The local bourse was not immune to the rout in global equities, as bearish sentiments persisted for the second consecutive week. Accordingly, the All-Share Index shed 0.6% w/w to close at 49,370.62 points.

August 19, 2022/Cordros Report

Global Economy  

In the United Kingdom (UK), spiralling food and energy prices continue to stoke upward inflationary pressures. According to the Office for National Statistics (ONS), headline inflation rose for the tenth consecutive month, increasing by 70bps in July to 10.1% y/y (June: 9.4% y/y) – the highest print since February 1982 (10.4% y/y). The persistent inflationary pressures reflect a combination of the (1) passthrough effect of the Russia-Ukraine conflict, (2) post-pandemic supply chain disruptions, and (3) elevated energy prices. Consequently, pressures were most significant in the prices of food (12.6% y/y vs June: 9.8% y/y), utilities (20.0% y/y vs June: 19.6% y/y) and recreation & culture (5.6% y/y vs June: 4.8% y/y). On a month-on-month basis, consumer prices rose by 0.6% (June: 0.8% m/m). We expect inflationary pressures to remain pressured upwards in the near term, with the Bank of England expecting inflation to top out at 13.3% in October and remain at very elevated levels throughout much of 2023. The preceding suggests that the BOE could be pressured to keep increasing the key policy rate over the short term.  

According to the flash estimates from Eurostat, the Euro Area’s real GDP grew by 0.6% q/q in Q2-22 (Q1-22: 0.3% q/q). We highlight that the growth reflects the lingering effects of easing COVID-19 restrictive measures, gradual recovery of economic activities, and the summer tourism season in southern countries. Growth was recorded across Spain (+1.1% q/q vs Q1-22: +0.2% q/q), Italy (+1.0% q/q vs Q1-22: 0.1% q/q) and France (+0.5% q/q vs Q1-22: -0.2% q/q). However, Germany (0.0% q/q vs Q1-22: +0.8% q/q) stagnated, while Portugal (-0.2% q/q vs Q1-22: +2.5% q/q), Lithuania (-0.4% q/q vs Q1-22: +1.2% q/q) and Latvia (-1.4% q/q vs Q1:22 +2.1% q/q) contracted. On a year-on-year basis, the regional bloc grew slowly by 3.9% y/y (Q1-22: 5.4% y/y), primarily driven by the unfavourable base from the corresponding period of the prior year. We expect the regional bloc’s economy to grow slowly over the short-to-medium term, given the troika impact of (1) tightening financial conditions, (2) elevated inflationary pressures, and (3) lingering supply chain constraints exacerbated by the Russia-Ukraine conflict.  

Global Markets  

Global stocks stumbled this week as investors weighed Federal Reserve policy signals on the likely pace of further interest-rate hikes. Consequently, US (DJIA: -0.1% and S&P 500: -0.9%) stocks were poised for a weekly loss as rate hike worries fueled selloffs in Tech stocks. In the European equities market, the STOXX Europe:(-0.3%) gave up gains accumulated earlier in the week as a rise in German producer prices in July added to recession fears. Conversely, the FTSE 100:(+0.8%) was poised for a weekly gain following a positive reaction to upbeat UK retail sales data amid continuing market caution over the inflationary outlook. In Asia, the Japanese (Nikkei 225: +1.3%) posted a weekly gain as sentiments were buoyed by the Bank of Japan’s (BOJ) sustained stance on ultra-low interest rates. In comparison, the Chinese (SSE: -0.6%) settled lower, undermined by worries of a fragile economic recovery, Covid-19 lockdowns, and a housing slump. Emerging (MSCI EM: -0.7%) market stocks declined marginally, primarily driven by the selloffs in China (-0.6%), while Frontier (MSCI FM: +0.4%) market stocks were buoyed by a positive performance in Vietnam (+0.4%).  

Nigeria  

Economy  

Nigeria’s headline inflation maintained its uptrend for the sixth consecutive month, rising to its highest level in 17 years. According to the National Bureau of Statistics (NBS), consumer prices rose by 105bps to 19.64% y/y in July (June: 18.60% y/y) – the highest print since September 2005 (24.32% y/y). Analysing the breakdown, food inflation (22.02% y/y vs June: 20.60% y/y) rose to its highest level since May 2021 (22.28% y/y), consistent with the (1) unfavourable base from the prior year, (2) higher transport costs, and (3) lingering currency pressures. Simultaneously, core inflation (+51bps to 16.26% y/y) rose to its highest level since January 2017 (17.87% y/y) as the existing factors stoking non-food prices remain dominant in the review period. We expect the headline inflation to settle at 1.76% m/m in August, translating to an 87bps increase in the y/y inflation rate to 20.52%. Our expectation is hinged on the lingering rise in transport costs, high gas and diesel prices, persistent currency pressures and the unfavourable base effects from the last year’s corresponding period.  

According to the recently released data from the Nigerian National Petroleum Corporation Limited (NNPC), the corporation incurred NGN319.18 billion (or 65.1% of its gross revenue) as PMS under-recovery cost in June (May: NGN327.07 billion). The tally now brings the total under-recovery cost in H1-22 to NGN1.59 trillion – 257.9% higher than H1-21 (NGN445.34 billion). That said, we note that the corporation carried forward an NGN1.01 trillion outstanding balance. Consequently, the NNPC limited estimated that it would deduct NGN1.49 trillion (consisting of the unpaid balance and estimated July value shortfall of NGN479.69 billion) from July proceeds due to be shared by the three tiers of government at the August FAAC meeting. Overall, we highlight that the NNPC did not transfer funds to the Federation account for the sixth consecutive month (vs H1-21: NGN281.97 billion and H1-20: NGN687.19 billion). We expect under-recovery costs to increase significantly over the short-to-medium term, given the elevated crude oil prices compared to the 2021FY levels. Accordingly, we estimate PMS under-recovery cost to settle at NGN3.55 trillion (or 55.3% of our estimated FGN’s retained revenue) in 2022E (vs 2021FY: NGN1.61 trillion or 33.6% of FGN’s retained revenue).  

Capital Markets  

Equities  

The local bourse was not immune to the rout in global equities, as bearish sentiments persisted for the second consecutive week. Accordingly, the All-Share Index shed 0.6% w/w to close at 49,370.62 points. Particularly, selloffs in bellwether stocks – OKOMUOIL (-10.0%), PRESCO (-10.0%), ACCESSCORP (-5.7%), and WAPCO (-10.0%), drove the weekly loss. Consequently, the MTD loss increased to -2.0%, while the YTD gain moderated to +15.6%. Likewise, activity levels mirrored the overall market broad gauge, as trading volume and value declined by 45.5% w/w and 9.7% w/w, respectively. Sectoral performance was mixed, as the Banking (+0.7%), Consumer Goods (+3.0%), and Industrial Goods (+0.3%) indices advanced, while the Insurance (-1.4%) and Oil and Gas (-0.9%) indices declined.  

We expect market performance to remain mixed in the coming week as investors rotate their portfolios towards stocks with attractive dividend yields, which could be matched by intermittent profit-taking activities. 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 200bps w/w to 15.0%, as the debit for FGN bonds (NGN200.57 billion) and FX auctions outweighed the inflow from OMO maturities (NGN95.79 billion). We also highlight that system liquidity was tighter this week, averaging a net short position of NGN78.80 billion (vs a net short position of NGN20.82 billion in the previous week).  

Next week, we expect the OVN rate to decline slightly, following the inflow of NGN111.82 billion – FGN bond coupon (NGN66.82 billion) and OMO maturities (NGN45.00 billion) – expected to hit the system.  

Treasury bills  

Trading activities in the Treasury bills secondary market were mixed, albeit with a bearish tilt, as the average yield across all instruments expanded slightly by 1bp to 8.6%. We attribute the bearish sentiments in this market to the depressed system liquidity, which caused participants to sell off bills across the curve. Across the segments, the average yield increased by 5bps to 11.2% at the OMO secondary markets, but contracted by 1bp to 7.9% at the NTB segment. That said, this week, an auction was held at the OMO segment, where the CBN offered the market participants NGN50.00 billion worth of bills. However, the auction closed with no sale, and we suspect the high bid range across all tenors was responsible for this.  

In the coming week, we expect the yields on T-bills to trend southward following the inflows expected in the system. Also, we expect the PMA holding next week Wednesday (24 August) to shape the direction of yields at the NTB segment, where the CBN will be rolling over NGN295.53 billion worth of maturing bills.  

Bonds  

This week, the FGN bonds secondary market continued in the bearish territory as investors re-priced bonds in reaction to the July CPI reading (19.64%) released Monday. As a result, the average yield across all instruments expanded by 13bps to 12.8%. Across the benchmark curve, the average yield increased at the short (+8bps), mid (+8bps), and long (+18bps) ends as investors sold off the JAN-2026 (+44bps), NOV-2029 (+13bps), and MAR-2050 (+35bps) bonds, respectively. At this month’s bond PMA, the DMO offered instruments worth NGN225.00 billion to investors through re-openings of the 13.53% MAR 2025 bond (Bid-to-offer: 0.3x; Stop rate: 12.50%), 12.50% APR 2032 (Bid-to-offer: 0.5x; Stop rate: 13.50%) and 13.00% JAN 2042 (Bid-to-offer: 2.4x; Stop rate: 14.00%) bonds. Demand improved relative to the last auction, with a subscription level of NGN247.07 billion, translating to a bid-to-offer ratio of 1.1x (vs bid-to-offer: 0.6x in the previous auction). The DMO eventually allotted instruments worth NGN196.57 billion, resulting in a bid-to-cover ratio of 1.3x.  

We maintain our stance 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 level over the rest of the year.  

Foreign Exchange  

Nigeria’s FX reserves increased after four weeks of decline, rising by USD22.35 million w/w to USD38.91 billion (17 August). Across the FX windows, the naira appreciated at the I&E window by 0.1% to NGN429.05/USD, but depreciated by 0.6% to NGN686.00/USD at the parallel market. In the Forwards market, the naira was flat at the 1-month NGN429.54/USD) contract but expanded at the 3-month (+0.2% to NGN437.51/USD) and 1-year (+0.2% to NGN481.17/USD) contracts; the naira depreciated at the 6-month (+0.1% to NGN452.82/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.