Headline Nigeria Inflation rate edges further down to 16.05% in July
Data released by the National Bureau of Statistics showed that headline inflation rate slowed further to 16.05% (Year-on-Year) in July, a modest 0.05% decrease from the 16.10% recorded in June.
This is the sixth straight month of decline in the headline CPI rate on favourable base effect over 2016 prices. On a month-on-month basis, the Headline index increased by 1.21 percent in July, 0.37 percent points lower from the rate of 1.58 percent recorded in June.
The food sub index increased by 20.28 percent (year-on-year) in July, up by 0.37 percent points from the rate recorded in June (19.91 percent). This represents the highest year on year increase in food inflation since the beginning of the new series in 2009. The rise in the index was caused by increases in prices of bread and cereals, meat, fish, oils and fats, coffee, tea and cocoa, potatoes yam and other tubers and vegetables.
The Core sub-index, which excludes the prices of volatile agricultural produce eased by 0.30 percent during the month to 12.20 percent points from 12.50 percent recorded in June as all key divisions which contributes to the index increased. The highest increases were recorded in clothing materials and articles of clothing, furniture and furnishing, books and stationary, medical services, glassware, tableware & household utensils, accommodation services and household textiles.
This is broadly in line with expectation amid high 2016 base effect and improving access to FX, with a spill over effect of lower input cost of manufacturing. Hence, PMI sustained the uptrend, recording 54.1 in July from 52.9 in June. The reading pointed to the fourth consecutive expansion in the manufacturing sector and the strongest since the series began in December of 2014. New orders increased for the fourth straight month and production grew for the fifth consecutive month, at a faster rate. However, energy cost and stubbornly high food inflation rate remain two major concerns for the expected contraction in headline inflation in the months ahead.
Impact on Equities
On equities, we expect the gyration to continue through 2017FY, particularly on stocks with sound fundamentals and ability to turn in attractive dividend yield by year end. Likewise, lower inflation rate bears lower valuations and improved total return on equities, thus, local stocks may remain relatively cheap and attractive to foreign portfolio investors when compared to regional peers vis-à-vis P/E (11.8x) and Dividend yield (3.8%). That said, we expect further appreciation in the value of stocks contained in our portfolio and see NAV remains resilient and poised for the projected 3.00000 level in 2017-Q3.
Impact on Fixed Income Instruments
Though, negative for Fixed Income instruments, the percentage decrease in the headline inflation rate is not enough to impact significantly on current yield level. More so, the continued tightening by the apex bank in defence of the Naira through aggressive naira liquidity mop up to reduce fund availability to the DMBs, will keep rates high in the fixed income market in the sessions ahead. Hence, we expect average bond yield to sustain at the 16% level, above 19% effective yield on Treasury bills and preference tilted more to the longer duration instruments.