Global Economy

The United States (US) economy returned to growth after two consecutive quarters of contraction, but evidence suggests more headwinds ahead. According to the US Bureau of Economic Analysis (BEA), the US economy grew by 2.6% q/q in Q3-22 (vs Q2-22: -0.6% q/q). The growth print was primarily driven by a shrinking trade deficit as the strong dollar reduced the cost of aggregate imports (-6.9% q/q vs Q2-22: +2.2% q/q). That said, domestic consumption (+1.4% q/q vs Q2-22: +2.0% q/q) remains weak albeit still resilient, while residential investment (-26.4% q/q vs Q2-22: -17.8% q/q) tanked for the sixth consecutive quarter amid the lingering interest rate hikes and elevated inflationary pressures. Based on the print, we understand that domestic demand was at its weakest level in two years, suggesting that the growth, which was driven by a reduced trade deficit, overstated the country’s economic health. Also, private investments are currently at their longest stretch of contraction since the 2006 housing market collapse. Therefore, we believe the US is headed for a downturn in the short term as the Fed doubles down on its rate hikes.

According to the Chinese National Bureau of Statistics (NBS), the world’s second-largest economy grew by 3.9% y/y in Q3-22 (Q2-22: 0.4% y/y), beating market expectations of a 3.4% y/y growth. The higher growth reflects the impact of the government’s measures to boost economic activities during the review period after the zero-COVID policies with limited interventions dampened growth in Q2-22. Notwithstanding, the real estate sector contracted by 4.2% y/y, remaining a drag on the overall growth amidst the lingering property sector woes. On a quarter-on-quarter basis, China’s economy expanded by 3.9% in Q3-22 (Q2-22: -2.7% q/q), while the 9M-22 growth rate settled at 3.0% y/y. While the government has pledged different measures to boost growth, including easier lending, the short-term growth outlook remains clouded by the trifecta impact of (1) lingering Zero-COVID policies because of intermittent rise in COVID-19 cases, (2) slow external demand, and (3) dampening property sector growth. Accordingly, we believe the economy is unlikely to achieve the government’s 5.5% growth target for 2022FY.

Global Markets

Global stock markets posted broadly bullish performances as investors assessed solid economic data and a mixed bag of corporate earnings, amid speculations that the Federal Reserve will slow its interest rate hikes. Consequently, US stocks (DJIA: +3.1%; S&P 500: +1.5%) added to last week’s gains as investors seemed to brush off disappointing results from tech giants amid growing expectations of moderating Fed rate hikes. European stocks (STOXX Europe: +2.4%; and FTSE 100: +0.5%) were on course to end the week higher as investors digested a flurry of corporate earnings and the European Central Bank’s latest monetary policy decision. Asian markets posted mixed performances — Japanese equities (Nikkei 225: +0.8%) closed higher, mirroring the positive sentiments on Wall Street. Conversely, the SSE (-4.0%) fell to its lowest level since April 2009 as investors weighed mixed earnings reports from market heavyweights amid a flare-up in Sino-US tensions. Elsewhere, the Emerging market (MSCI EM: -0.3%) dipped consequent upon bearish sentiments in China (-4.0%), while the Frontier market (MSCI FM: +1.6%) closed positively following gains in the Vietnamese (+0.7%) market.

Nigeria

Economy

The governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, held a special press briefing on 26 October, announcing the apex bank’s intention to issue new Naira bank notes. In his briefing, the governor cited that (1) over 80.0% of the currency in circulation is outside the vaults of commercial banks; (2) the ease and risk of currency counterfeiting have increased; and (3) there have been increased shortages of clean and fit bank notes. Accordingly, these challenges have limited the currency management function of the CBN, undermining the integrity of both the CBN and the country.Consequently, the governor announced that the CBN has sought and obtained the approval of the President to redesign new series of banknotes at NGN100, NGN200, NGN500, and NGN1,000 levels. In line with the approval, the new currency will circulate from 15 December. At the same time, the existing currencies will cease to be legal tender from 31 January 2023. Our analysis suggests that the CBN’s directive will likely pressure the local currency in the short term. However, barring unexpected shocks or if handled well, we believe it would achieve the stated objectives over the medium term. Read report here.

At a press briefing on 24 October, the CEO of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) stated that current statistics showed that the volume of oil lost to theft in Nigeria is about 100.00kb/d, translating to an estimated 3.00mb per month. However, asides from the massive theft and pipeline vandalism, we note that the current crude oil production challenges are also driven by (1) an age-long infrastructure deficit and (2) International Oil Companies (IOCs) divestments, specifically from onshore assets amid challenging operating environments. Accordingly, the preceding suggests that the attention placed on theft and pipeline vandalism alone as a solution to the lingering production challenges might have been overblown by the government. We note that Shell Petroleum Development Company Limited (SPDC) resumed crude oil exports at the Forcados oil terminal on 20 October after about three months of shutdown for essential repairs. Accordingly, we estimate this could add an average of 225.80kb/d to Nigeria’s crude oil production based on the terminal’s H1-22 production numbers. However, without significant improvement to infrastructure and proper training of indigenous firms to handle the divested IOC’s assets, we believe that Nigeria will be unable to meet its pre-COVID production high (c. 2.10mb/d).

Capital Markets

Equities

Although the domestic equities market kicked off the week positively, the bears resurfaced on the penultimate and last trading days of the week, as investors booked profits on bellwether stocks. Accordingly, the All-Share Index dipped by 1.1% w/w to close at 43,912.64 points. Notably, DANGCEM (-10.0%) closing limit down on the last trading session, and losses in AIRTELAFRI (-2.8%) and GTCO (-3.2%) drove the weekly loss. Based on the preceding, the MTD loss increased to -10.4%, while the YTD gain further moderated to +2.8%. Analysing activity levels, the total volume and value traded declined by 36.1% w/w and 14.8% w/w, respectively. Save for the Industrial Goods (+0.3%) index that closed positive, all other sectoral indices — Insurance (-2.4%), Consumer Goods (-0.4%), Banking (-0.1%), and Oil and Gas (-0.2%) – recorded losses.

We expect a mixed performance from the market in the week ahead as the bulls will likely increase their positions in light of decent corporate earnings released this week. On the other hand, we still see scope for intermittent profit-taking activities given the improving yields in the FI market. 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

The overnight (OVN) rate was unchanged this week at 16.5%, amid a flurry of inflows from FAAC disbursement (c. NGN465.99 billion), FGN bond coupon payments (NGN178.50 billion), net NTB issuances (NGN131.08 billion) and OMO maturities (NGN30.00 billion). We note that the average system liquidity for the week closed at a net short position of NGN15.48 billion vs a net short position of NGN174.62 billion in the previous week).

Next week, we expect the OVN rate to trend upwards, as the NGN20.00 billion expected from OMO maturities may not be sufficient to saturate the system and keep the system afloat.

Treasury bills

Bearish sentiments persisted in the Treasury bills secondary market this week as participants reacted to the higher stop rates at Wednesday’s NTB PMA. As a result, the average yield across all instruments expanded by 59bps to 10.9%. Across the segments, the average yields inched 76bps higher to 11.0% at the NTB segment but contracted by 2bps to 10.2% at the OMO secondary market. At this week’s NTB PMA, the CBN offered participants NGN240.26 billion worth of bills. However, the auction was undersubscribed as the total subscription settled at NGN136.96 billion – translating to a 1.3x bid-to-cover. Eventually, the CBN allotted NGN1.74 billion of the 91-day, NGN10.12 billion of the 182 – day and NGN97.33 billion of the 364-day – at respective stop rates of 6.50% (previously 6.47%), 8.05% (previously 7.90%), and 14.50% (previously 13.00%). 

Next week, we expect the yields on T-bills to maintain the same trajectory, following the thin liquidity expected in the system.

Bonds

Similarly, trading in the Treasury bonds secondary market closed the week on a bearish note as investors continued to reprice bonds upwards. As a result, the average yield across all instruments expanded by 16bps to 14.3%. Across the benchmark curve, the average yield contacted at the short (-26bps) end due to investors’ buying interest on the APR-2023 (-234bps) bond but expanded at the mid (+14bps) and long (+48bps) segments following profit-taking activities on the NOV-2029 (+19bps) and APR-2049 (+126bps) bonds, respectively.

In the medium term, we maintain our expectation of an uptick in yields in the bonds market, as both the FGN’s borrowing plan for 2022FY and the expected fiscal deficit point towards an increased supply.

Foreign Exchange

Nigeria’s FX reserves declined for the eighth consecutive week, falling by USD67.22 million w/w to USD37.49 billion (26 October). The naira depreciated by 0.7% to NGN444.75/USD at the I&E window. At the IEW, total turnover (as of 27 October) declined by 14.5% WTD to USD300.82 million, with trades consummated within the NGN423.00 – NGN458.15/USD band. In the Forwards market, the naira depreciated at the 1-month (-0.5% to NGN449.45/USD), 3-months (-1.0% to NGN458.75/USD), 6-months (-1.1% to NGN476.53/USD) and 1-year (-0.8% to NGN501.04USD) 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 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.