as the ease of containment and voluntary social distancing measures, the United Kingdom (U.K) grew by 15.5% q/q in Q3-20 according to preliminary estimates from the Office for National Statistics (ONS). While this reflects a partial recovery in economic activity which was largely driven by household spending, we highlight that the level of economic output is still 9.7% below where it was in Q4-19 particularly as the pickup in business investment has been much weaker than private consumption. On a year-on-year basis, we note that the U.K economy declined by 9.6% (Q2-20: -21.5% y/y).
With the introduction of a four-week national lockdown (albeit less restrictive compared to April) to combat the second wave of the pandemic on the economy, the recovery in economic output in Q4-20 is expected to lose steam, particularly if the restrictions extend beyond December 2nd, 2020.
Global markets
Global stocks rallied earlier in the week as the announcement by renowned U.S drug maker, Pfizer, on the development of a potential vaccine with 90% efficacy buoyed investors’ appetite for risky assets. The impact, however, waned as the growing number of infections in the U.S and Europe ignited concerns that the rekindling of economic shutdowns will dampen economic activities.
In the US, the DJIA (+2.7%) and S&P (+0.8%) were on track for their second consecutive week of gains, while in Europe, the STOXX Europe (+5.1%) and FTSE 100 (+7.3%) were on track for their second consecutive weekly gains. Asian markets posted mixed performance as Japanese (Nikkei 225: +4.4%) stocks were driven by risk-on sentiment emanating from hopes of an effective vaccine while Chinese (SSE: -0.1%) stocks were flat on concerns over rising coronavirus cases globally. Emerging market (MSCI EM: +2.3%) stocks also benefitted from euphoria over the development of a vaccine which drove gains in Brazil (+1.6%), while Frontier market (MSCI FM: +2.3%) gained due to robust gains in Nigeria (+13.0%).
Source: Cordros Capital
