Bond yields revved up over the last one week driven by sell-offs on auction bonds (in particular the 25-year) where yields crossed 13%. Though the Q2 2021 bond auction calendar points to a modest increase in borrowings by the DMO, the underlying driver of the sell-off appears to be forced liquidations of excess short-money positions from the March 2021 bond auction, amid another short-lived strain in the banking sector liquidity.
Liquidity squeeze across money markets drive money market rates higher: The step-down in OMO maturities over April implied that money markets were heading into a tight liquidity period. Unlike the usual NGN200-300billion weekly maturities, April opened to only NGN49billion in OMO maturities which implied tight funding positions across. Accordingly, interbank lending rates spiked to 30%, and though this subsequently receded, it remained in double digits. Placement rates for large institutions have moved to 7-8% from 0-1% levels at the start of 2021.
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‘Margin calls’ trigger sell-offs on the 25-year, resets curve to December 2019 levels: The steepening along the Naira yield curve resumed last week with an average increase of 41bps (YTD: +439bps) driven by over 120bps jump in the 25-year bond (2045). As I noted in my review following the bond auction, the DMO overallotment meant that everyone who needed a bond got on including speculative bids from short-money accounts (brokers). The overallotment resulted in these short-money winners having more bonds than their leverage financed positions could have permitted implying these excess positions needed to be sold off. Unfortunately, the over-allotment meant limited secondary market demand at current yield levels. Compounding the situation was the funding squeeze across the banks, who now applied pressure on these short-money positions to exit these auction bond positions (a sort of margin call). As consequence, these 2045 bond auction winners soon turned into desperate sellers and flooded the market with offers seeking to hit the bids. Above 13%, demand predictably returned and helped calm markets. Beyond the 2045, there were limited desperate offers on the other tenors which has resulted in a mispricing that should adjust in the coming days. The lesson here is in a tight liquidity environment as we are moving towards, bond auction over-allotments hold the risk of sell-offs by short-money traders.
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Figure 2: NGN Yield Curve
Source: FMDQ, NBS
Q2 2021 Bond calendar: The Debt Management Office (DMO) released the Q2 issuance calendar wherein it will seek to borrow between NGN450-540billion with the upper end pointing to an extra NGN90billion worth of sales. In my opinion, the bond calendars are not indicative of the evolution of actual borrowings as the DMO has shown a pattern of being highly sensitive to market liquidity conditions (with overallotments in coupon heavy months and under allotments during tight spells) while making maximum use of non-competitive bids. For evidence look no further than in Q1 2021 when the DMO sold bonds with face value of NGN637billion well above target of NGN450billion. Perhaps surprising is the planned re-opening of the 2049s at the May auction which looks odd but could indicate the existence of a large non-competitive bidder who wants the tenor.
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FX reserves continue to track higher, Eurobond conversations get underway: Foreign reserves continued to rise, up 0.6% w/w to USD34.9billion which suggests the impact of higher oil prices is starting to feed through. This comes just as news of parties being appointed for a Eurobond sale gathers steam. Depending on the size, and I expect a record sale, near term foreign reserve outlook appears positive. Throw in the upward adjustments in interest rates and moves to cultivate remittance inflows, Naira outlook appears on less shaky footing than in recent times. On this wise, the currency continues to hold around the NGN410/$ handle in the NAFEX window (Friday: NGN409/$) and NGN482/$ at the parallel market.
The Week ahead (April 12-April 16, 2021)
In the week ahead, system inflows are thin comprising OMO bills (NGN10billion) and NTB maturities (NGN70billion). As such there will be an NTB auction on Wednesday and possibly an OMO sale on Thursday. In keeping with the trend in recent auctions, the 1yr will likely take another step closer to parity with the OMO bill with a potential stop rate of 8.5-9%. A flurry of large corporate debt sales is also underway led by MTN and Dangote Cement which could take out NGN200billion. Funding pressures will continue to force banks to reduce trading positions but on a lesser scale than in the prior week. In terms of data releases, the NBS should announce the March inflation numbers.
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Inflation likely accelerated in March to over 18%: The National Bureau of Statistics (NBS) looks set to publish the March 2021 inflation numbers. Though fuel prices have stabilized after Nigerian authorities elected to continue working out a resolution with labour unions, food prices have continued to accelerate over the lean season. Though monthly trends likely remained sticky, the year-on-year comparison still points to over 20% increases in food prices which cover over half of the CPI basket. With this in my mind, my expectation is for the headline print to come in at 18-18.2% with the monthly print at 1.55-1.58%.
Term premiums have started to moderate reflecting the NTB re-pricing but the next big move on interest rates is the May 2021 MPC with the key data point of Q1 2021 GDP. In the event, Nigeria consolidates on the exit from recession with a positive growth read, then I expect the CBN to hike monetary policy rates by 200bps accompanied by an upward adjustment in the 1-year OMO and May 2021 SPEB maturities to at least over 12-13% levels as a first step towards managing inflation expectations.
Best performing Mutual Funds in Q1 2021
Information got from the Security and Exchange Commission (SEC), showed that lone 25 shared assets out of the 118 enlisted assets in the long stretch of February recorded value gains in the time frame.
Common assets have consistently been considered as a decent elective venture opportunity, especially for retail financial backers since it gives them admittance to expanded and expertly oversaw portfolios at a low cost.
In the wake of conveying an amazing development of 51.6% in 2020 and commencing 2021 with a negligible decrease of 0.13% in January, the complete net resource estimation of the enlisted common assets additionally declined further by 0.94% among January and February 2021.
As per SEC, the complete net resource estimation of the 118 enrolled shared assets in Nigeria was N1.56 trillion across the 9 common asset types offered as of February 26, 2021.
A comparison of the performance of the fund types month-on-month indicated that despite the fall in total net asset value at the end of February, real estate bonds’ net asset value grew by 17.48%, exchange traded bonds by +11.72%, fixed income funds by +5.27% while the bond funds grew by +1.26%. The infrastructure bonds sustained their value in January, recording no change in the month. Other funds recorded losses with the money market fund recording the highest loss of 7.09% in net asset value during the month.
It is also worthy of note that out of the 118 registered mutual funds, only 32 mutual funds had increased in net asset value between January and February 2021 while only 25 mutual funds had increased in unit price.
Below are the top-performing mutual funds in the month of February 2021. We also highlighted their performance in terms of returns and changes in net asset value and included profiles of the funds as described on their websites.
FBNQuest Asset Management Limited – Retail (Bond Funds)
The FBN Nigeria Eurobond is a fixed income mutual fund that invests in the US Dollar-denominated debt instruments issued by the Nigerian government and reputable corporate institutions. Investments can be made into this fund by both retail and institutional investors.
To get started as a retail investor, a minimum investment of $2,500 is required and the minimum holding period is 180 days.
January 29, 2021
Fund Price – N49,736.31
February 26, 2021
Fund Price – N51,765.35
Return – 4.08%
Ranking – Fifth
Commentary: The retail bond fund package of FBNQuest Asset Management Limited performed as the fifth-best fund in February 2021. The unit price appreciated by 4.08%, closely behind the growth of the institutional bond fund managed by the same asset manager.
The net asset value of the fund increased by 7.81% from N4.62 billion as of 29th January 2020, to N4.98 billion as at end of February 2021.
FBNQuest Asset Management Limited – Institutional (Bond Funds)
The FBN Nigeria Eurobond (USD) designed for institutional investors is also invested in US Dollar-denominated debt instruments issued by the Nigerian government and reputable corporate institutions and managed by FBNQuest Asset Management Limited.
To begin investment as an institutional investor, a minimum of $100,000 is required for a minimum tenor of 180 days.
January 29, 2021
Fund Price – N49,681.06
February 26, 2021
Fund Price – N51,712.01
Return – 4.09%
Ranking – Fourth
Commentary: The FBNQuest Asset Management Limited bond funds created for institutional investors is the fourth in the list best performing fund in the month of February, growing its unit price by 4.09% and net asset value by 4.41% from N578.37 million in January 2021 to N603.85 million in February 2021.
Nova Dollar Fixed Income Fund (Fixed Income Fund) – Novambl Asset Management
Nova USD Fixed income fund is an actively managed open-ended unit trust scheme managed by Novambl Asset Management. The fund has an asset allocation range target of 0% – 80% on sovereign Eurobonds, 0% – 80% on corporate Eurobonds, 0% – 50% on money market instruments and finally 0% – 5% on Cash.
The issue price is $100 per unit and the minimum initial investment for the offer is 5 units of the funds, while additional/subsequent investments will be issued in multiples of 5 units and payable in full, upon subscription.
January 29, 2021
Fund Price – N393.57
February 26, 2021
Fund Price – N410.23
Return – 4.23%
Ranking – Third
Commentary: Nova dollar fixed-income fund, managed by Novambl Asset Management Ltd, recorded unit price appreciation of 4.23% from N393.57 in January 2021 to N410.23 in February 2021. The fund’s net asset value also increased by 4.17% from N122.95 million as of 29th January 2021 to N128.08 million at end of February 2021.
United Capital Euro Bond Fund – United Capital Asset Management Limited (Bond Funds)
The United Capital Nigerian Eurobond Fund is an open-ended mutual fund that invests in dollar-denominated euro bonds, floated by the Federal Government of Nigeria, Nigerian top-tier banks, and corporates.
Investors can start with a minimum of 10 units, with each unit costing $100 and multiples of 5 units can be purchased thereafter.
January 29, 2021
Fund Price – N46,347.64
February 26, 2021
Fund Price – N48,466.73
Return – 4.57%
Ranking – Second
Commentary: The euro bond fund owned by United Capital Asset Management Ltd recorded a unit price growth of 4.57% in February 2021. The net asset value however declined by 3.61% from N29.74 billion as of 29th January 2021, to N28.67 billion at the end of February 2021.
Stanbic IBTC Dollar Fund – Stanbic IBTC Asset Management Limited (Fixed Income Funds)
Stanbic IBTC Dollar Fund (SIDF) is an open-ended fund launched in January 2017. The fund invests a minimum of 70% of its portfolio in high-quality Eurobonds, a maximum of 25% in short-term USD deposits, and a maximum of 10% in USD equities.
The expense ratio of the fund is 1.5%. The minimum investment amount is $1,000 while additional investments is $500. All investments must be held for a minimum period of 180 days.
January 29, 2021
Fund Price – N485.29
February 26, 2021
Fund Price – N507.73
Return – 4.62%
Ranking – First
Commentary: This is a dollar fund by Stanbic IBTC Asset Management Limited, which led the list of best-performing mutual funds in the month, appreciating by 4.62% in February.
Also, the net asset value as of 26th February 2021, was N119.23 billion indicating a growth of 3.50% when compared to N115.20 billion recorded as of January 29 2021.
The following are the other top 10 performing funds on our lists in ascending order:
Lotus Capital Fixed Income Fund – Lotus Capital Limited (Fixed Income Fund)
Return – 0.68%
Anchoria Equity Fund – Anchoria Asset Management Limited (Equity-Based Funds)
Return – 0.77%
SFS Fixed Income Fund – SFS Capital Nigeria Limited (Fixed Income Funds)
Return – 1.00%
Cordros Dollar Fund – Cordros Asset Management Limited (Fixed Income Funds)
Return – 1.51%
ARM Discovery Balanced Fund – Asset & Resources Management Company Limited (Mixed Funds)
Return – 1.58%
Crypto may suffer setbacks, remain trading within speculative confines except … – DLM Capital CEO
Several Nigerians, including Vice President Yemi Osinbajo, have called on the apex regulators of the banking and Financial market sectors, the Central Bank of Nigeria and the Securities and Exchange Commission (SEC) to implement a regulatory framework for Cryptocurrency transactions in the country.
In this interview with Nairametrics, Sonnie Ayere, the Group Chief Executive Officer of DLM Capital Group, a firm that has been at the forefront of creating alternative financing solutions for businesses and providing bespoke innovative ideas to access funds for growth, bared his mind on the subject.
To him, without a status of cryptocurrency as a medium of financial exchange by the majority, it could suffer setbacks and remain trading within speculative confines related to commodities, like gold.
What growth trajectory do you predict for the Nigerian economy in 2021 after recovery from recession?
We believe that the post-recession economy for Nigeria in 2021 would reflect significant growth as the effects of the Covid-19 pandemic on the economy wanes with the resumption of vaccinations to beat back its spread. Businesses requiring customer visits were most severely affected in 2020 by lost patronage. While manufacturers, and marketers alike, carried on with stable, unthreatened production levels and supply of goods; the challenge was how to get customers to pick and purchase them. This inspired a rise in demand for delivery options, by both customers and sellers; thus, we have indications of further potential in new and existing delivery and logistic companies, online retailing, and online payments for sales beyond fixed locations or outlets.
We expect the post-recession economy to exceed its current state in economic performance as this is a state for which most movement restrictions have been eased, and the conduct of business for physical transactions has resumed. We believe that the earlier formed opinions on the Nigerian economy forecasted a more than a transient period of recession relative to other countries facing the same. We believe this was premised on significant negative expectations of anticipated weak responsiveness from the government, high infection rates and perceived challenges of financing and management of the pandemic.
The year 2021 resumed with increased activity in the global economy which has induced higher price levels for commodities following a rebound in demand. In Nigeria’s case, this is relevant to the nation’s Crude Oil exports. Nigeria is again opportune with increased revenues and a chance to increase its savings.
Despite the disruption triggered by the COVID-19 pandemic, Agriculture, ICT and Financial Services sectors have remained resilient. What do you think is responsible for this and which sectors do you see driving further growth in 2021?
For these three sectors mentioned, the most profound contributions came from the ICT services, because it largely facilitated greater levels of transactions for the financial sector particularly with regards to growth in electronic payments and online merchandising. Agriculture particularly thrived as supply chains faced little threats with movement restrictions, and unlike most other sectors, enjoys steady demand. The prize for value should go to ICT related services for easing the sales of goods and services away from physical markets where people would ordinarily transact.
The Federal Government has presented a budget estimate of 13 trillion with a historic deficit of N5 trillion. How realistic do you see the 2021 budget in line with the assumptions?
Overall, higher oil prices translate to stable expectations on financing with crude oil production and sales. The expectations of performance from that should be covered with increased global energy consumption. Higher revenue from sales also affords the country a greater capacity to service future debt financing payments, which also translates to lower borrowing costs.
What would be critical is the government’s success in increasing tax revenues in the face of depressed economic activity and its ability to raise debt and conduct asset sales if needed.
What is your assessment of the investment climate in Nigeria on the back of COVID-19?
The Investment climate in Nigeria following the Covid-19 outbreak is shaped to reflect the economic situation following the impact felt within average households, and these are lower average earnings per household, a reduction in businesses that can breakeven, and a need for preserving wealth.
For the Financial Markets, the trend is of lower yields for all fixed-income investments; these span government treasury bills and bonds, corporate debt, that is commercial papers and corporate bonds, and even rates on bank deposits. For the stock market, 2020 featured a strong rally though corporate performances were varied, clearly reflecting differences in customer patronage of underlying sectors. We believe it was a clear search for yield as many companies offered attractive dividends relative to their trading prices.
What will be the outlook for the Nigerian fixed income market in 2021 in terms of the regulatory landscape and opportunities for investors?
For the fixed income market for 2021, we anticipate an increase in corporate issues from companies familiar with the financial market and “in-pipeline” transactions from new corporate prospects. The focus would be access to the current lower market rates at different tenures and refinancing their existing debt at these lower rates. We expect to also see increased issuance of commercial paper to shore up working capital for financing inventory.
We anticipate support from our regulators as we push for the inclusion of more companies into the opportunity space for all stakeholders in our domestic financial markets. However, there appears to be a push for higher rates by the main buyside operators, hence an increase in FGN yields.
The Nigerian equity market was on a rally that triggered a circuit breaker on the NSE recently, what does this mean for the market’s outlook?
The impressive rally of equities in 2020 was triggered by investors searching for higher yields. It is only rational that some investors would reconsider their aversion for stocks and seek the upside offered by rich dividend income relative to fixed income investments at the time. Institutional investors have for a recent while favoured fixed income and backed down on taking on equities; fixed income yields in the market had sufficed for the performances of their managed portfolios. We have seen this change with the rally and we do hope for better corporate performance to sustain strong fundamentals for each component industry represented on the Nigerian Stock Exchange All-Share Index.
From an investment perspective, what investment options would you advise investors (retail and institutions) to focus on in 2021?
2021 presents opportunities for value investors as some domestic company stocks remain undervalued relative to similar companies in other foreign stock markets. A domestic investor should focus on companies that have either better endured or increased their sales channels beyond the pre-pandemic levels.
In the fixed-income space, it is important to note that upcoming deals will seek to capitalise on current market offered rates as some sectors of the Nigerian economy ease back into profitability under rising economic activity. Current traded debt securities would be more attractive and priced to yield lower based on improvement in economic conditions.
The theme for investment should be the location of the business front. Many location-based businesses that an individual would traditionally visit to view and purchase merchandised products have had to step up on selling efforts by expanding sales channels beyond their physical location by way of promoting brands and products via social media, their e-commerce sites and offering online options of delivery and payment.
The frontier for distribution has been stretched to include mobile devices with online payments; investors must seek where revenues are secured with a focus on distribution costs.
What is the future of crypto regulation in Nigeria, and what are the gains of Nigeria adopting a digital currency?
Ultimately on admission as an acceptable medium of exchange; some form of regulation under the ambit of the monetary authority and the securities exchange commission would be handed down to manage its effects on the economy as currencies do. The adoption of cryptocurrency as an acceptable medium of transactions included in monetary resources across more countries would most likely precede its adoption in Nigeria; we do feel these would be soon addressed by individual countries and the International Monetary Union as full adoption of cryptocurrencies quite literarily portend some displacement of currently accepted international currencies in international trade, a development member countries which own the major currencies would most likely resist; and of course, countries with currencies out of this group, would most likely support.
Without a status of cryptocurrency as a medium of financial exchange by the majority, it could suffer setbacks and remain trading within speculative confines related to commodities, like gold.
Some critics have argued that there are other ways for the CBN to curb illegal transactions instead of placing a ban on crypto transactions. What is your take on this?
There is no argument that there are other ways to curb illicit flows, but with an unregulated status, it would be natural for the apex bank to view some transactions as ‘rogue’; that is, operating without oversight, controls or data on source and destination of transactions. Until the monetary authority props its infrastructure to monitor and regulate this, cryptocurrencies would be seen to support parallel transaction ecosystems.
NCDMB’s Oil and Gas Parks and their many adversaries
In 2018 the Nigerian Content Development and Monitoring Board (NCDMB), the body saddled with driving the development of Nigerian content in the Nigerian oil and gas sector, did a groundbreaking of the Nigerian Oil and Gas Park Scheme (NOGAPS), a scheme that involves the construction of sprawling oil and gas parks in Bayelsa, Imo and Cross Rivers State.
In a visit last week to one of the parks currently under construction in Emeya 1, Ogbia, Bayelsa State, the Minister of Petroleum for State, Chief Timipre Sylva, expressed delight at how the project was quickly progressing and was now at 70% completion. Mr Simbi Wabote, Executive Secretary of the NCDMB, during the visit also noted that the Oil and Gas Park project “is in line with the Federal Government’s mandate to develop indigenous capacities for the oil and gas industry.”
While this is highly commendable, as the project will indeed reduce Nigeria’s dependence on import of oil and gas equipment and provide jobs for local indigenes -which would likely reduce restiveness in the area-, there exist significant challenges to this project achieving its goals.
Perhaps one of the biggest of them is the African Continental Free Trade Area (AfCFTA) regime which is expected to open Nigeria’s borders to an influx of imports from other countries within Africa. Beyond opening the borders, however, the tax treatment given to domestically produced items will be no different from similar products imported, and the typical tariffs for imported items will be removed.
This essentially means that large and established original equipment manufacturers (OEMs) from other African countries may on the basis of their economies of scale be able to supply the same products produced in the oil and gas parks at lower rates. A report by Dun & Bradstreet reveals that in Africa, countries like Guinea, Gabon, Burkina Faso and Ghana that flank Nigeria play host to various oil and gas OEMs.
With the large oil and gas market Nigeria has, these companies will seek to make inroads into Nigeria under the AfCFTA regime. This will mean that the new businesses within the NOGAPS will face intense competition from foreign players that do not have to battle with tariffs and different tax treatment. Additionally, the Nigerian culture of preferring imported products over domestically manufactured ones might play a role in this, particularly if the prices of the imported ones even up with domestically produced ones or only have a slim margin.
If the patronage for Innoson vehicles is anything to go by, in a market where there is no real difference in price between that and the domestically produced ones, we will see a preference for imported products.
All of this will be further aggravated by Nigeria’s doing business difficulties. Things like delays in obtaining permits, approvals and licenses, the corruption that accompanies these processes, weak currency and dual exchange rates, poor infrastructure and lack of power supply abound. While the Nigerian businesses struggle with this, their foreign counterparts get to produce under more convenient conditions and are thus able to deliver within time and without the additional costs passed to consumers through these poor doing business practices.
While Mr Wabote has promised that the park in Ogbia will have dedicated power supply, it is hard to imagine that this power will not significantly cost the businesses if they are served at maximum capacity. At number 131 on the World Bank’s Ease of Doing Business Ranking, a park would not solve Nigeria’s problems, only a positive commitment to fix these doing business issues will.
The christening of a park as an “oil and gas park” in the 21st century, where countries of the world –and indeed private companies- are working towards achieving increased use of cleaner energy sources, is counterintuitive. The park should be an energy park that integrates significant research and development in its function as well as innovation and production of renewable energy equipment, both adapted to benefit from local conditions and standardized for export purposes.
It seems too, that not much consideration has been given to export of these equipment, as the parks earmarked so far are in landlocked Imo, port-less Bayelsa and Cross River that feeds into Cameroon, which is not a very prime market, although the DRC on the other end could attempt to compensate for this. It might be worth considering, the setting up of a park in Lagos – perhaps in the same vicinity as the Dangote refinery.
The park would benefit from being able to supply equipment to the refinery (especially as the refinery starts production in early 2023). It will also be able to tap into the global market through export via the Lekki port. This might also be a good time for the Agge deep sea port mulled by the Bayelsa State government to come onstream to open up the Ogbia park to a global market.
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