Global Economy

According to the Office for National Statistics (ONS), the United Kingdom’s (UK) headline inflation rate rose by 70bps to 6.2% y/y in February (January: 5.5% y/y) – the highest since March 1992 (7.1% y/y). The surge in inflationary pressures primarily reflects the troika impact of (1) persistent increase in energy prices, (2) low base effect from the prior year, and (3) lingering supply chain challenges. Accordingly, price pressures were most significant in the transport (11.5% y/y vs January: 11.3% y/y), food (6.2% y/y vs January: 5.5% y/y), housing & utilities (7.2% y/y vs January: 7.1% y/y), and furniture & household equipment (9.1% y/y vs January: 8.4% y/y) sub-baskets. On a month-on-month basis, the headline inflation rose by the highest in five months, settling at 0.8% (January: -0.1% m/m). In the short term, we expect inflationary pressure to remain biased to the upside given the sharp increase in energy and agricultural prices, exacerbated by the Russia-Ukraine conflict. Accordingly, we think the sustained domestic price pressures could put more pressure on the Bank of England (BOE) to further raise the key policy rate, primarily to ensure inflation expectations are well anchored.

According to the flash estimates from the S&P Global (formerly IHS Markit), the United States (US) Composite PMI expanded to 58.5 points in March (February: 55.9 points), the highest level since July 2021 (59.9 points). The improved reading reflects the confluence of (1) improved demand in line with the relaxation of strict COVID-19 containment measures, (2) gradual ease in supply chain disruptions, and (3) improved labour market conditions. Decomposing the breakdown, we highlight that the Manufacturing PMI (58.5 points vs February: 57.3 points) rose to a 6-month high driven by expansion in output, new orders and employment. Similarly, the Services PMI (58.9 points vs February: 56.5 points) rose to an 8-month high in line with improved demand conditions. We believe the improved job numbers and relaxation of restrictions bode well for private sector activity over the short-to-medium term. However, the downside risks to business activities include (1) higher living costs arising from elevated energy prices and (2) uncertainties associated with the Russia-Ukraine conflict.

Global Markets

Global stocks posted mixed performances, albeit with a bullish bias, as investors weighed the impact of tightening of monetary policy by the US Federal Reserve against the effectiveness of Western sanctions on Russia to deescalate geopolitical risk. Accordingly, US markets (DJIA: -0.1%; S&P 500: +1.3%) moved in different directions on the back of investors’ repricing Fed policy tightening expectations amidst a sustained rebound in tech stocks. European markets (STOXX Europe: -0.3%; and FTSE 100: 0.8%) also moved in opposite directions as uncertainties surrounding the tensions between Russia and Ukraine undermined positive reaction to the moderation in crude oil prices. Asian markets posted mixed performances, as the Japanese Nikkei 225: (+4.9%) posted robust gains following the announcement by Toyota Motor to buy back its shares, further supported by gains in Mining and Petroleum sectors. Conversely, the SSE: (-1.2%) recorded losses as sentiments weakened after US revealed it was premature to expect a deal with China regarding the status of Chinese listed companies in US exchanges. Emerging markets (MSCI EM: +1.2%) and Frontier (MSCI FM: +0.5%) market stocks were on course to end the week in the green consequent upon gains in Brazil (+3.3%) and Kuwait (+2.7%), respectively.   

Nigeria

Economy

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to maintain the MPR at 11.5% at its recently concluded meeting. Similarly, the Committee also voted to retain the asymmetric corridor around the MPR at +100bps/-700bps, Cash Reserve Requirement (CRR) at 27.5%, and liquidity ratio at 30.0%. In terms of voting pattern, three of the ten members present at the meeting voted to raise the MPR by 25bps, one member voted for a 50bps hike, while the remaining six voted to hold all key parameters constant. We believe the Committee decided to keep rates steady to provide more room to examine the (1) evolution of the ongoing conflict between Russia and Ukraine and (2) monetary policy decisions of global central banks and their attendant impact on the Balance of Payment. We believe the eventual change to a tight monetary policy stance would be primarily hinged on the magnitude of external sector pressures emanating from the policy actions of global central banks as they redirect their efforts towards taming inflationary pressures. 

According to the data released by the National Bureau of Statistics (NBS), capital importation into Nigeria in Q4-21 increased by 109.3% y/y to USD2.19 billion (Q3-21: +18.5% y/y to USD1.73 billion) – the highest since Q1-20 (USD5.85 billion). With the Q4-21 numbers, the total capital imported to the country settled at USD6.70 billion in 2021FY (-30.6% vs 2020FY: USD9.66 billion). We believe the reduction in capital import in 2021FY reflects foreign investors’ lacklustre interest in the country given (1) weak macro narrative, (2) relatively lower yields on fixed income instruments and OMO bills compared to historical trends, and (3) lingering FX liquidity constraints. Decomposing the Q4-21 breakdown, we highlight that capital importation increased across FPI (+1,728.7% y/y to USD642.87 million), FDI (+43.3% y/y to NGN358.23 million), and other investments (+56.1% y/y to USD1.19 billion), given the significant low base from the corresponding period of the prior year. Asides from that, we think global liquidity conditions contributed to the increased inflows from FPI. Over the medium term, we expect foreign inflows to remain challenged by (1) the lack of flexibility in the FX framework, (2) inadequate structural reforms, and (3) election uncertainties.  

Capital markets
 
Equities
 
In what can be regarded as a quiet trading week, the local bourse traded within tight bands before settling at 46,964.23 points (down 0.67% w/w). The negative performance was due to bouts of profit-taking activities in heavyweight stocks, namely NESTLE (-2.8%), UBA (-2.6%), GTCO (-1.4%), MTNN (-0.7%), and LAFARGE (-0.6%). Based on the preceding, the MTD and YTD return settled at -0.9% and +9.9%, respectively. Activity levels were weaker than the prior week, as trading volumes and value declined by 52.0% w/w and 19.6% w/w, respectively. Sectoral performance was broadly bearish as the Insurance (-1.4%) index led the laggards, followed by the Consumer Goods (-1.1%) and Banking (-0.7%) indices. The Industrial Goods and Oil and Gas indices closed flat.      

In the week ahead, we expect the market to trade sideways as the activities of bargain hunters in dividend-paying stocks fizzle out due to the winding down of the 2021FY earnings season. In addition, risk-averse investors will likely sustain profit-taking activities in anticipation of an uptick in FI yields. Notwithstanding, we reiterate the need for positioning in only fundamentally sound stocks as the weak macro environment remains a significant headwind for corporate earnings. 

Money market and fixed income

Money marketThe overnight (OVN) rate contracted by 350bps w/w to 6.2% this week, as inflows from FAAC disbursements (NGN354.35 billion) and OMO maturities (NGN42.00 billion) outweighed debits for CRR, the FGN’s monthly bond (NGN297.01 billion) and CBN’s weekly FX auctions.

In the coming week, we expect the OVN rate to remain elevated in the double-digit region as expected inflows from OMO maturities (NGN10.00 billion) and FGN bond coupons (NGN40.77 billion) are likely to be offset by funding pressures for next week’s auctions (NTB, OMO and FX). 

Treasury Bills

Although the Treasury bills secondary market started the trading week in a lull, it ended on a bullish note, as market participants reacted to the declining marginal rates at the last FGN bonds primary market auction (PMA). Consequently, the average yield across all instruments declined by 7bps to 3.3%. Across the market segments, the average yield contracted by 6bps to 3.2% at the NTB segment but closed flat at 3.6% at the OMO segment, possibly as market participants stayed on the sidelines in anticipation of an OMO auction. Notably, the CBN did not float an OMO auction this week for the first time this year after twenty consecutive weeks of regular auctions.

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 NGN143.29 billion worth of maturities to market participants at the auction. 

Bonds

This week, trading in the Treasury bonds secondary market continued with bearish sentiments, following the lower demand observed across the curve as investors continued cherry-picking instruments with attractive yields. Consequently, the average yield expanded by 16bps to 10.7%. Across the benchmark curve, the average yield expanded at the short (+19bps), mid (+13bps) and long (+18bps) segments following investors’ profit-taking activities on the MAR-2024 (+57bps), FEB-2028 (+24bps) and JUL-2045 (+84bps) bonds, respectively. At the bond auction on Monday, the DMO offered instruments worth NGN150.00 billion to investors through re-openings of the 12.50% FGN JAN 2026 (Bid-to-offer: 3.1x | Stop rate: 10.15%; previously 10.95%) and 13.00% FGN JAN 2042 (Bid-to-offer: 4.9x | Stop rate: 12.70%; previously 13.00%) bonds. As anticipated, demand was strong, with a subscription level of NGN598.42 billion – the highest subscription level recorded in the year – translating to a bid-to-offer ratio of 4.0x. The DMO eventually over-allotted instruments worth NGN297.01 billion (competitive allotments: NGN296.37 billion, non-competitive allotments: NGN0.64 billion), resulting in a bid-to-cover ratio of 2.0x.

In the medium term, we envisage an uptick in bond yields as the FGN’s borrowing plan (NGN2.57 trillion) for 2022FY points to elevated supply.