Global Economy

According to the Chinese National Bureau of Statistics (NBS), China’s manufacturing PMI rose slightly to 50.2 points in February (January: 50.1 points) – marking the fourth consecutive month above the 50-points growth threshold amidst the seasonal disruption to production in line with the Lunar New Year holiday. We highlight that new orders (50.7 points vs January: 49.3 points) expanded for the first time in seven months in line with increased demand from consumers, while the production index (50.4 points vs January: 50.9 points) remained above the 50-points benchmark for the fourth consecutive month. Elsewhere, the non-manufacturing PMI settled at 51.6 points in February (January: 51.1 points), in line with the ease in COVID-19 infections during the period. We expect factory activity to slow in the short term, given the (1) interruptions caused by the winter Olympics and (2) lingering supply chain constraints. Similarly, we expect the pace of expansion in business activities to moderate, given the recent surge in new daily COVID-19 infections in some parts of the country.

According to the IHS Markit, Euro Area’s composite PMI rose to 55.5 points in February (January: 52.3 points), the highest level since September 2021 (56.2 points). The expansion was primarily driven by business activity as measured by the Services PMI (55.5 points vs January: 51.1 points). We highlight that growth in business activity was driven by the relaxation of containment measures introduced to limit the spread of the Omicron variant of COVID-19. Accordingly, domestic demand accelerated as spending on consumer-facing services increased. Meanwhile, the Manufacturing PMI (58.2 points vs January: 58.7 points) remained in the expansionary region, supported by new orders, which buoyed higher production volumes during the period. Although we expect the service sector to continue to support the overall private sector activity in the short term, we expect the impact of (1) Russia-Ukraine crisis uncertainties, (2) higher commodity prices and (3) lingering inflationary pressures to constrain growth prospects in the coming months.

Global Markets

Like the prior week, global stocks tumbled as investors fled to safe-haven assets amid fears of a potential nuclear disaster following reports that Russia’s gunfire caused a fire at Europe’s largest nuclear plant. Furthermore, mounting concerns over the economic impact of Russia’s invasion of Ukraine and expanding international sanctions on Moscow continued to weigh on sentiments. Accordingly, US (DJIA: -0.8%; S&P 500: -0.5%) stocks were on track to close the week in the red. European stock markets (STOXX Europe: -3.6%; and FTSE 100: -3.3%) were on course for another weekly loss as signs that Russia’s invasion of Ukraine was intensifying drove selloffs in banking and auto stocks. Asian markets posted broadly negative performances, as the Nikkei 225 (-1.9%) settled lower taking a cue from the selloffs on Wall Street. Similarly, the SSE (-0.1%) declined marginally despite investors’ negative reaction to the Russia-Ukraine war-led damages to a nuclear power plant. The Emerging (MSCI EM: 0.0%) markets stocks were unchanged while the Frontier (MSCI FM: -2.2%) market stocks mirrored the downtrend in global equities consequent upon losses in Nigeria (-0.1%).

Nigeria

Economy

The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in February (based on January revenue) declined by 17.9% m/m to NGN574.67 billion (January: NGN699.82 billion) – the lowest since June 2020 (NGN547.30 billion). We highlight that the reduced pay-out was due to the significant month-on-month reduction in the receipts from Petroleum Profit Tax (PPT), Companies Income Tax (CIT), and Oil & Gas royalties. In terms of allocations, we note that the FGN received NGN204.58 billion (January: NGN279.46 billion), State Governments received NGN238.21 billion (January: NGN256.48 billion), while the Local Governments received NGN131.88 billion (January: NGN163.88 billion). Despite the rally in oil prices, we expect receipts from oil revenue to remain low given (1) low crude oil production volume and (2) deduction of fuel subsidy payments. Thus, FAAC allocations to the three tiers of government could be constrained by lower oil receipts over the short term. Nonetheless, we expect receipt from the non-oil revenue to be supported by the continued recovery in economic activities.

Nigeria’s oil sector continues to grapple with low crude oil production in line with challenges facing the sector. According to OPEC’s Monthly Oil Market Report (MOMR), Nigeria’s crude oil production (excluding condensates) averaged 1.40mb/d in January (December 2021: 1.32mb/d) – 16.7% below OPEC+ production agreement (1.68mb/d) for the month. For us, the chief factor responsible for the lethargic performance of the oil sector relates to the difficulties in restarting the oil wells for operation after the COVID-19 induced shutdown. Other factors contributing to the recurring low crude oil production level include (1) infrastructure decay, (2) divestments given the challenging business environment amidst companies’ move to cleaner energy sources, and (3) oil thefts. Overall, we do not expect a significant improvement in crude oil production over the short term, given the nature of challenges hampering production. Accordingly, we expect the government’s oil revenue performance to be underwhelming over the short term despite the rally in crude oil prices.

Capital markets
 
Equities
 
Although the local bourse opened the week on a strong footing, the bullish momentum lost steam as investors took a breather later in the week to digest corporate earnings released thus far. Midweek selloffs undermined the market performance as the All-Share Index settled 0.1% lower to close at 47,268.61 points. Particularly, intense profit-taking activities witnessed in INTBREW (-9.1%), WAPCO (-8.8%), NASCON (-8.3%), DANGSUGAR (-7.7%), UBA (-5.2%), and GUINNESS (-4.4%) drove the weekly loss. Consequently, the MTD and YTD return for the index moderated to -0.3% and +10.7%, respectively. In terms of activity levels, trading volume declined by 17.2% w/w, while trading value grew by 22.8% w/w. On sectors, the Oil and Gas (+10.6%) index was the lone advancer while the Banking (-2.7%), Consumer Goods (-1.7%), Industrial Goods (-0.7%), and Insurance (-0.2%) indices declined.      

We expect investors to take advantage of the significant moderation in the share prices to make a re-entry in dividend-paying stocks in the week ahead. However, we envisage a zig-zag pattern as intermittent profit-taking activities will likely persist due to medium-term expectations on the direction of yields in the FI market.  Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the unimpressive macro story remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate contracted by 117bps w/w to 13.8% this week, as inflows from FAAC disbursements (NGN370.01 billion) and OMO maturities (NGN70.00 billion) outweighed funding pressures for CBN’s weekly OMO (NGN30.00 billion) and FX auctions. 

Next week, we expect the OVN rate to remain in the double-digit territory as funding pressures for CBN’s (NTB, OMO and FX) auctions are likely to offset the sole expected inflow from OMO maturities (NGN110.00 billion).

Treasury Bills

The Treasury bills secondary market continued its bullish run for the fourth consecutive week, following (1) the significant improvement in system liquidity (this week’s net average position: NGN326.39 billion vs last week: NGN69.72 billion) and (2) local banks’ objective to re-invest idle cash. Consequently, the average yield across all instruments declined by 37bps to 3.4%. Across the market segments, the average yield contracted by 129bps to 3.3% at the OMO segment. At this week’s OMO auction, the CBN offered and allotted NGN30.00 billion worth of OMO bills to participants and maintained stop rates across the three tenors (89DTM – 7.0%, 173DTM – 8.5% and 348DTM – 10.1%), as with prior auctions. Similarly, the average yield at the NTB segment moderated by 18bps to 3.4% as participants sustained buying activities following consistent moderation in stop rate at last few PMAs.

In the coming week, we expect the outcome of the NTB auction to shape the direction of yields in the T-bills market. The CBN is set to roll over NGN94.00 billion worth of maturities to market participants at the auction.

Bonds

Trading in the Treasury bonds secondary market ended the week on a bullish note, still mirroring sentiments at recent primary market auctions. Consequently, the average yield contracted by 50bps to 10.6%. We highlight that the buying activity was spread across the benchmark curve, as the average yield declined at the short (-41bps), mid (-84bps), and long (-18bps) segments following interests in attractive yields of the MAR-2024 (-68bps), JUL-2030 (-153bps) and MAR-2035 (-54bps) bonds, respectively.

We envisage reinvestment of funds from maturities will continue to drive demand from investors and push yields lower next week. Nonetheless, we are maintaining our medium-term view that the FG’s significant frontloading of borrowings for the year in H1-22 will result in an uptick in bond yields, as investors demand higher yields in the face of elevated supply.

Foreign Exchange

Nigeria’s FX reserves recorded its second consecutive week of accretion as it closed higher by USD25.56 million w/w to USD39.87 billion (2nd March 2022). Meanwhile, the naira depreciated by 0.2% and 0.5% w/w to NGN416.67/USD and NGN577.00/USD at the I&E window (IEW) and the parallel market, respectively. At the IEW, total turnover (as of 3rd March 2022) declined by 24.9% WTD to USD433.45 million, with trades consummated within the NGN408.00 – 453.15/USD band. In the Forwards market, the naira appreciated at the 1-month (+0.1% to NGN418.80/USD), 3-months (+0.2% to NGN424.34/USD), 6-months (+0.4% to NGN433.42/USD) and 1-year (+1.3% to NGN449.67/USD) contracts.

In our opinion, the CBN has enough supply to support the FX market over the short term, given inflows from the recently issued Eurobond and the IMF’s SDR. However, foreign inflows are paramount for sustained FX liquidity over the medium term, in line with our expectation that accretion to the reserves will be weak given that crude oil production levels remain pretty low. Thus, FPIs which have historically supported supply levels in the IEW (53.8% of FX inflows to the IEW in 2019FY) will be needed to sustain FX liquidity levels. Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would be significant in attracting foreign inflows back to the market.

VIEW REPORT