Experts in Nigeria’s financial sector say there are indications domestic prices will continue to increase as a result of limited food harvest, lingering effects of border closure and further depreciation of the Naira. In October, the country’s headline inflation notched higher by 14.23% compared to 13.71% y/y in the previous month.
While food inflation went up by 17.38% due to price increase across farm produce, processed food and imported food compared to the corresponding period of last year, they say core inflation continued as it advanced by 11.14%, the highest since March 2018
On a month-on-month basis, headline inflation increased by 1.54% – tracking significantly above the 2020 average of 1.15%.
According to the CBN Purchasing Managers’ Index survey, Nigeria’s manufacturing PMI rose above an expansionary territory for the first time since March, as it printed 50.2 points in November, October being 49.4 points.
The Non-manufacturing PMI however, continues to grapple with the impact of the COVID-19 pandemic as it remained in the contractionary zone for the eighth consecutive month. Although employment level and raw materials inventories remain in the contractionary territory, supplier delivery time was faster and production level increased.
Despite the improved readings of the manufacturing PMI in November, the sub-50 reading of the non-manufacturing PMI implies business activities are yet to return to the pre-pandemic levels. With the elevated inflationary pressure and lingering liquidity constraints in the FX market, we expect the overall recovery to be elongated.
Nigerian Stock Market
Meanwhile, after eight weeks of break from the local bourse, the bears staged a comeback dominating the market on three of the five trading days of the week. Activity level was mixed, as volume grew strongly by 153.8% w/w while value declined 38.7% w/w.
The All-Share Index settled below the 35,000 psychological mark breached in the prior week, closing at 34,136.82 points. Investors’ sell down in UBA (-10.9%), DANGSUGAR (-7.7%), FLOURMILL (-7.4%), STANBIC (-6.5%), ZENITH (-5.7%), and DANGCEM (-3.4%) drove the benchmark index to 2.6% lower, its first weekly loss in eight weeks.
The MTD return moderated to 27.2% while the YTD return for index declined to 27.2%. Performance across sectors was all broadly negative. Save for the Insurance (+0.5%) index that closed marginally positive, the Banking (-6.0%), Oil and Gas (-4.4%), Consumer Goods (-4.3%), and Industrial (-0.7%) indices closed in the red.
In the short to medium term, Investors see scope for expansion in valuation multiples as the depressed yield environment remains compelling for yield-seeking investors to rebalance their portfolio towards equities. In the week ahead, we expect a mixed market performance due to continued profit-taking activities and positioning by early birds in dividend-paying stocks ahead of FY 2020 dividend declarations. We reiterate the need for positioning in only fundamentally sound stocks as the weak macro environment remains a significant headwind for corporate earnings.
Nigeria’s FX reserves decreased by USD95.82 million w/w to USD35.51 billion, as the CBN maintained its support for the currency via its weekly interventions across the various FX windows. Across the windows, the naira closed flat at NGN385.83/USD at the I&E window (YTD: -5.5%), while it further weakened by 2.1% to NGN480.00/USD in the parallel market (YTD: -24.6%). In the Forwards market, the naira strengthened in the 1-month (+0.1% to NGN385.59/USD), 3-month (+0.2% to NGN386.08/USD) and 6-month (+0.2% to NGN386.11/USD) contracts, while it depreciated in the 1-year (-0.2% to NGN388.12/USD) contract.
Financial Experts expect CBN’s FX management strategies to continue supporting the naira at its current level at the official and I&E windows. However, it is believed that the parallel market rate will remain volatile and continue to trade above the CBN’s Relative Purchasing Power Parity and value estimate of NGN453.67/USD at the current level of intervention in the FX market.