Economic growth snapped in the United States as the supply chain disruption weighed on economic activities. According to the Bureau of Economic Statistics (BEA), the United States economy shrunk by 1.4% q/q in Q1-22 (Q4-21: +6.9% q/q) – the first slowdown since the pandemic in Q2-20. The negative GDP print was primarily due to the troika effects of (1) widening gap in the country’s trade deficit, (2) decline in inventory investment, and (3) fading government stimulus in the economy. Accordingly, Gross Private Domestic Investment (2.3% q/q vs Q4-21: 36.7% q/q), Exports of goods and services (-5.3% q/q vs Q4-21: 6.4% q/q), and import of goods and services (17.7% q/q vs Q4-21: 17.9% q/q) sub-components. However, on a year-on-year basis, the economy grew by 3.6% y/y in Q1-22 (Q4-21: +5.5% y/y). Although we expect the ongoing supply chain disruptions further exacerbated by elevated energy prices to weigh on economic growth over the next quarter, we anticipate an improvement in GDP growth in the medium term, given the improvement in consumer spending and job numbers.

Growth in the Euro Area slowed substantially in the first quarter of 2022 due to the Russia/Ukraine crisis that led to a spike in commodities prices. According to preliminary estimates from Eurostat, the Euro Area economy expanded by 0.2% q/q in Q1-22 (Q4-21: 0.3% q/q) – the slowest growth since the bloc exited economic recession in Q1-21. The subdued growth reflects the dual impact of the (1) lingering supply chain disruptions and (2) persistent inflationary pressures due to the surge in energy prices induced by the tensions between Russian and Ukraine. Notably, growth in Spain (+0.3% q/q) and Germany (+0.2% q/q) offset the contraction in Italy (-0.2% q/q). On a year-on-year basis, the euro area grew by 5.0% y/y in Q1-22 (Q4-21: 4.7% y/y). We expect the bloc’s economy to continue to grow moderately in the coming quarter, given the (1) uncertainties relating to the war in Ukraine, (2) elevated inflationary pressures, and (3) lingering supply chain constraints.

Global Markets

Mixed sentiments trailed global equities for the second consecutive week as investors digested a batch of corporate earnings, prospect of EU oil embargo on Russia and weaker-than-expected GDP data from US and the Euro Area. Accordingly, US (DJIA; +0.3% and S&P 500; 0.4%) stocks managed to eke out weekly gains as the disappointing GDP print for the first quarter undermined appetite for risk assets amidst weak earnings outlook on tech giants (notably Apple and Amazon). European markets (STOXX Europe: -0.5% and FTSE 100: +0.3%) moved in opposite directions as investors weighed the subdued Q1 GDP for the bloc and the possibility that Europe will place an embargo on Russia’s oil against decent earnings releases. On the other hand, Asian markets posted negative performances as the SSE (-1.3%) and Nikkei 225 (-0.9%) recorded losses as investors fretted about signs of economic slowdown in China induced by the nation’s stringent Covid policy and the downbeat mood on Wall Street. Likewise, the Emerging (MSCI EM: -2.0%) and Frontier (MSCI FM: -1.8%) markets declined following the selloffs in China (-1.3%) and Kenya (-3.0%), respectively.

Nigeria

Economy

According to the March Domestic & Foreign Portfolio Investment report of the Nigerian Exchange Limited (NGX), the total transaction value in the domestic equities market increased by 0.9% m/m to NGN185.26 billion in March (February: NGN183.56 billion). The increase was mainly due to a 3.6% m/m increase in domestic transactions to NGN143.09 billion (77.2% of total transaction value). Meanwhile, foreign transactions declined by 7.2% m/m from NGN45.43 billion in February to NGN42.17 billion in March. We think the continued low participation from the foreign investors reflects the impact of FX liquidity constraints and lack of flexibility in the FX framework. We highlight that the total transaction value at the local bourse printed NGN692.10 billion in Q1-22 (Q1-21: NGN676.53 billion). In the short to medium term, we expect domestic investors will continue to dominate market performance albeit, buying activities will be constrained by expectations about uptick in FI yields amid uncertainties associated with an election cycle. Also, FPIs who have exhibited a lacklustre interest in domestic equities are likely to remain on the sidelines due to sustained FX liquidity challenges and interest rate hikes by central banks in advanced countries.

The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in April (based on March 2022 revenue) increased by 22.9% m/m or NGN135.02 billion to NGN725.57 billion (March 2022: NGN590.55 billion). We highlight that the increased pay-out was due to a significant month-on-month revenue increase across Petroleum Profit Tax (PPT), Value Added Tax (VAT), Companies’ Income Tax, and Oil & Gas royalties. Overall, the FGN received 38.2% or NGN277.10 billion (March 2022: NGN236.18 billion), and State Governments received NGN227.29 billion (March 2022: NGN190.01 billion), while the Local Governments received NGN167.91 billion (March 2022: NGN140.61 billion). We maintain our expectations that actual oil revenue will remain below the FGN’s budget as low crude oil production continues to limit the gains from the rally in oil prices. However, we expect the non-oil revenue to support the aggregate revenue given our expectations of sustained positive readings in GDP. Accordingly, we expect the amount to be shared by the tiers of government to remain stable at current levels (NGN650.00 billion to NGN750.00 billion) over the medium term.

Capital markets
 
Equities
 
Impressive corporate earnings by bellwether stocks supported market performance this week, as investors increased their bets on blue-chip companies in anticipation of continued expansion in profits. Notably, investors’ buying interest in NB (+18.6%), SEPLAT (+16.5%), WAPCO (+16.1%), GUINNESS (+13.1%), and UNILEVER (+11.5%) supported market performance. Pertinently, the All-Share Index rose by 2.4% w/w to close at 49,638.94 points. Consequently, the MTD and YTD return increased to +5.7% and +16.2%, respectively. Similarly, activity levels were stronger than the prior week, as trading volumes and value increased by 62.8% w/w and 32.4% w/w, respectively. Across our sectoral coverage, the Oil and Gas (+10.2%), Consumer Goods (+6.3%), Insurance (+3.4%) and Industrial Goods (+0.5%) indices closed in the green, while the Banking (-1.5%) index was the sole loser.          
     
In the week ahead, we expect investors to continue to rotate their portfolios towards cyclical stocks that delivered decent earnings this week. Thus, we see scope for the bulls to maintain dominance, albeit the magnitude of the gains will be substantially lower, as profit takers are likely to cash out on the gains across bellwether stocks. 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 oscillated in the double-digit region through the week, eventually rising by 683bps w/w to close at 12.5% on lower system liquidity. The average liquidity level for the week settled at NGN19.03 billion (vs NGN78.37 billion in the previous week) as outflows for the FGN bond auction (NGN219.88 billion), Net NTB issuances (NGN9.08 billion) and FX auction offset inflows from FGN bond coupon payments (NGN160.32 billion).

In the coming week, inflows from FAAC allocations (NGN448.46 billion) and OMO maturities (NGN20.00 billion) are expected to hit the system. This should boost system liquidity towards the end of the week and result in the OVN rate trending southwards at the end of the week.

Treasury bills

Trading in the Treasury bills secondary market turned bearish this week due to weak system liquidity and market participants preparing bids for the week’s NTB PMA. Consequently, the average yield across all instruments expanded by bps to 3.8% – the average yield at the OMO segment expanded by 21bps to 4.2% but contracted by 8bps to 3.7% at the NTB segment. At this week’s NTB PMA, the CBN offered NGN120.97 billion – NGN2.68 billion of the 91-day, NGN2.02 billion of the 182-day, and NGN116.27 billion of the 364-day – in bills. Ultimately, the CBN allotted NGN130.05 billion – NGN2.22 billion of the 91-day, NGN8.23 billion of the 182-day and NGN119.61 billion of the 364-day bills – at respective stop rates of 1.74% (unchanged), 3.00% (unchanged) and 4.79% (previously 4.60%).

We expect demand for T-bills to improve in the coming week as system liquidity becomes buoyant. Thus, we envisage a decline in the average yields on T-bills.

Bonds

Similarly, the Treasury bonds secondary market traded with bearish sentiments, as demand for FGN bonds remained tepid, with only a handful of trades passing through during the week. As a result, the average yield expanded by 9bps to 11.2%. Across the benchmark curve, the average yield expanded at the short (+14bps) and long (+6bps) ends following investors’ profit-taking activities on the MAR-2025 (+80bps) and APR-2037 (+22bps) bonds, respectively; but contracted at the mid (-2bps) segment as investors sold of the FEB 2028 (-5bps) bond. The DMO conducted the April 2022 FGN bond PMA on Monday (25 April). At the auction, instruments worth NGN225.00 billion were offered to investors through a new issue bond; APR 2032 bond (Bid-to-offer: 1.0x; Stop rate: 12.5%) and re-openings – 13.53% MAR 2025 (Bid-to-offer: 1.5x; Stop rate: 10.0%) and 13.00% JAN 2042 (Bid-to-offer: 3.0x; Stop rate: 12.9%). Total subscriptions across the offer instruments settled at NGN409.41 billion, with the DMO eventually allotting instruments worth NGN348.58 billion (of which NGN128.70 billion was allocated to non-competitive bids), resulting in a bid-cover ratio of 1.2x.

We maintain our view of an uptick in bond yields in the medium term, as the FGN’s borrowing plan for 2022FY and expected fiscal deficit point towards an elevated supply.

Foreign Exchange

Nigeria’s FX reserves recorded its first depletion in five weeks as it decreased by USD160.32 million w/w to USD39.65 billion (27 April 2022). Elsewhere, the naira depreciated by 0.2% both at the I&E window (IEW) and parallel market to NGN419.00/USD and NGN590.00/USD, respectively. At the IEW, total turnover (as of 28 April 2022) increased by 44.3% WTD to USD866.38 million, with trades consummated within the NGN410.00 – NGN453.15/USD band. In the Forwards market, the naira depreciated at the 1-month (-0.1% to NGN418.31/USD), 3-months (-0.1% to NGN423.77/USD), 6-months (-0.2% to NGN432.48/USD) and 1-year (-0.3% to NGN448.53/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.