June 3, 2022/Cordros Report

Local stocks closed in the bear territory following pressure from profit-taking activities during the week. Save for the last trading day of the week; the local bourse recorded losses in all of the week’s five trading sessions. Accordingly, the All-Share Index shed 2.2% w/w to close at 52,908.24 points. 

Global Economy

According to the Chinese National Bureau of Statistics (NBS), the manufacturing PMI rose to 49.6 points in May from April’s 26-month low of 47.4 points, signalling an improvement in factory activity. Similarly, the non-manufacturing PMI also improved to 47.8 points in May (April: 41.9 points). In our opinion, the broad-based expansion across both indices reflects the impact of easing strict COVID-19 restrictions in some areas during the review period amidst the government’s efforts to stabilise economic conditions. Notably, the breakdown provided showed broad-based increases across the production (49.7 points vs April: 44.4 points), new orders (48.2 points vs April: 42.6 points), and employment (47.6 points vs April: 47.2 points) indices, although still below the 50-points threshold. Overall, the composite PMI increased by 5.7 points to 48.4 points in May. We expect private sector activity to rebound into the expansionary territory in the near term as the government sustains the phased reopening of major cities. However, a significant spike in new COVID-19 caseloads remains a critical downside risk.

Although private sector activities remained in the expansionary region across the Eurozone, they lost some momentum in May. According to the S&P Global, the Eurozone’s composite PMI slowed to a 4-month low of 54.8 points in May (April: 55.8 points). Analysing the breakdown provided, we highlight that the manufacturing PMI (54.6 points vs April: 55.5 points) moderated to an 18-month low consistent with the (1) ongoing supply chain disruptions, (2) knock-on effect of the Russia-Ukraine conflict, and (3) low consumer demand. Similarly, the service sector lost momentum as the services PMI moderated to 56.1 points (April: 57.7 points) given the (1) fading post-pandemic boost, (2) elevated uncertainties on the economic outlook, and (3) persistent inflationary pressures. We expect the private sector activity to slow further in the near term. Our prognosis is hinged on the slowdown in the manufacturing sector, which remains hampered by supply shortages and cost-induced shock to household spending. The preceding comes amidst the fading impact of pent-up demand for services arising from the relaxation of pandemic restrictions.  

Global Markets

Global stocks posted mixed performances this week as investors traded cautiously ahead of U.S. nonfarm payroll data to determine how aggressively the Fed may continue to raise interest rates. Accordingly, US (DJIA: -0.4%; S&P 500: -0.4%) stocks pared gains accumulated during the week as stronger-than-expected jobs report heightened expectations of a more hawkish Fed Reserve amid jitters caused by possible layoffs of Tesla workers. European markets (STOXX Europe: -0.7%; and FTSE 100: -0.7%) were set for a weekly loss as hot inflation data reignited concerns about the pace of monetary tightening from central banks. Elsewhere, Asian markets were broadly positive, as the Japanese (Nikkei 225:+3.7%) closed higher buoyed by the rebound on Wall Street during the week. Similarly, the SSE: (+2.1%) posted a weekly gain as investors bought the dip after selloffs triggered by a surge in Covid-19 caseloads and geopolitical tensions. Emerging markets (MSCI EM: +1.8%) and Frontier (MSCI FM: +0.1%) market stocks closed on a positive note consequent upon gains in China (+2.1%) and Kuwait (+1.8%), respectively.

Nigeria

Economy

There is no respite in sight for capital importation as foreign investors continue to limit their exposure to the Nigerian economy. According to the National Bureau of Statistics (NBS), capital importation into Nigeria fell to the lowest in four quarters, declining by 17.5% y/y to USD1.57 billion in Q1-22 (Q4-21: USD2.19 billion. We believe the persistent slowdown in capital importation 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. Parsing through the breakdown provided, we highlight that the decline in other investments (-40.7% y/y to USD406.59 million) and foreign portfolio investments (-1.7% y/y to USD957.58 million) were enough to offset the slight increase in foreign direct investments (+0.1% y/y to USD154.97 million). Accordingly, we maintain our expectation that foreign inflows would remain low compared to pre-COVID levels over the medium term, given a plethora of factors, including (1) the lack of flexibility in the FX framework, (2) inadequate structural reforms, and (3) election uncertainties.  

According to the recently released trade report by the National Bureau of Statistics (NBS), the trade balance returned to a surplus position in Q1-22 (NGN1.20 trillion vs deficit of NGN173.96 billion in Q4-21) after two consecutive quarters of deficit. The trade surplus was due to a faster increase in total exports (+137.9% y/y to NGN7.10 trillion) relative to imports (+21.0% y/y to NGN5.90 trillion). The significant increase in exports was underpinned by a 175.1% y/y increase in crude oil exports (79.2% of total exports) in line with the rally in crude oil prices (+60.1% y/y to an average of USD98.17/bbl. in Q1-22). Elsewhere, total imports grew by 21.0% y/y to NGN5.90 trillion (Q4-21: NGN5.94 trillion) given the (1) continued rebound in domestic demand, (2) higher freight costs, and (3) elevated global commodity prices exacerbated by Russia/Ukraine conflict. Although we expect the elevated crude oil prices to support exports over the short term, we expect the impact to be tethered by low crude oil production volume. Similarly, we expect the spike in global food prices to continue to exert upward pressures on total imports. Accordingly, we expect the trade balance surplus to moderate over the short term.

Capital markets

Equities

Local stocks closed in the bear territory following pressure from profit-taking activities during the week. Save for the last trading day of the week; the local bourse recorded losses in all of the week’s five trading sessions. Accordingly, the All-Share Index shed 2.2% w/w to close at 52,908.24 points. Profit-taking witnessed in the shares of OKOMUOIL (-10.0%), PRESCO (-10.0%), NB (-8.1%), WAPCO (-4.1%), and MTNN (-3.0%) drove the weekly loss. Based on the preceding, the YTD return settled lower at +23.9%. Subsequent to a block-divestment in UBN during the week, the total volume traded increased significantly to 28.74 billion (last week: 1.84 billion), valued at NGN209.06 billion. Sectoral performance was broadly negative as losses in the Insurance (-5.5%), Industrial Goods (-3.7%), Consumer Goods (-2.5%), Banking (-0.7%), and Oil and Gas (-0.4%) indices reflected the overall negative sentiments in the market.

We believe a “choppy theme” will be the overarching theme in the local bourse as investors continue to play close attention to the direction of yields in the FI market. Following the moderation in the share prices of bellwether stocks this week, we see scope for the bulls to make a re-entry in stocks with attractive dividend yields. However, we reiterate the need for positioning in only fundamentally sound stocks as the macroeconomic environment’s fragility remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate dipped significantly by 700bps w/w to close at 7.0% on the back of higher system liquidity. For evidence, the average liquidity level for the week settled at NGN312.07 billion (vs NGN12.96 billion in the previous week) as inflows from FAAC disbursement (c. NGN400.00 billion) and OMO maturities (NGN62.69 billion) outweighed debits for CRR, OMO (NGN40.00 billion) and FX auctions.

We expect the OVN to trend upward in the coming week, as funding pressures from the CBN’s auction (NTB, OMO & FX) will likely offset the expected inflow from OMO maturities (NGN20.00 billion).

Treasury bills

Bearish sentiments dominated the Treasury bills secondary market despite the buoyant liquidity in the system. We attribute the performance to market participants selling off their positions amid scarce bids for the available offers. Thus, the average yield across all instruments expanded by 10bps to 4.1%. Across the segments, the average yield expanded by 13bps to 4.0% at the NTB segment but was flat at 4.4% at the OMO segment. At this week’s OMO auction, the CBN offered and allotted NGN40.00 billion worth of bills to market participants and maintained stop rates across the three tenors, as with previous auctions.

Following the relatively lower inflows expected in the system next week, we expect low demand for T-bills and a slight expansion in yields from current levels. Also, we expect market focus to be shifted to the NTB PMA holding on Wednesday (8th June), with the CBN expected to roll over NGN167.22 billion worth of instruments.

Bonds

Activities in the Treasury bonds secondary market were mixed, albeit with a bullish tilt, as investors sustained their cherry-picking of attractive instruments across the curve. Thus, the average yield across all instruments pared by 6bps to close at 11.2%. Across the benchmark curve, the average yield contracted at the short (-11bps), mid (-7bps), and long (-3bps) ends as investors demanded the JAN-2026 (-60bps), FEB-2028 (-22bps), and MAR-2036 (-9bps) bonds, respectively.

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

Foreign Exchange

Nigeria’s FX reserve sustained its descent for the fifth consecutive week, decreasing to its lowest level since 8th October 2021. Precisely, the reserves declined by USD58.90 million w/w to USD38.48 billion (31st May 2022). Across the FX windows, the naira fell by 0.1% to NGN419.75/USD at the I&E window (IEW) but appreciated by 0.7% to NGN606.00/USD at the parallel market. At the I&E window, total turnover (as of 2nd June 2022) increased by 115.3% WTD to USD1.15 billion, with trades consummated within the NGN410.00 – NGN453.55/USD band. In the Forwards market, the rate was flat on the 1-month (NGN419.70/USD) and 3-month (NGN426.63/USD) contracts but contracted on the 6-month (-0.1% to NGN438.05/USD) and 1-year (-0.2% to NGN459.74/USD) contracts.

We believe the CBN has enough liquidity to support the FX market over the short term, given inflows from the recently issued Eurobond and the IMF’s SDR. However, we highlight that foreign inflows are paramount for sustained FX liquidity over the medium term, in line with our expectation that accretion to the reserves will be tepid given that crude oil production levels remain pretty low. Thus, FPIs which have historically supported supply levels in the IEW 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.