Global Economy

China’s private sector activity moved back to expansionary territory in June amidst further easing of strict COVID-19 containment measures. According to the Chinese National Bureau of Statistics (NBS), China’s manufacturing PMI expanded for the first time in four months, reaching 50.2 points in June (May: 49.6 points) – after three consecutive months of being below the 50-point psychological benchmark. At the same time, business activity measured by the non-manufacturing PMI expanded to 54.7 points (May: 47.8 points) – its highest print since May 2021 (55.2 points). We understand that the increase in factory and business activities was supported by the (1) reduction in new COVID-19 infections, (2) partial easing of strict COVID-19 control measures, and (3) impact of policy measures instituted to support the economy. Overall, the composite PMI settled at 54.1 points (May: 48.4 points). In the short term, we expect the growth momentum to be in the manufacturing and services sectors, in line with the government’s further ease of preventive measures amid the reduction in COVID-19 infections. That said, the risks to the overall growth remain tilted to the downside – lingering real estate wobbles, soft consumer spending, and intermittent waves of COVID-19 infections.

According to the United States Department of Labor, the initial jobless claims in the US declined by 2,000 to 231,000 in the week ending 25th June (vs week ending 18th June: 229,000) – slightly above market expectation of 230,000. We believe the jobs data print highlights that the US labour market remains tight as the broader economy shows signs of slowing. Meanwhile, continuing claims for unemployment insurance settled at 1.33 million (3,000 less than the week ending 18th June 2022). These claims are now back to pre-COVID-19 levels. On a 4-week moving average, we highlight that the initial jobless claims increased by 7,250 to 231,750 (vs week ending 18th June: 223,500), reflecting the highest print since December 2021. While the labour market is likely to remain resilient given strong demand from companies, we maintain that the geopolitical risks stemming from the spillover effects from the Russia/Ukraine conflict and renewed surge in COVID-19 infections may pose key downside risks to the labour market in the short term.

Global Markets

Negative sentiments continue to dominate global markets as stocks were on course to close lower as investors continue to assess the risk of a slowing global economy against major Central Banks’ aggressive monetary tightening moves amid the Russia/Ukraine war. Consequently, US (DJIA: -2.3%; S&P 500: -3.2%) stocks were set to close the week in the red as weak economic data reignited recession fears amid a hawkish Fed. In the same vein, European (STOXX Europe: -0.7%; and FTSE 100: -1.7%) stocks were on course for a weekly loss as rising inflation and rate hike concerns continue to dampen sentiments. Meanwhile, Asian markets posted mixed performances, as the Japanese Nikkei 225: (-2.1%) closed lower following weaker-than-expected results from the Bank of Japan’s Tankan business survey amid unabated recession worries. Elsewhere, the SSE (+1.1%) posted a weekly gain as investors weighed signs of gradual improvement in China’s economy. Emerging (MSCI EM: -1.0%) market stocks dipped, following bearish sentiments in South Korea (-2.6%), while the Frontier (MSCI FM: +0.3%) market stocks closed higher consequent upon gains in Kuwait (+2.8%).

Nigeria

Economy

The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in June (based on May 2022 revenue) increased by 3.7% m/m to NGN680.78 billion (May: NGN656.60 billion). We understand that increased receipts from Companies Income Tax (CIT), Value-Added Tax (VAT), and import duty were responsible for the increased pay-out during the review period. Consequently, the FGN received 33.7% or NGN229.56 billion (May: NGN257.61 billion), and State Governments received NGN275.27 billion (May 2022: NGN249.75 billion), while the Local Governments received NGN175.94 billion (May 2022: NGN149.25 billion). We maintain our expectations that actual oil revenue will remain below the FGN’s budget as low crude oil production and high under-recovery costs continue to undermine 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 NGN700.00 billion) over the medium term.

According to the recently released data from the Nigerian National Petroleum Corporation (NNPC), the corporation incurred NGN327.07 billion (or 69.5% of its gross revenue) as PMS under-recovery cost in May (April: NGN271.59 billion). However, we highlight that the corporation carried forward an NGN617.43 billion outstanding balance. Accordingly, the corporation estimated that it would deduct NGN845.15 billion (consisting of the unpaid balance and estimated June value shortfall of NGN227.72 billion) from June proceeds due to be shared by the three tiers of government at the July FAAC meeting. Overall, we note that the total under-recovery cost in 5M-22 settled at NGN1.27 trillion – 2.9x the size in 5M-21 (NGN438.38 billion). Thus, we are unsurprised that the NNPC did not transfer funds to the Federation account in 5M-22. We expect under-recovery costs to increase significantly over the short-to-medium term, given the rise in crude oil prices compared to the 2021FY levels. Consequently, we estimate PMS under-recovery cost to settle at NGN3.55 trillion (or 56.8% of our estimated FGN’s retained revenue) in 2022E (vs 2021FY: NGN1.61 trillion or 34.3% of FGN’s retained revenue).

Capital markets

Equities

This week was a contested battle between the bulls and the bears as mixed sentiments dominated trading activities on the domestic bourse. Eventually, the All-Share Index notched a 0.2% w/w gain to close at 51,829.67 points. Notably, buying interests in OKOMUOIL (+12.1%), FBNH (+10.0%), ETI (+9.3%), and INTBREW (+5.0%) underpinned the market’s performance. Accordingly, the YTD return increased to 21.3%. Likewise, activity level was positive, as volume and value traded rose by 20.3% w/w and 78.7% w/w, respectively. Sectoral performance was mixed, as the Consumer Goods (-0.4%), Oil and Gas (-0.2%), and Industrial Goods (-0.1%) indices declined, while the Insurance (+3.6%) and Banking (+1.1%) indices recorded gains.

With the H1-22 earnings season on the horizon, we believe investors will be looking for clues on the sustainability of the decent corporate earnings released for Q1-22. However, we expect mixed market performance in the coming week as bargain hunting in stocks with attractive dividend yields will be matched by intermittent profit-taking activities. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the unimpressive macro story remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

This week, the overnight (OVN) rate remained in the double-digit region, staying flat at 14.0%, following the already tight system liquidity, which was further pressured by outflows for net NTB issuances (NGN23.56 billion), FX auction, and CRR debit in the absence of any significant inflows to the system.

We expect the OVN rate to trend southwards next week, as the system is saturated with inflows worth a combined NGN471.22 billion from FAAC disbursements (NGN451.22 billion) and OMO maturities (NGN20.00 billion).

Treasury bills

The Treasury bills secondary market remained bearish this week due to the intertwined factors of (1) persistent illiquidity in the system and (2) participants selling off their positions on some short to mid-dated instruments. As a result, the average yield across all instruments expanded by 50bps to 5.4%. Across the segments, average yield expanded by 60bps and 18bps to 5.4% and 5.3% at the NTB and OMO secondary markets, respectively. At this week’s NTB PMA, the CBN offered NGN174.09 billion – NGN13.88 billion of the 91-day, NGN2.16 million of the 182-day, and NGN158.04 billion of the 364-day – in bills. Eventually, the CBN allotted NGN197.65 billion – NGN12.28 million of the 91-day, NGN17.16 billion of the 182-day and NGN168.21 billion of the 364-day bills – at respective stop rates of 2.40% (previously 2.49%), 3.79% (unchanged), and 6.07% (unchanged).

Next week, given our expectations of healthier system liquidity, we expect T-bills yields to decline from current levels in the face of improved demand.

Bonds

This week, the Treasury bonds secondary market turned bearish as month-end sell-offs at the top of the week, and increasing investor apathy for yields at this level drove the average yield higher by 3bps to 11.2%. Across the benchmark curve, the average yield contracted at the short (-4bps) end following bargain hunting on the APR-2023 (-22bps) bond; but contracted at the mid (+6bps) and long (-6bps) segments as investors sold off the APR-2032 (+9bps) and JUL-2045 (+54bps) bonds, respectively.

We maintain our expectation of an uptick in 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 reserve maintained its accretion for the fifth consecutive week, as the gross reserve position grew by USD230.14 million w/w to USD39.16 billion (30 June 2022). Across the FX windows, the naira weakened against the US dollar by 1.1% w/w to NGN425.00/USD at the I&E window and by 0.2% to NGN615.00/USD in the parallel market. At the I&E window, total turnover (as of 30 June) declined by 7.1% WTD to USD549.17 million, with trades consummated within the NGN410.00 – NGN444.00/USD band. In the Forwards market, the naira depreciated at the 1-month (-1.0% to NGN424.65/USD), 3-month (-1.0% to NGN431.97/USD), 6-month (-1.1% to NGN443.59/USD), and 1-year (-1.2% to NGN467.12/USD) contracts.

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.

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