Global Economy

According to the Chinese National Bureau of Statistics (NBS), China’s composite PMI slowed for the second consecutive month to 51.7 points in August (July: 52.5 points). We highlight that the slowdown in private sector activity is in line with the (1) resurgence of new COVID-19 infections and the associated lockdowns in some cities, (2) lingering property sector woes, and (3) power shortages as the country battles with its worst heatwave in decades. Notably, we understand that 28 cities which account for c.18.0% of the country’s GDP were under full or partial lockdowns as of the end of August. Accordingly, the non-manufacturing PMI (52.6 points vs July: 53.8 points) weakened to its lowest level in four months while the manufacturing PMI (49.4 points vs July: 49.0 points) remained below the 50-point threshold. In the short term, we expect overall private sector activity to remain subdued given the renewed restrictions in line with the government’s zero-COVID policy, weakening external demand, soft consumer spending, and the lingering real estate wobbles.

Soaring food and energy prices continue to ensure Euro Area’s consumer prices rise to record highs, widening the European Central Bank’s (ECB) dilemma amidst recession risks. According to the flash estimates from Eurostat, headline inflation in the Euro Area broke a new record high, increasing to 9.1% y/y in August (July: 8.9% y/y). More recently, knock-on effects of recent heatwaves across the continent contributed to the increased prices in addition to the pre-existing factors – elevated energy costs and higher food prices. Consequently, pressures remain significant in the prices of energy (38.3% y/y vs July: 39.6% y/y), food (10.6% y/y vs July: 9.8% y/y) and non-energy industrial goods (5.0% y/y vs July: 4.5% y/y). On a month-on-month basis, headline inflation notched higher by 0.5% (July: 0.1% m/m). We expect consumer prices to remain significantly above pre-pandemic levels over the short-to-medium term, increasing the pressure on the ECB to maintain its interest rate hiking cycle. Indeed, the current market expectation is for the Governing Council of the ECB to raise the key policy rates by at least 50bps at its next policy meeting on 08 September.

Global Markets

Global stocks posted bearish performances as hawkish central banks, fresh lockdowns in China and heightened geopolitical uncertainties drove risk-off sentiments. Accordingly, US (DJIA: -1.9% and S&P 500: -2.2%) stocks were on track to close in the red as investors assessed the pace of interest rate hikes. Likewise, European equities (STOXX Europe: -3.2% and FTSE 100: -3.8%) were set for a weekly loss as worries of slowing global growth and energy supply shortages arising from the Russia-Ukraine war dampened sentiments. In Asia, the Nikkei 225 (-3.5%) tracked the broad selloffs on Wall Street. Conversely, the SSE (-1.5%) posted its third consecutive weekly loss as wider COVID-19 lockdowns in China reignited concerns about production curbs and corporate earnings fallouts. Elsewhere, Emerging (MSCI EM: -3.0%) and Frontier (MSCI FM: -1.9%) markets mirrored the downbeat mood across global equities consequent upon losses in China (-1.5%) and Kuwait (-2.0%), respectively.

Nigeria

Economy

According to the National Bureau of Statistics (NBS), capital importation into Nigeria declined by 2.4% q/q to USD1.54 billion in Q2-22 (Q1-22: USD1.57 billion). We believe the persistent slowdown in capital importation reflects foreign investors’ lacklustre interest in the country given (1) uninspiring macro narrative, (2) relatively lower yields on fixed income instruments and OMO bills compared to historical trends and (3) lingering FX liquidity constraints. Accordingly, the breakdown provided showed that the decline in foreign portfolio investment (-20.9% q/q to USD757.32 million) and foreign direct investment (-5.0% q/q to USD147.16 million) were enough to outweigh the increase in other investments (+37.0% q/q to USD630.87 million). However, on a year-on-year basis, capital importation rose by 75.3%, primarily driven by a low statistical base effect from the corresponding period of 2021. 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 provisional data from the CBN’s monthly economic report, the FGN’s retained revenue declined by 7.2% m/m to NGN387.93 billion in May (April: NGN417.96 billion), primarily driven by a persistent shortfall in inflow from the Federation account (-11.8% m/m) given the lower net oil and gas revenue. At the same time, aggregate expenditure declined by 14.0% m/m to NGN912.18 billion (April: NGN1.06 trillion), given a 3.4% m/m and 46.8% m/m decline in recurrent and capital expenditure, respectively. Consequently, the provisional fiscal deficit (NGN524.25 billion vs pro-rated budget: NGN532.17 billion) reduced by 18.5% m/m compared to April (NGN643.09 billion). Overall, our baseline expectation is that the fiscal deficit will print NGN9.74 trillion (including GOEs) in 2022E (2021FY: NGN6.94 trillion). Accordingly, we envisage increased domestic borrowing and reliance on the CBN’s Ways & Means (W&M) as external borrowing conditions are presently unfavourable. Indeed, the actual W&M in 7M-22 was NGN3.15 trillion, according to the CBN.

Capital Markets

Equities

Though the local bourse opened the week on a negative note, bargain-hunting activities regained steam in the latter part of the week as the All-Share Index rose above the 50,000 psychological mark, advancing by 0.7% w/w to 50,045.83 points. The positive outing was underpinned by investors’ interest in GUINNESS (+9.9%), STANBIC (+8.2%), ACCESSCORP (+6.1%), WAPCO (+4.6%), BUAFOODS (+4.5%) and BUACEMENT (+2.7%). Based on the preceding, the MTD return printed +0.4%, while the YTD return increased to +17.2%. Activity levels were mixed, as trading volume increased by 30.7% w/w, while trading value declined by 15.3% w/w. Sectoral performance was largely bullish as the Consumer Goods (+2.0%), Industrial Goods (+1.4%), Banking (+1.2%) and Oil & Gas (+0.6%) indices advanced, while the Insurance index was flat.

We expect alpha-seeking investors to continue to seek trading opportunities in stocks of companies that delivered impressive earnings during the Q2-22 earnings season amid the yield uptick 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. Notwithstanding, we reiterate the need for positioning in only fundamentally sound stocks as the unimpressive macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate maintained a downtrend through the week and eventually settled 117bps lower, w/w, at 12.5% on improved system liquidity. The average system liquidity level for the week settled at a net long position of NGN352.31 billion (vs a net short of NGN70.07 billion in the previous week) as inflow from July FAAC disbursement (c. NGN490.00 billion) offset outflows for FX retail and OMO (NGN50.00 billion) auctions.

In the coming week, we expect the OVN rate to trend northwards as outflows for CBN’s weekly auctions and arbitrary CRR debits, if any, are likely to pressure system liquidity.

Treasury bills

Trading in the Treasury bills secondary market sustained last week’s sentiments, remaining bullish on account of the improved system liquidity. Consequently, the average yield across all instruments contracted by 9bps to 8.5%. Across the segments, the average yield fell by 14bps to 11.1% at the OMO secondary market and by 7bps to 7.7% in the NTB segment. Meanwhile, at this week’s OMO auction, the CBN offered and sold NGN50.00 billion worth of bills to market participants and maintained stop rates across the three tenors, as with previous auctions.

As we anticipate weakened system liquidity next week, we expect yields to trend upwards. Also, we expect quiet trading at the NTB market as participants position for next week’s PMA, with NGN214.74 billion worth of maturities on offer.

Bonds

Similarly, the Treasury bonds secondary market traded with bullish sentiments, as investors continued bargain hunting on select instruments, especially at the short spectrum of the benchmark curve. As a result, the average yield declined by 2bps to 12.8%. Across the curve, the average yield was lower at the short (-7bps) and long (-1bp) ends, as investors demanded the JAN-2026 (-25bps) and JUL-2042 (-13bps) bonds, respectively. Conversely, the average yield expanded at the mid (+3bps) segment following sell-offs of the APR-2032 (+7bps) bond.

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 sustained its ascent, as it grew by USD68.23 million w/w to USD39.02 billion (as of 31 August). Across the FX windows, the naira weakened against the dollar in the I&E window by 0.3% to NGN431.50/USD but stayed flat at NGN700.00/USD at the parallel market. At the IEW, total turnover (as of 1 September) increased by 2.9% WTD to USD655.74 million, with trades consummated within the NGN417.00 – NGN447.48/USD band. In the Forwards market, the naira depreciated at the 1-month (-1.3% to NGN434.44/USD), 3-month (-0.9% to NGN440.19/USD), and 6-month (-0.3% to NGN452.58/USD) contracts; but appreciated at the 1-year (+0.2% to NGN477.74/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 that 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.