Positive sentiments returned to the domestic bourse this week as investors took advantage of the moderation in share prices last week to make re-entry into sound companies with attractive dividend yields. Thus, the All-Share Index inched higher by 0.6% w/w to close at 53,201.38 points.
June 10, 2022/Cordros Report
Global Economy
At its June policy meeting, the Governing Council of the European Central Bank voted to retain the interest rate on the main refinancing operations, marginal lending facility and the deposit facility at 0.00%, 0.25% and -0.50%, respectively. However, the Council guided that it intends to raise the key ECB interest rates by 25bps at its July monetary policy meeting. Indeed, the Council expects to raise the key ECB rates again in September and beyond, based on its current assessments. Moreover, the Council decided to end net asset purchases under its Asset Purchase Programme (APP) as of 1st July. Overall, the Committee reiterated its pledge to adjust all of its instruments, incorporating flexibility if warranted, to ensure that inflation stabilises at its 2.0% target over the medium term. Although the Council faces the challenge of reining in inflation without compounding the economic slowdown, we believe further increases in the key policy rates will be appropriate over the rest of the year. Our prognosis is underpinned by rising inflationary pressures confronting the region amidst strong labour market conditions.
According to the Bureau of Labor Statistics (BLS), United States headline inflation rose higher than market expectations (8.3% y/y), increasing by 30bps to 8.6% y/y in May (April: 8.3% y/y) – the highest print since December 1981 (+8.9% y/y). The persistent inflationary pressures primarily reflect the impact of (1) strong consumer demand, (2) food and energy shortages arising from the Russia-Ukraine conflict, (3) supply chain constraints worsened by China’s zero-COVID policy, and (4) steady increase in services-related costs, particularly those linked to the tourism industry. Notably, energy (34.6% y/y vs April: 30.3% y/y) costs are at their highest level since September 2005 while food (10.1% y/y vs April: 9.4% y/y) prices rose to the highest level since March 1981. On a month-on-month basis, the headline inflation rose by 1.0% m/m in May (April: 0.3% m/m). We expect the inflationary pressures to remain elevated in the short to medium term, given the nature of factors limiting supply amidst higher consumer demand. Accordingly, we expect the FOMC to raise the key policy rate further by at least 50bps at its June and July policy meeting.
Global Markets
Risk-off sentiment was the overarching theme across global markets as rate hike announcements from the European Central Bank (ECB) and worries over the hotter-than-expected U.S. inflation data reignited concerns about global growth. Accordingly, US (DJIA: -1.9%; S&P 500: -2.2%) stocks stumbled as investors braced up for further rate hikes from the Federal Reserve. European stock markets (STOXX Europe: -2.4%; and FTSE 100: -1.5%) were on course to end the week in the red as investors reacted negatively to the European Central Bank’s (ECB) plan to hike interest rates by 25bps in July. Elsewhere, In the Asian market, the Nikkei 225 (+0.2%) managed to eke out a weekly gain as the weakening in the yen against the greenback drove bargain hunting in export-oriented shares. While the SSE (+2.8%) closed in the green territory as hopes of further monetary policy easing and a rebound in tech stocks buoyed sentiments. The Emerging (MSCI EM: +0.6%) and Frontier (MSCI FM: +0.3%) markets stocks were bullish following gains in China (+2.8%) and Nigeria (+0.6%), respectively.
Nigeria
Economy
According to the Debt Management Office (DMO), Nigeria’s public debt increased by 5.2% q/q to NGN41.60 trillion or 23.3% of GDP in Q1-22 (vs Q4-21: NGN39.56 trillion). The increase was consistent with the (1) new domestic borrowings to fund part of the 2022E budget deficit, (2) USD1.25 Eurobond issuance in March, and (3) disbursements by multilateral (+1.6% q/q) and bilateral (+0.9% q/q) lenders. Accordingly, there was a broad-based increase across the domestic (+5.4% q/q to NGN24.99 trillion) and external (+4.8% q/q to NGN16.62 trillion) debt stock outstanding. We expect the government to hold off its external borrowing plans for the rest of the year, given the increased global interest rates in line with global central banks’ monetary policy tightening. Based on the preceding, we expect most of the borrowing plans for 2022E to be carried out in the domestic capital market. Accordingly, we maintain our expectations of yield increase in the fixed income market over the short-to-medium term. Overall, we expect the public debt to settle at NGN46.96 trillion or 25.47% of GDP in 2022E.
Based on the recently released data by the National Bureau of Statistics (NBS), collections from Company Income Tax (CIT) increased by 35.6% y/y to NGN532.48 billion in Q1-22 (Q1-21: NGN392.65 billion)- the highest collection since Q2-15 (NGN621.50 billion). Analysing the breakdown, we highlight that the increase was due to broad-based growth across foreign CIT payment (+75.3% y/y to NGN323.35 billion) and local collections (+37.3% y/y to NGN209.13 billion). In our view, currency depreciation supported the substantial increase in foreign collections. In contrast, we think the growth in local collection was underpinned by improved business activities consistent with the strong corporate earnings delivered by companies during the review period. On a quarter-on-quarter basis, we highlight that the CIT collection increased by 53.1% q/q in Q1-22 (vs Q4-21: -26.4% q/q to NGN347.81 billion). In the absence of any major shock to the economy, we expect the CIT collections to continue to improve, albeit slowly, over the short term. Our expectation of a moderate rise is in line with the normalisation of business activities after the initial post-COVID boost in 2021FY.
Capital markets
Equities
Positive sentiments returned to the domestic bourse this week as investors took advantage of the moderation in share prices last week to make re-entry into sound companies with attractive dividend yields. Thus, the All-Share Index inched higher by 0.6% w/w to close at 53,201.38 points. Precisely, bargain hunting in MTNN (+4.3%), UBN (+4.0%), WAPCO (+3.7%), and PRESCO (+3.0%) drove the weekly gain. Based on the preceding, the MTD and YTD returns for the index increased to +0.4% and +24.5%, respectively. However, activity levels were weaker than in the prior week, as trading volume and value declined by 93.6% w/w and 90.7% w/w, respectively. Performance across sectors was mixed albeit with a bearish tilt, as the Oil and Gas (+0.7%) and Industrial Goods (+0.3%) indices closed positive while the Banking (-2.1%), Insurance (-1.6%) and Consumer Goods (-0.1%) indices declined.
We expect alpha-seeking investors to continue to seek trading opportunities in companies that delivered impressive earnings during the Q1-22 earnings season despite the expectation of an uptick in yields in the FI market. However, we think the absence of a near-term catalyst will likely skew overall market sentiments to the negative side, particularly as the political space gets heated up. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the weak macro story remains a significant headwind for corporate earnings.
Money market and fixed income
Money market
In line with our expectations, the overnight (OVN) rate expanded by 700bps w/w to close at 14.0% as outflows for FX auctions and NTB net issuances (NGN15.37 billion) outweighed this week’s inflows and caused tighter liquidity in the system. For clarity, the average liquidity level for the week settled at NGN140.12 billion (vs NGN312.07 billion in the previous week).
For the coming week, we expect the system liquidity to be pressured further as the expected inflow from OMO maturities (NGN20.00 billion) is unlikely to saturate the financial system. Thus, we expect an expansion in the OVN rate in the coming week.
Treasury bills
Activities in the Treasury bills secondary market remained bearish as average yield across all instruments expanded by 13bps to 4.2%, due to the intertwining impact of (1) the tight system liquidity and (2) market participants shifting their focus to Wednesday’s NTB PMA. Consequently, the average yield was higher by 16bps to 4.1% at the NTB segment and expanded by 3bps to 4.4% at the OMO segment. At this week’s NTB auction, the CBN offered NGN167.22 billion – NGN2.33 billion of the 91-day, NGN789.10 million of the 182-day, and NGN164.11 billion of the 364-day – in bills. Ultimately, the CBN allotted NGN182.59 billion – NGN766.65 million of the 91-day, NGN1.94 billion of the 182-day and NGN179.89 billion of the 364-day bills – at respective stop rates of 2.50% (unchanged), 3.84% (previously 3.89%), and 6.44% (previously 6.49%).
Following our expectations of tighter system liquidity next week, we envisage a low demand for T-bills and thus, project a slight expansion in yields from current levels.
Bonds
The Treasury bonds secondary market started the week quietly. However, it turned bullish towards the end of the week as investors continued to cherry-pick bonds with attractive yields at the belly of the curve amid sell-offs on the short and long ends of the curve. Consequently, the average yield across all instruments dipped by 3bps to close at 11.1%. Across the benchmark curve, the average yield expanded at the short (+6bps) and long (+1bp) ends following sell-offs of the MAR-2024 (+35bps) and JUL-2034 (+18bps) bonds, respectively; but contracted at the mid (-9bps) segment as investors demanded the NOV-2029 (-18bps) bond.
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
This week, Nigeria’s FX reserve recorded its first reserve accretion in five weeks as the reserves increased by USD56.35 million WTD to USD38.52 billion (9th June 2022). Nonetheless, the Naira depreciated against the USD by 0.4% w/w to NGN421.25/USD at the I&E window but closed higher by 0.2% w/w to NGN606.00/USD in the parallel market. At the I&E window, total turnover (as of 9th June 2022) declined by 81.7% WTD to USD244.96 million, with trades consummated within the NGN410.00 – NGN453.55/USD band. In the Forwards market, the rate was flat on the 1-month (NGN419.75/USD) contract but contracted on the 6-month (-0.1% to NGN438.27/USD) and 1-year (-0.1% to NGN460.15/USD) contracts. Meanwhile, the rate appreciated on the 3-month (+0.1% to NGN426.19/USD) contract.
Although the CBN has enough liquidity to support the FX market over the short term, we highlight that foreign inflows are paramount for sustained FX liquidity over the medium term. Considering the tepid accretion to the reserves given the (1) low crude oil production level and (2) elevated PMS under-recovery costs, FPIs which have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long term. 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.
