Global Economy

China’s private sector activity weakened to the lowest level since April amid a new wave of COVID-19 infections dampening hopes that the government would ease its strict restrictions in key cities. According to the China Federation of Logistics and Purchasing (CFLP), China’s Manufacturing PMI remained below the 50-point threshold for the second consecutive month, settling at 48.0 points in November (October: 49.2 points) – the lowest print in seven months. In our opinion, the subdued factory activity reflects the increase in new COVID-19 infections and the associated restrictive measures during the review period. Equally, the Non-manufacturing PMI mirrored the contraction in factory activity, moderating to 46.7 points (October: 48.7 points). We expect growth to remain weak over the short-to-medium term, given that the government is unlikely to remove all COVID-19 restrictive measures even as the citizens recently embarked on a rare street protest across many cities. Moreover, weak global demand and lingering property sector woes are expected to further pressure the economy in the near term.

According to the S&P Global flash PMI survey data, the Euro area’s Composite PMI remain in the contraction territory, printing 47.8 points in November (October: 47.3 points), albeit above the market expectation of 47.0 points. The downturn in overall private sector activity continues to reflect lingering challenges in the regional bloc even as the contraction eased in the review period amid a slight pick-up in business confidence. Decomposing the breakdown, we highlight that the manufacturing PMI (November: 47.1 Points vs October: 46.4 points) printed higher, although still below the 50 -points psychological benchmark, as output and new orders declined slowly. On the other hand, the Service PMI (48.6 points vs October: 48.6 points) was unchanged after four consecutive months of contraction due to weak consumer demand and lower employment numbers. We expect moderation in private sector activities on the back of lingering headwinds which continue to dampen service and factory activities. Notably, we expect the lingering cost of living crisis, tight finance conditions, and weak demand to push overall business activities southwards in the near term.

Global Markets

Global equities were broadly positive as investors’ sentiments were buoyed by dovish comments from Federal Reserve Chairman Jerome Powell, indicating a moderation in interest rate hikes starting from December. Furthermore, China’s slight easing of Covid-19 lockdown measures following unrest over restrictive virus controls supported sentiments. Accordingly, US (DJIA: +0.1% and S&P 500: +1.3%) stocks are set to close the week higher following the positive reaction to dovish comments from the Federal Reserve amid stronger-than-expected payroll data. Likewise, European equities (STOXX Europe: +0.3% and FTSE 100: +0.5%) posted marginal gains as investors reacted positively to a slower-than-expected inflation reading in the Eurozone. In Asian markets, the Japanese (Nikkei 225: -1.8%) equities declined as the strengthening of the Japanese yen against the greenback undermined market performance. In comparison, the SSE (+1.8%) rallied on heightened expectations that Beijing will loosen its harsh COVID-19 restrictions while focusing on economic growth. Likewise, the Emerging (MSCI EM: +4.0%) and Frontier (MSCI FM: +3.1%) markets posted significant gains on the back of positive sentiments in China (+1.8%) and Vietnam (+11.2%), respectively.

Nigeria

Economy

According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions in the local bourse reversed the previous month’s trend, increasing by 34.4% m/m to NGN110.09 billion in October (September: NGN81.90 billion). Still, the print is significantly below the 2022 average (NGN207.90 billion), reflecting the trifecta effects of (1) higher yields in the fixed-income market, (2) lingering FX liquidity constraints, and (3) heightened global uncertainties. Analysing the breakdown provided, we highlight that the domestic (74.1% of gross transactions) and foreign transactions (25.9% of total transactions) increased by 31.0% m/m and 45.1% m/m, respectively. Looking ahead, we expect domestic investors to continue to dominate market performance, although rising FI yields may constrain buying activities. Also, FPIs who have exhibited a lacklustre interest in domestic equities are likely to remain on the sidelines due to (1) sustained FX liquidity challenges, (2) global uncertainties, (3) election concerns, and (4) interest rate hikes by central banks in developed countries.

The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in November (from the total revenue generated in October) increased by 5.2% m/m to NGN736.78 billion (October: NGN700.24 billion). We understand that a significant increase across Value-Added Tax (VAT), Companies’ Income Tax (CIT) and excise duties was responsible for the increased payout during the review period. On the other hand, we highlight that inflows from import duties, oil & gas royalties, and Petroleum Profit Tax (PPT) declined in the review period. Overall, the FGN received NGN293.96 billion (October: NGN262.64 billion), state governments shared NGN265.74 billion (October: NGN277.18 billion), and the local governments received NGN177.09 billion (October: NGN160.42 billion). We maintain our expectation that the non-oil revenue will continue to support aggregate revenue, given the sustained improvement in economic activities and the impact of the provisions of the 2021 Finance Act. However, we expect the oil revenue to remain underwhelming because of the low crude oil production volume and high under-recovery costs.

Capital Markets

Equities

Though the local bourse started the week on a sour note, positive sentiments returned to the market as investors renewed buying interests in bellwether stocks. Pertinently, the All-Share Index ended the week 1.3% higher, settling at 48,156.56 points. Gains in MTNN (+4.8%), AIRTELAFRI (+2.6%) and GTCO (+7.0%) underpinned the market’s performance. Based on the preceding, the YTD gain settled higher at +12.7%. Activity levels were mixed, as trading volume increased by 16.4% w/w while trading value declined by 19.5% w/w. Analysing by sectors, the Banking (+1.2%), Insurance (+1.1%), and Oil and Gas (+0.4%) indices advanced, while the Industrial Goods (-1.2%) and Consumer Goods (-0.6%) indices declined.
 
In the week ahead, we expect market performance to be dominated by the bulls, as positioning by early birds in dividend-paying stocks ahead of 2022FY dividend declarations should outweigh profit-taking activities. However, we reiterate the need for positioning in only fundamentally sound stocks as the weak macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

This week, the overnight (OVN) rate expanded by 38bps to 13.0%, as the inflows from FGN bond coupon payment (NGN5.63 billion) and OMO maturities (NGN25.00 billion) were insufficient to sustain the system liquidity. Notwithstanding, we note that the average system liquidity settled higher, printing a net long position of NGN146.41 billion (vs a net long position of NGN24.11 billion in the previous week).

Barring any significant inflow to the financial system coupled with expected outflows for (NTB, OMO & FX) auctions next week, we expect the OVN rate to trend upward from current levels.

Treasury bills

The Treasury bills secondary market closed this week on a bearish note despite the improved system liquidity. We attribute this week’s bearish sentiments to participants taking profits from their positions in anticipation of the NTB PMA scheduled to hold next week. As a result, the average yield across all instruments expanded by 26bps to 10.8%. Across the segments, the average yield increased by 32bps to 11.0% at the NTB secondary markets, but contracted by 2bps to 10.1% at the OMO segment. 

Next week, we expect the yields on T-bills to maintain the same trajectory, following the expected tight system liquidity. Also, we believe participants will shift focus to next week’s NTB PMA, as the CBN is set to roll over NGN54.36 billion worth of maturities.

Bonds

Activities in the FGN bonds secondary market were bullish as investors cautiously cherry-picked instruments with attractive yields across the curve. As a result, the average yield across instruments contracted by 10bps to 14.3%. Across the benchmark curve, the average yield contracted at the short (-30bps) and long (-3bps) ends following demand on the MAR-2027 (-55bps) and MAR-2036 (-26bps) bonds, respectively. Conversely, the average yield expanded at the mid (+4bps) segment as investors sold off the APR-2032 (+8bps) bond.

We maintain our view of an uptick in bond yields in the medium term, as the FGN’s borrowing plan for 2023FY and expected fiscal deficit point towards an elevated supply.

Foreign Exchange

Nigeria’s FX reserve recorded another decline for thirteen consecutive weeks, dipping by USD59.56 million w/w to USD37.11 billion (30 November). Across the FX windows, the naira appreciated by 0.2% to NGN445.33/USD at the I&E window (IEW). At the I&E window, total turnover (as of 01 December 2022) fell by 14.8% WTD to USD460.25 million, with trades consummated within the NGN410.00 – 444.00/USD band. In the Forwards market, the rate weakened at the 1-month (-1.8% to NGN460.03/USD), 3-month (-2.7% to NGN471.58/USD), 6-Month (-3.1% to NGN491.30/USD) and 1-year (-4.3% to NGN473.02/USD) contracts.

We expect the FX liquidity issues to remain over the short-to-medium term in the absence of any positive signal that denotes an improvement in FX supply relative to the pre-pandemic levels. Moreover, considering the tepid accretion to the reserves given (1) low crude oil production 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 significantly attract foreign inflows back to the market.