According to the Chinese National Bureau of Statistics (NBS), China’s real GDP grew by 4.8% y/y in Q1-22 (Q4-21: +4.0% y/y and Q1-21: +18.3% y/y). Asides from the unfavourable base from the prior year, we believe that the growth was undermined by weak consumer spending in line with the (1) travel restrictions during the winter Olympics and (2) lockdown measures in major cities to combat the rapid spread of new COVID-19 infections. Similarly, the Real estate sector continues to struggle amidst the government’s clampdown on property transactions. On a quarter-on-quarter basis, the world’s second-largest economy grew moderately by 1.3% (Q4-21: +1.5% q/q), given the slow consumer spending compared to the prior quarter. We expect the impact of the government’s zero-COVID policy on domestic demand to linger in the short term as the lockdown drags on. Similarly, we believe the heightened geopolitical risks arising from the Russia-Ukraine conflict would weigh on China’s growth as supply and commodity cost pressures intensify. Indeed, the IMF expects China’s growth to decelerate to 4.4% in 2022E compared with 8.1% y/y growth in 2021FY.

The United Kingdom’s (UK) private-sector output slowed to a three-month low amidst the uncertainty arising from the Russia-Ukraine conflict, which impacted demand. According to the S&P Global/CIPS flash estimates, the UK’s Composite PMI settled at 57.6 points in April (March: 60.9 points). The moderation was driven by the Services PMI (58.3 points vs March: 62.6 points), which lost momentum on account of the pass-through impact of escalating costs which offset the boost to consumer spending from the relaxation of all COVID-19 containment measures. Meanwhile, factory activity as measured by the Manufacturing PMI (55.3 points vs March: 55.2 points) increased slightly amidst the (1) production bottlenecks related to the Russia-Ukraine conflict; (2) ongoing ports congestion; and (3) lockdown in China. Although we expect the overall private sector activity to remain relatively robust in the short term, we expect the growth pace to slow given the (1) Russia-Ukraine crisis uncertainties, (2) rising interest rates and (3) lingering inflationary pressures.

Global Markets

Mixed sentiments dominated global equities as investors digested a batch of corporate earnings, hawkish comments from the Federal Reserve Chairman, and developments in the ongoing war between Russia and Ukraine. Accordingly, US (DJIA; +1.0% and S&P 500; 0.0%) stocks posted marginal gains as positive reactions to corporate earnings were tempered by concerns that the Federal Reserve will accelerate the pace of its monetary tightening. European markets (STOXX Europe: -0.5% and FTSE 100: -0.2%) were on course to close lower as investors fretted about the possibility of slowing economic growth on the back of aggressive monetary policy tightening amid the Russia/Ukraine crisis. On the other hand, Asian markets posted mixed performances as the SSE (-3.9%) recorded huge losses following selloffs in tech stocks as investors assessed measures to tackle economic headwinds from Covid-led lockdowns. Elsewhere the Japanese (Nikkei 225; 0.0%) closed the week unchanged amid a dearth of positive triggers. On the other hand, Elsewhere, the Emerging (MSCI EM: -2.3%), and Frontier (MSCI FM: -1.7%) markets declined following the selloffs in China (-3.9%) and Kuwait (-0.1%), respectively.

Nigeria

Economy

According to the National Bureau of Statistics (NBS), headline inflation increased for the second consecutive month, rising by 21bps to 15.92% y/y in March (February: 15.70% y/y) – the highest print since October 2021 (15.99% y/y). The increase was primarily driven by the food basket (+9bps to 17.20% y/y), given the indirect impact of increased transportation costs amidst pre-existing structural challenges. Meanwhile, the core inflation (-10bps to 13.91% y/y) reversed the previous month’s uptrend despite higher utilities and transport prices. Notably, Transport (+25bps to 15.37% y/y) prices rose to a five-year high while Utilities (+50bps to 12.32% y/y) prices are at their highest level since May 2017 (12.91% y/y). We expect inflationary pressures to be sustained in April given the troika impact of (1) Easter and Ramadan-induced increased food demand amidst limited supply, (2) higher gas and other energy prices and (3) increased taxes in line with the 2021 Finance Act. Consequently, we expect the headline inflation to settle at 1.62% m/m in April, with the corresponding base from the prior year translating to a 75bps increase in the y/y inflation rate to 16.66%.

In the April edition of its World Economic Outlook (WEO), the IMF expects Nigeria to grow by 3.4% y/y in 2022E (2021FY: +3.4% y/y) – 70bps higher than the January forecast (+2.7% y/y). The revised growth forecast was primarily hinged on the sustained increase in crude oil prices. The combined impact of (1) geopolitical tension arising from the Russia-Ukraine conflict and (2) OPEC+ output underperformance relative to quota have continued to push up oil prices amidst China’s strict zero-COVID strategy. Accordingly, the IMF expects African oil-exporting countries to grow by 3.4% y/y in 2022E (2021FY: +2.9% y/y) in line with their growth expectations for Nigeria and Angola (2022E: +3.0% y/y vs 2021FY: +0.7% y/y). Nonetheless, the risks to the global growth outlook include (1) possible worsening of the Russia-Ukraine conflict, (2) sharper-than-expected deceleration in China, (3) extension of sanctions on Russian energy exports and (4) rise of more lethal COVID-19 variants that escape vaccines. Although we align with the IMF on Nigeria’s growth expectations, our projection is below the IMF’s forecast given the (1) uncertainties that characterise a pre-election year, (2) fading impact of government stimulus and (3) normalisation of growth outcomes as base effects wane.

Capital markets
 
Equities
 
Bargain hunting was the overarching theme during the week as investors flocked into bellwether stocks ahead of Q1-22 corporate earnings releases. Notably, investors’ buying interest in GUINNESS (+17.5%), WAPCO (+10.6%), NB (+8.3%), INTBREW (+7.1%), AIRTELAFRI (+4.7%), SEPLAT (+4.6%), and FLOURMILL (+4.6%) supported market performance. Pertinently, the All-Share Index rose by 2.0% w/w to close at 48,459.65 points. Consequently, the MTD and YTD return increased to +3.2% and +13.4%, respectively. However, activity levels were weaker than the prior week, as trading volumes and value declined by 7.1% w/w and 26.2% w/w, respectively. Across our sectoral coverage, the Oil and Gas (+6.4%), Consumer Goods (+3.3%), Industrial Goods (+1.7%), and Banking (+0.6%) indices closed positive, while the Insurance (-0.1%) index was the sole loser.    
     
In the week ahead, we expect the NGX’s floor to be flooded with results as the Q1-22 earnings season commences in full swing. Thus, the local bourse is likely to close positive next week as we expect decent earnings releases across the board to temper selling activities by investors reluctant to leave gains in the market. 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 market

The overnight (OVN) rate dipped by 5.5ppts w/w to 5.7%, as the liquidity surfeit from the prior week coupled with additional inflows from OMO maturities (NGN23.95 billion) saturated the system and outweighed outflows for this week’s debits.

In the coming week, we expect the OVN rate to trend upward, as expected inflows from FGN bond coupons (NGN160.32 billion) are likely to be offset by funding pressures for next week’s auctions (NTB, OMO and FX).

Treasury bills

Trading in the Treasury bills secondary market sustained last week’s bearish sentiment following the continued slowdown in demand for bills. Thus, the average yield across all instruments rose by 41bps to 3.8%. Across the market segments, the average yield expanded both at the OMO and NTB segments by 28bps to 4.0% and 43bps to 3.8%, respectively.

We anticipate a further increase in T-bills yields given the expected tight liquidity position. Also, the CBN is set to hold its bi-weekly NTB PMA with NGN5.86 billion worth of maturing bills on offer.

Bonds

The Treasury bonds secondary market closed this week on a bearish note, as demand for FGN bonds remained low amid investors positioning for next week’s PMA. Consequently, the average yield increased 11bps w/w to 11.2%. Across the benchmark curve, the average yield increased at the short (+25bps), mid (+12bps) and long (+5bps) ends, as investors took profit off the APR-2023 (+102bps), FEB-2028 (+40bps), and APR-2037 (+25bps) bonds, respectively.

Next week, we expect the outcome of the April 2022 FGN bond auction scheduled to hold on Monday (25th April) to influence the direction of yields in the secondary market. At the auction, the DMO is offering instruments worth NGN225.00 billion through a new issue of the FGN APR 2032 bond and re-openings of the 13.53% FGN MAR 2025 and 13.00% FGN JAN 2042 bonds. In the medium term, we maintain our view of an uptick in bond yields, as the FGN’s borrowing plan (Q2-22: NGN675.00 billion) points towards an elevated supply.

Foreign Exchange

Nigeria’s FX reserves increased by USD59.99 million w/w to USD39.80 billion (20th April 2022). Meanwhile, the naira depreciated at the I&E window (IEW) by 0.2% to NGN418.33/USD but appreciated by 0.2% to NGN589/USD at the parallel market. At the IEW, total turnover (as of 21st April 2022) declined by 4.3% WTD to USD556.21 million, with trades consummated within the NGN410.00 – NGN453.15/USD band. In the Forwards market, the naira was flat at the 1-month (NGN418.11/USD) contract but appreciated at the 3-months (+0.1% to NGN423.46/USD), 6-months (+0.2% to NGN431.67/USD), and 1-year (+0.4% to NGN447.07/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 quite 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 significantly attract foreign inflows back to the market.