According to the National Bureau of Statistics (NBS) of China, the world’s second-largest economy grew by 4.5% y/y in Q1-23 (Q4-22: +2.9% y/y) – the highest growth print since Q1-22. The solid start in 2023 synchronised neatly with the boost in consumer spending as the government ended three years of strict COVID-19 restrictive measures. That said, we highlight that the property sector remained in the woods as property investments declined by 5.8% in the review period. On a quarter-on-quarter basis, the Chinese economy expanded by 2.2% (Q4-22: 0.0% q/q). We understand that the Chinese government is likely to release additional stimulus programmes in the near term to boost its infrastructure investments and consumption. We expect the preceding, in addition to the (1) lingering rebound in consumer demand and (2) low base effects in the prior year to keep the economy on a solid growth path. Nonetheless, pressured external demand poses a downside risk to the solid growth outlook. Overall, the IMF expects the country to grow by 5.2% in 2023E (2022FY: 3.0% y/y).

Consumer prices in the United Kingdom (UK) remain sticky, with the headline inflation staying above 10.0% for the seventh consecutive month. According to the Office for National Statistics (ONS), the UK’s headline inflation eased by 30bps to 10.1% y/y in March (February: 10.4% y/y), albeit above market expectations (9.8% y/y). While food prices (19.1% y/y vs February: 18.0% y/y) were the major pressure point in the review period, core inflation remained sticky and unchanged at 6.2% y/y. On a month-on-month basis, consumer prices settled at 0.8% (February: 1.1% m/m). In the near term, we expect headline inflation to moderate further because of the (1) favourable base effects from the prior year, (2) stabilizing energy prices, and (3) lagging impacts of rising interest rates. Nonetheless, the elevated inflationary pressures reinforce the view that the BOE has more work to do in driving down prices through continuous rate hikes. Consequently, the market is currently pricing in a 25bps hike when the Monetary Policy Committee (MPC) meets on the 11th of May.

Global Markets

The major themes in the global equities market this week have centred around (1) quarterly corporate reports, (2) economic data (UK inflation data and China GDP data), and (3) mixed signals from the Federal Reserve officials on the trajectory of interest rate hikes. As of the time of writing, US equities (DJIA: +0.0%; S&P 500: +0.4%) were partly stable as investors parsed a bevy of corporate earnings and the latest assessment on the US economy as reported by the Federal Reserve’s monthly ‘Beige Book’ survey. Likewise, European equities (STOXX Europe: +0.1%; FTSE 100: +0.2%) were moderately positive, as investors assessed the latest UK inflation print while shifting focus to the Federal Reserve rate-hiking decision expected on 3 May. In Asia, Chinese equities (SSE: +0.9%) were boosted by positive economic growth data, and prospects of another round of policy stimulus. In a similar vein, Japanese equities (Nikkei 225: +0.6%) gained over the week, riding on Wall Street’s positive sentiments. In conclusion, the Emerging (MSCI EM: -1.0%) and Frontier (MSCI FM: -0.3%) market indices declined following losses in Taiwan (-1.4%) and Vietnam (-0.3%), respectively.

Nigeria

Domestic Economy

According to the National Bureau of Statistics (NBS), headline inflation increased by 13bps to 22.04% y/y in March (February: 21.91% y/y) – the highest level since September 2005 (24.32% y/y). To wit, food prices (+10bps to 24.45% y/y) rose to the highest level since October 2005 (24.56% y/y) on the back of (1) below-historical average cultivation activities limiting food supply, (2) increased food demand, and (3) passthrough effects of increased transport costs. Similarly, the (1) unfavourable base effects from the prior year, and (2) electioneering spending fanned the core inflation (+102bps to 19.86% y/y) to its highest level since May 2004 (23.43% y/y). On a month-on-month basis, headline inflation increased by 15bps to 1.86% (February: 1.71% m/m). While we expect the Ramadan and Easter celebrations are likely to have stoked food demand, increasing short-term upward pressure on food prices, we believe the core inflation will likely moderate in April, given the phase-out of election spending and reduced volatility in PMS prices. Accordingly, we forecast the headline inflation to settle at 1.73% m/m in April, translating to 22.01% y/y.

The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in March (from the total revenue generated in February) declined by 1.1% m/m to NGN714.63 billion (February: NGN722.68 billion). Analysing the breakdown provided, a significant decline in Value Added Tax (VAT) was responsible for the shortfall in the review period relative to February. Nonetheless, we note increases in the inflows from Petroleum Profit Tax (PPT), Oil & Gas Royalties, Companies Income Tax (CIT), Import and Excise duties, and Electronic Money Transfer Levy (EMTL). Accordingly, the FGN received NGN276.14 billion (February: NGN269.06 billion), state governments shared NGN267.23 billion (February: NGN279.68 billion), the local governments received NGN171.26 billion (February: NGN173.94 billion). We maintain our expectation that non-oil revenue will continue to support aggregate revenue, given the sustained improvement in economic activities and the impact of the provisions of the 2022 Finance Act. However, we expect oil revenue to remain underwhelming due to (1) lower crude oil prices, (2) reduced crude oil production relative to pre-pandemic levels, and (3) high PMS under-recovery costs.

Capital Markets

Equities

The local stock market witnessed another subdued performance despite closing marginally higher on three out of the four trading sessions this week. The downward slide was primarily due to sell pressures on MTNN (-6.7%), amid strong bargain hunting on ACCESSCORP (+11.9%) and TRANSCORP (+45.0%) – we observed strong buying interest in TRANSCORP, supported by positive reactions to the recent announcement of the acquisition of a significant stake (5.52%) in the company by one of Nigeria’s prominent billionaires, Femi Otedola. Eventually, the All-Share Index shed 1.0% w/w, with the MTD and YTD returns settling at -5.3% and +0.2%, respectively. Analysing activity levels, traded volume and value improved by 41.2% w/w and 45.6% w/w, respectively, with TRANSCORP accounting for about 30.7% and 16.2% of the total trading volume and value. Elsewhere, sectoral performance was largely bearish, following declines in the Banking (-2.5%), Oil and Gas (-1.4%), and Industrial Goods (-0.2%) indices and gains in the Insurance (+1.4%) and Consumer Goods (+0.2%) indices.

In the coming week, we expect the NGX’s floor to be flooded with results as the Q1-23 earnings season commences in full swing. Thus, we expect decent earnings releases across board to temper selling activities and support positive sentiments on the bourse. In the medium term, we expect investors’ sentiments to be influenced by developments in the macroeconomic landscape and the movement of yields in the fixed-income space. Overall, 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 remains elevated at 19.0%, as the liquidity in the system remained low. For clarity, debits for the FGN bond auction (NGN552.47 billion) overshadowed the inflow from FGN bond coupon payments (NGN46.44 billion). As a result, the average system liquidity closed at a net short position of NGN338.33 billion (vs. a net short position of NGN176.33 billion in the previous week).

Next week, we believe the financial system will be saturated with liquidity given the expected inflows from the maturing APR-2023 bond (NGN735.96 billion), FAAC disbursements (NGN438.49 billion) and FGN bond coupon payments (NGN178.50 billion). Hence, we envisage a decline in the OVN rate.

Treasury bills

Activities in the Treasury bills secondary market were mixed, albeit with a bullish bias, following the tepid demand for bills due to the depressed liquidity levels. As a result, the average yield across the market dipped by 3bps to 8.5%. Across the market segments, the average yield contracted by 3bps to 8.8% in the NTB secondary market and was flat in the OMO segment at 4.0%.

Next week, we envisage lower yields in the Treasury bills secondary market as we believe the liquidity surfeit in the financial system will drive demand. In addition, we expect market focus to be shifted to the NTB PMA holding on Wednesday (26 April), where the CBN is scheduled to roll over NGN131.46 billion worth of maturities.

Bonds

The Treasury bonds secondary market traded with bearish sentiments, as investors continue to exit positions across the short and long ends of the curve. Consequently, the average yield expanded by 13bps to 13.9%. Across the benchmark curve, the average yield expanded at the short (+39bps) and long (+4bps) ends due to the sell-offs on the APR-2023 (+277bps) and JAN-2042 (+19bps) bonds, respectively. Meanwhile, the average yield contracted at the mid (-3bps) segment following demand on the APR-2032 (-6bps) bond. At this month’s auction, the DMO offered instruments worth NGN360.00 billion to investors through re-openings of the 13.98% FEB 2028 bond (Bid-to-offer: 1.2x; Stop rate: 14.0%), 12.50% APR 2032 (Bid-to-offer: 0.1x; Stop rate: 14.8%), 13.00% JAN 2042 (Bid-to-offer: 1.1x; Stop rate: 15.4%), and 12.98% MAR 2050 (Bid-to-offer: 3.6x; Stop rate: 15.8%) bonds. The subscription level settled at NGN444.03 billion, translating to a bid-to-offer ratio of 1.2x, with demand skewed towards the MAR 2050 bond (bid-to-offer: 3.6x). The DMO eventually over-allotted instruments worth NGN552.47 billion (non-competitive allotments: NGN183.80 billion), resulting in a bid-to-cover ratio of 0.8x.

Next week, we expect the liquidity influx from the maturing APR-2023 bond along with coupon payments will support demand in the FGN bond secondary market and drive yields downwards in the interim. Over the medium term, we expect an uptick in bond yields as we believe investors will demand higher yields, which will be driven by significant borrowings expected from the FG for the year.

Foreign Exchange

This week, Nigeria’s FX reserve declined by USD79.77 million w/w to close at USD35.33 billion (19 April). Meanwhile, the naira appreciated by 0.1% to N463.67/USD at the I&E window (IEW), with total turnover at the window (as of 19 April 2023) decreasing by 19.7% WTD to USD290.46 million, as trades were consummated within the NGN460.00 – NGN480.18/USD band. In the Forwards market, the naira rates recorded for the 1-month (+0.1% to NGN468.68/USD) and 1-year (+0.3% to NGN560.79/USD) contracts increased, but depreciated on the 3-month (-0.8% to NGN489.86/USD) and 6-month (-0.6% to NGN516.33/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.