February 16, 2021/InvestmentOne Report
Please click to download our January 2021 Inflation Update
· Recently, the National Bureau of Statistics released the inflation figure for the month of January 2021 which further showed the pressure on consumer prices as the headline inflation hit a near 4-year high of 16.47% from 15.75% in December 2020. In the same vein, the index rose by 1.49% on a month on month (m/m) basis, though slower than 1.61% recorded in December 2020.
· The food sub index remained the main driver of the uptick in headline inflation. The sub index rose by 20.57%y/y, the highest in over 10years, as challenges associated with food supply chain persisted. In the same vein, the index rose by 1.83% m/m slower than 2.05%m/m recorded in December 2020.
· The core sub index rose by 11.85%y/y in January 2021 from 11.37%y/y in December 2020 as FX related challenges remained. The index also increased by 1.26% on a month on month basis, higher than 1.10% recorded in December 2020.
· Going forward, we believe food sub index may maintain its fast uptrend on the back of the escalating insecurity in the country as farmers vs herdsmen crisis persists. With the exemption of items like rice, flour, sugar and cement from the list of liberalized items under the African Continental Free Trade Area (AfCFTA), we think the benefits associated with the agreement in terms of competition, which may cause prices of these items to fall, may not be realized. This may outweigh the positive impact of the recent reopening of land borders. As such, we think prices of these items may remain sticky and by extension put pressure on headline inflation.
· Despite the recent stability in PMS price, we think it is only a matter of time before the current PMS price is adjusted to reflect the current rally in oil prices (Brent is up 22%YTD) in line with the subsidy removal implemented by the Federal Government in 2020.
· In the same vein, with the possibility of increase in electricity and further devaluation, we expect prices of the core items to increase in the near term.
· Overall, we expect inflation to remain high for a while before slowing down due to high base effect. On the average, we see inflation around 15% (Our base case scenario) in 2021 higher than the average of 13.20% in 2020.
· Despite the recent increase in rates in the Fixed Income markets, we think real return may still remain negative for a while as the FG and CBN are keen on keeping Debt service and cost of borrowing respectively within control. Nonetheless, the continuous increase in headline inflation may force investors to demand for higher rates in the next bond and NTB auctions.
· With the real return on FI instruments expected to remain negative, we believe investors will still be cautiously attracted to some quality names, especially those with decent dividend yields, in the equities market. While the economy is expected to return to positive growth in 2021, we are of the view that another devaluation may attract FPI inflows into the equities market. From valuation standpoint, we believe NSE-ASI, with P/E ratio of 11.92x, is still undervalued compared to Frontier and Emerging markets with P/E ratios of 14.76x and 26.08x respectively. Overall, we expect investors to still buy some quality names as we await more corporate actions from these names in the near term.
