The Global Economy and financial markets reacted strongly to the spread of the Covid-19 (coronavirus) to Europe, Middle East and Africa. During the period, the reactions of the global economy resulted in big shifts in global stock markets, with stock prices declining to levels not seen since the 2008 global financial crisis. The Chinese economic growth is expected to record slow growth of 4.5% in Q1’20, representing its slowest pace in decades. Accordingly, the global crude oil market took a hit, as crude oil prices declined to an average of $52 per barrel in February 2020 (from an average of $61 per barrel in January 2020).
The implication of the spreading virus to other parts of the world meant that the steady flow of goods and services across the global economy disrupted, thus affected companies around the world, notably Apple (who announced a profit warning to investors). With over 85,000 confirmed cases of Covid-19 across the globe, the coronavirus is seen as a big
threat to the global economy. The rapid spread of the virus has resulted in the disrupted supply of goods and lost revenue for global companies amid shutdowns and lockdowns of factories, especially in China.
In the United States, the valuation of risk assets took a new turn during the period. Valuations of safe assets have increased significantly (with yields on the US 10-year government bond below 1% for the first time in history). The United States stock market also witnessed significant sell-offs, thus leading to fears of an economic recession in the United States economy.
According to the data released by the National Bureau of Statistics, the Nigeran economy grew faster than expectations in Q4’19, posting a 2.55% Q4’19 output growth. Overall for FY’19, the GDP grew by 2.27%, the highest since Q3’15. The GDP growth driver in Q4’19 was particularly owing to a sharp growth in the financial institution’s sector, attributed to the policies of the Central Bank of Nigeria on the growth of private sector credit. On a broader note, there were indications of a relatively weaker contribution from the non-oil sector from 93% in FY’18 to 91% in FY’19. We believe that the decline in the contribution of the non-oil sector to total GDP was a resultant effect of a weak macroeconomic environment, lack of effective fiscal stimulus and waning investors’ confidence in the economy.
Inflation figures for January 2020 were released on February 18, 2020. According to the data released, inflation rose to 12.13% year-on-year in January 2020 from 11.98% in December 2020. Core inflation and food inflation both rose to 14.85% and 9.35% respectively during the period. There were increases recorded in all the components of the Consumer Price Index, notably the electricity index which increased by 7.78%. We believe that the rise in food inflation, which was the major inflation driver (contributing c.50% to headline inflation), was due to the sustained border closure during the period.
The equities market nosedived to the negative territory for the first time since the turn of the year. The NSE All-Share Index declined by 9% in February 2020 to 26,216.46 points. The decline in market prices in February 2020 by 9% offset the January rally of 8%, thus taking the market to the negative zone. We attribute the stock market decline, despite being in an earnings season, to the domino effect of the coronavirus that has spread across economies of the world.
The consumer goods index declined the most in February 2020 by 18%, while the banking sector index followed with a 16% decline. For the consumer goods sector, we believe that beyond the domino effect of the coronavirus, weak growth prospects and economic outlook influenced investors’ sentiments, especially after a weak manufacturing and trade sectors
growth was reported in the Q4’19 GDP report. For the banking sector, we believe that expectations for weak earnings prospects amid heightened regulatory risk possibly played a role in the investment decisions of investors.
In the month of February 2020, 12 stocks gained, with Law Union & Rock leading the pack by a 43% price increase during the period; while 71 stocks recorded a price decline during the same period, with SAHCO (-44%) leading the losers list. Beyond the release of FY’19 results and declaration of dividends, other major developments in the stock market include the proposed acquisition of Law Union and Rock Insurance Plc by Verod Capital Management Ltd. We posit that the acquisition plans was a major catalyst to the share price performance in the month of February.
The direction of yields in the fixed income market was mixed during the period, with yields on shorter-dated instruments increasing in February 2020, while yields on longer-dated instruments declined. Specifically, yields on 1-year T-bills rose to 5.63% as of the end of February 2020 from 4.38% as of the beginning of February 2020. We note that within the period, the yield on 364-day T-bill rose as high as 6.22% before retreating. We believe that the uptick in yields to 6% levels was as a result of the repricing of yields in the secondary markets due to the higher stop rates (on 364-day T-bill), from 6.50% to 6.54% in the first
T-bills auction was done on February 12, 2020. However, the stop rate on 364-day T-bill declined to 5.70% (from 6.54% during the previous auction) in the second T-bills auction conducted on February 26, 2020. Consequently, the decline in yields in the primary market prompted a similar response in the secondary market. On the other hand, yields in the Open market operations (OMO) remained relatively unchanged at 15%, as the Central Bank continued to attract foreign portfolio investors in the economy, amid depleting external reserves.
During the month, the Federal Government of Nigeria, through the Debt Management Office (DMO) conducted a bond auction. Stop yields declined across all maturities. The DMO sold 29% less than it initially offered. The DMO offered bonds worth N140bn across all tenors. The subscription levels were high, especially on the 30-year bond.
Foreign Exchange Market
A major development in the foreign exchange market was the announcement of the CBN to expand the tenors of the OTC-settled futures FX futures to a maximum 5-year tenor (previously 1-year). The rationale for this move is deemed to attract foreign portfolio inflows, in a bid to shore up external reserves and maintain stability in the foreign exchange market. By extending the future contracts tenors, it could induce portfolio investors who had hitherto worried about the long-term currency risk of the economy to invest in Nigerian assets. The external reserves recorded a net outflow of $1.7bn in February 2020, representing a 4% decline to N36.26bn. The external reserves are currently close to the CBN’s resistance level of $35bn.
Overall, the exchange rate depreciated slightly by 0.35% in the Investors and Exporters (I&E) window to N365.25/$1 from N364.17/$1 as of the start of February. We note that the intervention of the CBN in the I & E window increased considerably during the period. Inflows from foreign investors (both FPIs and FDIs) declined to $1.18bn in February 2020
from $2.09bn in January 2020. On the other hand, inflows from the CBN rose to $2.09bn in February 2020 from $386.20mn in January 2020. We believe that the significant rise in the interventions of the CBN in the I&E window resulted in the decline in the external reserves.