The invasion of Ukraine by Russia began last week after months of military build-up and diplomatic activity: diplomacy failed. What are the implications for Nigeria’s financial markets? The key effects are on oil prices and Federal Government of Nigeria Eurobond yields. Last week, the exchange rate at the Investors and Exporters Window (I&E Window) appreciated by 0.18% to N416.00/US$1. Elsewhere, the foreign exchange (FX) reserves of the Central Bank of Nigeria (CBN) recorded a slight increase, gaining 0.12% to $39.84bn, the highest level since 11 February. We reiterate our view that the CBN’s position is strong as the level of FX reserves remains high in the long-term context. Hence, it seems likely that stability will be maintained in the I&E and NAFEX rates over the medium term.
Last week, trading in the Federal Government of Nigeria (FGN) secondary bond market was bullish as investors reacted to the drop in auction yields at the short end of the naira curve. The average benchmark yield for bonds declined by 13bps to close at 11.11%. Notably, the yield on the 3-year (-5bps to 8.20%) and 7-year (-6bps to 11.18%) bonds tightened while the yield on the 10-year (+70bps to 12.25%) bond expanded. Nevertheless, we expect a rise in bond yields over the medium term owing to an expected increase in domestic borrowing by the FGN. Activity in the Treasury Bill (T-Bill) secondary market was similarly bullish following the outcome of the T-bill primary auction. As a result, the average benchmark yield for T-bills fell by 68bps to 3.49%. However, the yield on the 349-day T-bill closed at 5.07%. At the primary auction, the Debt Management Office (DMO) allotted N258.01bn. $620.22m) worth of bills across all tenors. Demand was strong, as a total subscription of N602.62bn was recorded – the highest level since 11 November 2020. This implies a bid-to-offer ratio of 5.23x (vs 4.55x at the previous auction).
As a result, the rate on the 91-day bill fell by 24bps to 2.24%, and the rate on the 364-day bill declined by 85bps to 4.35% (annualised yield, 4.55%), which is the lowest level since 10 February 2021. The rate on the 182-day (3.30%) bill remained unchanged from the last auction. Elsewhere, the average yield for OMO bills fell by 68bps to 4.61%; the yield on the 221-day OMO bill declined by 152bps to 4.18%. Last week, the price of Brent rose to as high as $105.79/bbl, the highest level in over seven years, before settling at $97.93/bbl. The 4.69% gain, the highest weekly gain since 14 January 2022, offset the previous week’s loss. Consequently, Brent is up 25.91% year-to- date and has traded at an average of $89.45/bbl, 26.18% higher than the average of $70.89/bbl in 2021.
Oil prices crossed $100/bbl following expectations of escalating sanctions against Russia over its invasion of Ukraine, which continues to heighten fears that oil shipments from the world’s second-largest producer could be disrupted. Worsening the already bad situation, the Russian President has put the country’s nuclear deterrent on high alert, dampening hopes that these tensions will be quelled anytime soon.
The prospects of a return of Iranian oil to the market remain: however, the impact on the market in terms of easing supply challenges may be offset in the event that supply from Russia is impacted. In our view, the persistently low level of supply and strong demand, coupled with the existing tensions in Eastern Europe. are likely to support oil comfortably above the US$60.00/bbl mark over the first half of this year. Last week, the NGX All-Share Index gained 0.40%, halting two consecutive weeks of losses, to settle at 47,328.42 points, the highest level since 3 February. Consequently, its year-to-date return rose to 10.80%. Seplat (+7.49%), International Breweries (+4.76%) and PZ Cussons (+2.94%) closed positive last week, while Flour Mills of Nigeria (-8.83%), Honeywell Flour Mills (-7.21%) and Dangote Sugar Refinery (-7.10%) closed negative. Performances across the NGX sub-indices were broadly positive, with the NGX Oil and Gas index (+3.89%) recording the most significant gain, followed by the NGX Pension (+1.01%), the NGX Insurance (+0.73%), the NGX-30 (+0.60%) and the NGX Banking (+0.21%) indices.
On the flip side, the NGX Consumer Goods (-1.06%) index led the laggards, followed by the NGX Industrial Goods (-0.01%) index. General By reading this report the reader assents to the terms of the disclaimer and disclosures which appear at the end of this report, and which form an integral part of it.
The war will likely make nervous investors sell more, while long-term investors will weigh the odds of buying sold-off stocks at discounted values. Safe-haven assets such as gold, US dollars and US government bonds are being bought. Note that, long before war was in prospect, some large US institutional investors had rotated out of their growth stocks (including tech stocks) and into established companies with strong cash flows and strong balance sheets. For more details on these defensive strategies, see Coronation Research, ‘2022 Investment Strategy, Optimising Risk and Return’ 22 Feb 2022. Should investors in developed markets buy on the dips? The investment approach of Coronation Research is to buy value as cheaply as possible and to avoid the downside as much as possible. Think about this in the context of a listed company with strong fundamentals and healthy cash flows. Unless the company is directly caught up in the Ukraine situation (e.g. it is directly or indirectly affected by sanctions or supply chain disruptions), its cashflows will remain strong. Its stock may be marked down by traders, in which case it becomes fundamentally cheaper. This presents an opportunity to buy. The question is: “How much cheaper is it going to get?” This question never has a precise answer. So, the point is to set a range of valuations and prices at which you are prepared to purchase it. As your entry point, you may even use mean reversion to estimate a valuation level (e.g. one standard deviation below its long-term price/earnings ratio). A catalyst (e.g. a peace deal or rapid end to the war) may make the market recover, but today this is not an immediate prospect. Waiting a little is likely to pay off, but do not wait forever
Implications for Nigerian markets
Nigerian T-bill, fixed income and equity markets do not correlate with global markets. This is a strength in a situation like this.
