Global Economy

According to the National Bureau of Statistics of China, consumer prices rose for the second consecutive month, settling at 2.1% y/y in January (December 2022: 1.8% y/y). The increase did not surprise us as it reflects the combined impact of (1) the easing of COVID-19 containment measures and (2) higher demand associated with the Lunar New Year holiday. Notably, from holiday spending data, there was an increase in spending on tourism, catering, and other in-person businesses. Accordingly, food inflation accelerated to 6.2% y/y (December 2022: 4.8% y/y), while core inflation settled at 1.2% y/y (December 2022: 1.1% y/y). On a month-on-month basis, headline inflation rose by 0.8% relative to a flat reading in December 2022. While consumer prices are expected to rise in 2023 relative to the prior year as China recovers, the economy is not likely to face acute price pressures like advanced economies. Consequently, the People’s Bank of China will likely keep monetary policy accommodative over the year to support the country’s economic recovery.

Preliminary estimates show that the economy of the United Kingdom (UK) stalled in Q4-22 relative to a contraction recorded in Q3-22. According to the Office for National Statistics (ONS), the UK did not record growth in Q4-22, as real GDP growth settled at 0.0% q/q in Q4-22 (Q3-22: -0.2% q/q). The preceding shows that the economy remains under pressure, broadly in line with the lingering impact of the decline in disposable income and tighter monetary and financing conditions. Consequently, the Services (0.0% q/q vs Q3-22: +0.2% q/q) sector did not record growth, while the sixth consecutive quarter of contraction in the Production (-0.2% q/q vs Q3-22: -1.5% q/q) sector neutered the growth in Construction (+0.3% q/q vs Q3-22: -0.2% q/q). On a year-on-year basis, the economy grew slower by 0.4% in Q4-22 (Q3-22: +1.9% y/y), bringing the 2022FY growth to 4.0% (2021FY: +7.6%). Looking ahead, we believe the economic prospects remain gloomy as tighter fiscal & monetary policies and still-high inflationary pressures weigh on household budgets. Indeed, the IMF now expects the UK to contract by 0.6% y/y in 2023FY.

Global Markets

Global equities headed for the first weekly retreat in two weeks amid renewed risk-off sentiments by investors, underpinned by hawkish comments by top central bank policymakers and heightened recessionary fears. US stocks (DJIA: -0.7%; S&P: -1.3%) slid after (1) comments from Federal Reserve officials on more interest rate hikes being on the cards, and (2) significant sell-offs of Alphabet Inc’s stock after its new AI chatbot ‘Bard’ delivered an incorrect answer in an online advertisement. In contrast, European equities (STOXX 600: +0.3%; FTSE 100: +0.1%) eked out a positive performance as cooling inflation in Germany, and a slew of upbeat earnings outweighed fears about more interest rate increases. Elsewhere, Asian equities were mixed, with the hawkish global central bank comments dampening sentiments. Specifically, Chinese stocks (SSE: -0.1%) were dragged by the general global recessionary fears and a weaker-than-expected Chinese inflation data. Whereas the slightly positive performance in Japan (Nikkei 225: +0.6%) was influenced by the fall in Japan’s producer inflation (-100bps y/y to 9.5%). Emerging markets (MSCI EM: -1.4%) and Frontier markets (MSCI FM: -0.5%) mirrored the theme in the global market, as losses in China (-0.1%) and Vietnam (-2.1%) weighed down the respective indices.

Nigeria

Domestic Economy

Inflows into the Investors & Exporters Window (IEW) declined by 54.1% m/m to USD847.20 million in January after hitting a 12-month high in December 2022 (USD1.85 billion). On the one hand, foreign investors remain on the sidelines as the lingering FX illiquidity bites harder amidst the lack of FX reforms and weak domestic macro narrative. Thus, inflows from foreign investors settled at USD114.00 million (December: 109.80 million). On the other hand, inflows from the local sources (-57.8% m/m to USD733.20 million) settled at a 4-month low as supply dipped across all the different local segments (Non-bank corporates: -62.1% m/m | Exporters: -56.1% m/m | CBN: -15.8% m/m | Individuals: -67.7% m/m). We believe FX liquidity conditions will remain frail over the short-to-medium term in the absence of reforms to attract US dollar inflows into the economy. The low FX liquidity conditions will also be driven by the lingering global uncertainties and higher global interest rates, limiting foreign inflows to the economy amid uncertainties over the 2023 general elections.

According to the Nigerian Upstream Regulatory Commission (NUPRC), aggregate crude oil production (including condensates) increased by 5.7% m/m to 1.49mb/d in January (December 2022: 1.41mb/d), reflecting the impact of the government’s recent efforts to curb crude oil theft and vandalism. The breakdown provided showed that crude oil production increased across the Forcados (+5.4% m/m), Escravos (+5.3% m/m), Bonga (+9.3% m/m), and Agbami (+160.8% m/m) oil terminals. However, production volume remains significantly below the country’s OPEC+ production quota (1.83mb/d), likely reflecting the impact of other factors hindering higher crude oil production asides from oil thefts and vandalism. The notable factors include an age-long infrastructure deficit and divestments by large International Oil Companies (IOCs). Although we expect crude oil production to increase in 2023E (Cordros estimate: 1.53mb/d vs FGN’s estimate: 1.69mb/d), we think it is unlikely to reach the pre-pandemic level (c. 2.10mb/d) in the absence of incentivising investment in new production capacity and proper handover of divested IOC’s assets to indigenous companies. Consequently, we expect the government’s oil revenue performance to remain underwhelming over the short term.

Capital Markets

Equities

The domestic bourse ended the week positively, representing two consecutive weeks of gains, as the All-Share Index advanced by 0.2% w/w, to settle at 54,327.30 points. We attribute the gain to investors’ sustained interest in MTNN (+1.7%) and DANGCEM (+1.2%). Thus, the MTD and YTD returns increased to +2.0% and +6.0%, respectively. However, activity levels were lower as the trading volume and value declined by 75.2% and 17.8% w/w, respectively. Sectoral performance was largely negative following losses in the Insurance (-3.3%), Banking (-0.9%) and Consumer Goods (-0.6%) indices. On the flip side, the Oil and Gas (+0.6%) and Industrial Goods (+0.6%) indices closed the week higher.

In the subsequent weeks, we expect the NGX to be flooded with corporate earnings as more companies publish 2022FY numbers, which will be accompanied by dividend declarations. We believe this should provide a catalyst for buying activities even as risk-averse investors are likely to remain cautious due to medium-term expectations of an uptick in FI yields. Overall, we advise investors to seek trading opportunities 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 flat through the week before eventually expanding by 6bps to 11.1%, as the debits for CRR and net NTB issuances (NGN200.00 billion) outweighed the inflow from OMO maturities (c. NGN38.53 billion). As a result, the average system liquidity settled lower at a net long position of NGN452.55 billion (vs a net long position of NGN919.76 billion in the previous week).

We believe the OVN rate will head northwards, as the outflows for next week’s auctions (FGN bond, OMO & FX) will pressure the financial system and offset the impact of the anticipated inflow from OMO maturities (NGN60.00 billion).

Treasury bills

Bullish sentiments persisted in the Nigerian Treasury bills secondary market, as the average yield across all instruments contracted further by 22bps to 1.5%. We attribute this performance to higher demand as investors looked to cover for lost bids at the NTB PMA on Wednesday. Across the market segments, the average yield contracted by 68bps and 10bps to 1.3% and 1.5% in the OMO and NTB secondary markets, respectively. At the primary auction, the CBN offered instruments worth NGN217.06 billion – NGN4.52 billion of the 91-day, NGN1.31 billion of the 182-day, and NGN211.23 billion of the 364-day bills. Demand was at its highest level at a total subscription of NGN1.06 trillion (bid-to-offer settled at 4.9x) with more interest on the longer-dated bills (NGN1.03 billion translating to 97.6% of the total subscription). Eventually, the CBN allotted bills worth NGN417.06 billion – NGN4.52 billion of the 91-day, NGN1.31 billion of the 182-day, and NGN411.23 billion of the 364-day – at respective stop rates of 0.10% (previously: 0.29%), 0.30% (previously: 1.80%), and 2.24% (previously: 4.78%).

Given the expected tight liquidity in the system next week, we anticipate increased T-bills yields from current levels.

Bonds

This week, the Treasury bonds secondary market closed on a bullish note, as investors took positions at the short end of the curve ahead of the bond PMA scheduled to hold next week Monday. As a result, the average yield dipped by 17bps to 13.1%. Across the benchmark curve, the average yield contracted at the short (-67bps) end following the interest on the MAR-2025 (-151bps) bond, but expanded slightly at the long (+8bps) end due to investors taking profits off the APR-2037 (+30bps) bond. Conversely, the average yield was flat at the mid segment.

Next week, we expect the outcome of the FGN bond primary auction scheduled to hold on Monday (13 February) to shape the direction of yields in the secondary market. At the auction, the DMO is offering instruments worth NGN360.00 billion through re-openings of the 13.98% FGN FEB 2028, 12.50% FGN APR 2032, 16.25% FGN APR 2037 and 14.80% FGN APR 2049 bonds. Notwithstanding, we maintain our medium-term view that the FG’s frontloading of significant borrowings for the year will result in an uptick in bond yields, as investors demand higher yields in the face of elevated supply.

Foreign Exchange

This week, Nigeria’s FX reserves declined by USD167.87 million w/w to USD36.82 billion (08 February 2023) – the lowest level since September 2021 (USD36.78 billion). Meanwhile, the naira appreciated by 0.1% to NGN461.50/USD at the I&E window (IEW), with total turnover at the window (as of 09 February 2023) declining by 46.1% WTD to USD292.76 million, as trades were consummated within the NGN416.00 – NGN478.18/USD band. In the Forwards market, the naira rates recorded for the 1-month (-1.1% to NGN488.77/USD) and 1-year (-8.0% to NGN529.62/USD) contracts declined, but increased for the 3-month (+0.6% to NGN486.65/USD) and 6-month (+0.3% to NGN504.45/USD) contracts.

We believe FX liquidity issues will remain over the short-to-medium term as we do not see 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 who have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long-term.