In March, private sector activities in the United States (US) softened amidst lingering monetary policy tightening. According to the Institute of Supply Management (ISM), US Manufacturing PMI remained in the contractionary territory for the fifth consecutive month, declining to 46.3 points in March (February: 47.7 points) – the lowest level since May 2020 (43.5 points). Excluding the COVID-19 pandemic, the March print is the lowest since June 2009, highlighting the continued impact of rising borrowing costs. Elsewhere, the Services PMI slowed to 51.2 points (February: 55.1 points) reflecting the impact of policy actions on demand. We expect overall private sector activity to slow further in the near term, given our expectations of continued moderation in factory and business activities. Our prognosis is hinged on the lingering impact of tighter monetary conditions amid weak demand. Consequently, we think the US Fed is approaching the end of its interest rate hiking cycle. 

According to the flash estimates from S&P Global/CIPS, the United Kingdom’s (UK’s) Composite PMI settled at 52.2 points in March (February: 53.1 points). Analyzing the breakdown, the Manufacturing PMI (47.9 points vs February: 49.3 points) moderated after two consecutive months of increase as the combined impact of (1) weaker consumer demand and (2) low production output, dampened factory activities during the review period. At the same time, the Services PMI settled lower at 52.9 points (February: 53.5 points) even as rising business and consumer confidence led to a marked growth in new business intakes. While factory activity remains a drag on the economy, the strong business activity supported overall private sector activity in Q1-23. That said, a continued positive performance in the service sector could trigger hopes that a turnaround is on the horizon for the UK economy although (1) elevated financing conditions, (2) a tight labour market, and (3) increased inflationary pressures remain a constraint on business growth.

Global Markets

Growth worries picked up in the global equities market after a slew of soft economic data soured market sentiments, stoking fears of a recession and prompting risk-off sentiments. As of the time of writing, US equities (DJIA: +0.6%; S&P 500: -0.5%) were mixed as weak economic data (a decline in US job openings and manufacturing PMI) worsened worries that the Fed’s pace of interest rate hikes might tip the US into a recession. Elsewhere, European equities (STOXX Europe: +0.1%; FTSE 100: +1.0%) were on course for a weekly gain as a rally in real estate and travel stocks outweighed concerns over a slowdown in the global economy. Meanwhile, mixed sentiments dominated the Asian markets. Specifically, Chinese equities (SSE: +1.2%) traded higher this week following positive reactions to upbeat Chinese PMI data, while Japanese equities (Nikkei 225: -2.0%) declined as recession concerns took center stage. Likewise, the Emerging market index (MSCI EM: -0.2%) declined following bearish sentiments in Taiwan (-0.4%) while the Frontier market index (MSCI FM: +1.0%) edged higher supported by gains in Vietnam (+0.6%).

Nigeria

Domestic Economy

According to the National Bureau of Statistics (NBS), capital importation into Nigeria declined by 51.5% y/y to USD1.06 billion in Q4-22 (Q4-21: USD2.19 billion | Q3-22: USD1.16 billion). We believe the persistent slowdown in capital importation reflects foreign investors’ lacklustre interest in the country given (1) an unclear foreign exchange framework, (2) an uninspiring macro narrative, (3) elevated global interest rates, and (4) heightened global uncertainties. Accordingly, the breakdown provided showed that there was a broad-based decline across the portfolio investments (-55.6% y/y to USD285.26 million), foreign direct investments (-76.5% y/y to USD84.23 million), and other investments (-41.7% q/q to USD691.23 million). On an annual basis, capital importation declined for the third consecutive year, dipping by 20.5% to USD5.33 billion in 2022FY (2021FY: USD6.70 billion) – the lowest annual print since 2016FY (USD5.12 billion). While we believe a new government will be a breather for the country in the short term as sentiments are likely to improve, we think foreign capital inflows will remain low compared to pre-COVID levels over the medium term in the absence of significant reforms in the FX, fiscal and monetary policy frameworks. 

According to the data obtained from FMDQ, total inflows into the Investors & Exporters Window (IEW) rose by 59.2% m/m to USD1.49 billion in March (February: USD 937.60 million). On the one hand, local inflows increased by 46.9% m/m to USD1.20 billion primarily due to higher inflows from the CBN (+240.3% m/m), exporters (+7.2% m/m) and non-bank corporates (+50.9% m/m) in the review period. On the other hand, while foreign inflows rose by 2.4x to USD291.90 million, they remain significantly below pre-pandemic levels (2019FY monthly average: USD1.56 billion) because of (1) FX liquidity constraints, (2) an overvalued currency, and (3) absence of significant macro reforms. Over the short-to-medium term, we expect FX liquidity conditions to remain frail in the absence of reforms to attract US dollar inflows into the economy. The low FX liquidity conditions will also be driven by lingering global uncertainties and higher global interest rates, limiting foreign inflows to the economy. Thus, foreign investors will need some convincing actions as regards flexibility and clarity in the FX framework going forward.

Capital Markets

Equities

The local bourse continued its descent for the fourth consecutive week as massive sell-offs of AIRTELAFRI (-10.0%) heaped greater pressure on the market, causing the benchmark index to plummet by 2.3% w/w to close at 52,994.13 points. As a result, the MTD and YTD returns settled at -2.3% and +3.4%, respectively. Activity levels mirrored the decline in the market’s broad gauge, as trading volumes and value declined by 49.1% w/w and 42.8% w/w, respectively. Across sectors, the Banking (-1.0%), Consumer Goods (-0.6%), and Oil & Gas (-0.1%) indices declined while the Insurance (+2.2%) index was the sole gainer of the week. On the other hand, the industrial Goods index closed flat.

Heading into the second quarter, we expect investors to rebalance their portfolios based on an assessment of corporate earnings released for 2022FY and the movement of yields in the FI market. We continue to advise investors to take positions in only fundamentally justified stocks as the unimpressive macro story remains a significant headwind for corporate earnings.

Money Market and Fixed Income

Money market

With limited inflows, the average system liquidity settled at a net short position of NGN64.90 billion (vs a net short position of NGN463.91 billion in the previous week). Consequently, the overnight (OVN) rate remained elevated and settled at 18.9% by the end of the week.

Given the thin maturity profile over the coming weeks, the absence of any significant inflows into the system next week should keep money market rates elevated over the short term. Nonetheless, we note a significant maturity at the tail-end of the month (c. NGN759.00 billion), which will be accompanied by coupon payments that may cause rates to descend.

Treasury bills

This week, activities in the Treasury bills secondary market closed on a mixed note, albeit with a bearish undertone, as market participants traded cautiously given the low system liquidity. Thus, the average yield across all instruments increased by 3bps to 7.5%. Across the market segments, the average yield at the NTB segment expanded by 3bps to 7.8% but remained at 4.0% in the OMO segment.

Next week, we anticipate an increase in T-bills yields given the expected tight liquidity position. Nonetheless, we expect market focus to be shifted to the NTB PMA holding on Wednesday (12 April), where the CBN is scheduled to roll over NGN149.64 billion worth of maturities.

Bonds

The Treasury bonds secondary market remained bearish this week, as investors continued to sell-off positions across the mid and long segments of the curve. Consequently, the average yield increased by 11bps w/w to 13.7%. Across the benchmark curve, the average yield expanded across the short (+13bps), mid (+13bps), and long (+5bps) segments, as investors sold off the MAR-2024 (+35bps), NOV-2029 (+22bps) and APR-2037 (+30bps) bonds, respectively. 

In the medium term, we believe that the significant borrowings expected from the FG for the year will result in an uptick in bond yields, as investors demand higher yields in the face of elevated supply. However, over the short term, the maturities expected should drive market activities and cause market yields to descend, especially on on-the-run instruments, as investors reinvest funds.

Foreign Exchange

Nigeria’s FX reserves decreased by USD111.10 million w/w to USD35.39 billion (05 April). Likewise, the naira depreciated by 0.4% to N463.25/USD at the I&E window (IEW), with total turnover at the window (as of 05 April) decreasing by 45.0% WTD to USD305.58 million – trades were consummated within the NGN460.00 – NGN479.98/USD band. In the Forwards market, the naira appreciated on the 1-month (+0.1% to NGN467.00/USD) and 6-month (+0.1% to NGN511.41/USD) contracts but decreased across the 3-month (-0.1% to NGN483.53/USD) and 1-year (-0.1% to NGN565.88/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.