Notably, intense buying activities on the first trading session of the holiday shortened week resulted in the market recording its biggest single-day gain (+5.2%) since 12 November 2020 (+6.2%). As such, the All-Share Index ended the week in the green, closing higher by +5.4% w/w at 55,822.82 points.

Global Economy

According to the flash estimates from S&P Global/CIPS, United Kingdom’s Manufacturing PMI (47.1 points vs April: 47.8 points) decelerated to a 4-month low in May as the benefits from improved supply chains were offset by the combined impact of (1) weak domestic market sentiment and (2) subdued new orders. At the same time, the Services PMI weakened to 55.1 points (April: 55.9 points), reflecting the effects of the cost-of-living crisis, elevated borrowing costs, and rising economic uncertainties on corporate clients amid resilient consumer demand. Overall, the Composite PMI fell to 53.9 points (April: 54.9 points), although it continues to signal a sustained positive private-sector activity as the index remains above the 50 points psychological threshold. Over the short-to-medium term, we expect private sector activities to stay resilient, mainly driven by post-pandemic demand in the service sector, amid the business downturn in factory activities. Accordingly, we expect the Bank of England (BOE) to remain hawkish in their June policy meeting to lessen the stubbornly high inflationary pressures influenced by business activities.

Private sector activity in China remains weak as demand continues to moderate, adding pressures on local authorities to shore up the economy. According to the Chinese National Bureau of Statistics (NBS), China’s Manufacturing PMI slowed for the second consecutive month to 48.8 points in May (April: 49.2 points), representing the lowest level in 5 months and below market expectation (49.4 points). We attribute the slowdown in factory activities to the subdued demand, weaker output, and new orders falling to record lows. Simultaneously, the Non-Manufacturing PMI (54.5 points vs April: 56.4 points) eased to its weakest level since January (54.4 points), given the weak external demand, new orders, and employment in the period. The lower-than-expected private sector activity continues to raise doubt about the sustainability of China’s post-COVID recovery, more so that the factory, property, and export-oriented sectors remain underwhelming. Accordingly, we believe structural reforms, together with proactive fiscal and monetary policies, will be crucial to support the real economy over the short term to medium term. 

Global Markets

The global equities market was broadly mixed this week. While enthusiasm following the news of a debt ceiling deal waned, investors seemed more concerned about recent trends that defined the wider backdrop – moderating inflation, the outlook for the Federal Reserve policy path, and a slowing economy. Accordingly, mixed sentiments dominated trading in US equities (DJIA: -0.1%; S&P 500: +0.4%) as investors assessed the labour market’s strength amid optimism that the Fed can create a smooth landing for the economy. Meanwhile, European equities (STOXX Europe: -0.8; FTSE 100: -1.3%) were set to close lower on global slowdown concerns. Elsewhere, Asian markets were broadly positive, as the Nikkei 225 (+2.0%) and SSE (+0.5%) closed higher following positive reactions to China stimulus bets. Finally, the Emerging market (MSCI EM: -1.1%) index declined consequent upon losses in Brazil (-0.3%), while the Frontier market (MSCI FM: +0.9%) index closed higher, driven by gains in Vietnam (+2.4%).

Nigeria

Domestic Economy

On 31 May, the Nigerian National Petroleum Company Limited (NNPCL) announced that it adjusted the pump price of PMS across its retail outlets in line with current realities, indicating the end of the country’s age-long PMS subsidies. The preceding comes two days after the Nigerian President announced the end of the PMS subsidy regime in his inauguration speech. We are unsurprised by the NNPCL’s announcement as we argued (see report: A Look at the Inaugural Speech) in favour of a reference price to clear the queues that ensued after President Tinubu’s pronouncement in his inaugural address. Accordingly, we note that PMS prices across the country increased by 174.6% to an average of NGN526.70/litre (previously: NGN191.84/litre). In the near term, we expect the significant increase in PMS prices to fuel inflationary pressures, depressing consumer spending and weighing on economic activities. Nonetheless, the subsidy removal helps free up government resources for more productive uses. Also, given the impact on revenue, we expect fiscal deficits to reduce over time if the aggregate expenditure does not grow more than the increase in revenue.

According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange Group (NGX), total transactions in the domestic equities market recorded their first increase in three months, rising by 30.8% m/m to NGN191.21 billion in April (March: NGN146.22 billion). The breakdown shows that the domestic investors were the primary drivers of the increase, as domestic transactions grew by 33.4% m/m to NGN182.74 billion (March: NGN137.03 billion) – its highest print in 11 months. However, foreign transactions (-7.8% m/m to NGN8.47 billion | 4.4% of total transactions) declined to a new record low primarily due to the (1) lingering FX liquidity constraints, (2) weak macro narrative, (3) elevated global interest rates, and (4) heightened global uncertainties. We expect domestic investors to continue to dominate the domestic equities market over the short-to-medium term, even as higher 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 elevated global uncertainties, sustained FX liquidity challenges, and tightening global financing conditions.

Capital Markets

Equities

The bullish momentum in the local bourse accelerated as investors hunted for bargains following positive reactions to President Tinubu’s inaugural speech. Notably, intense buying activities on the first trading session of the holiday shortened week resulted in the market recording its biggest single-day gain (+5.2%) since 12 November 2020 (+6.2%). As such, the All-Share Index ended the week in the green, closing higher by +5.4% w/w at 55,822.82 points. Remarkably, investors’ interest in MTNN (+7.5%), DANGCEM (+7.4%), and BUAFOODS (+11.0%) underpinned the positive performance. Thus, the YTD return for the index increased to 8.9%. Activity level was positive, as trading volume and value grew by 31.1% w/w and 37.0% w/w, respectively. Elsewhere, performance across sectors was positive, as the Oil and Gas (+10.5%) index topped the gainers’ chart, trailed by the Consumer Goods (+8.5%), Industrial Goods (+5.8%), Banking (+4.9%) and Insurance (+1.2%) indices.

We envisage extended bargain hunting in the coming week as investors continue to digest the policy direction of the new administration. However, we do not rule out intermittent profit-taking activities. 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. Lastly, 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

The overnight (OVN) rate contracted by 138bps to 11.9% on the back of the buoyant system liquidity from the prior week combined with additional inflows this week from OMO maturities (NGN20.00 billion) and FGN bond coupon payment (NGN5.63 billion). Nonetheless, we highlight that the average system liquidity settled at a lower net long position of NGN184.17 billion, relative to the net long position of NGN339.93 billion in the previous week.

In the absence of any significant inflows into the system, we expect system liquidity to be pressured next week, causing the OVN rate to trend upward from current levels.

Treasury bills

Activities in the Nigerian Treasury bills secondary market were bullish this week, as the healthy system liquidity continued to support buying interest for bills across the market. Consequently, the average yield contracted by 44bps to 6.4%. We noticed particular interests for the 97DTM (109bps), 251DTM (-144bps), and 300DTM (-100bps) bills, respectively.

Next week, we believe yields in the NTB secondary market will tilt northwards, following our expectations for a depressed system liquidity. Notwithstanding, we expect market participants to shift focus to the NTB PMA on Wednesday (07 June), where the CBN is scheduled to roll over NGN182.85 billion worth of bills.

Bonds

This week, the Treasury bonds secondary market continued on a bullish note, as market participants sought out high-yielding bonds across the curve. As a result, the average yield across all instruments contracted by 10bps to 13.9%. Across the benchmark curve, the average yield declined at the short (-1bp), mid (-12bps) and long (-8bps) segments, following bargain hunting in the FEB-2028 (-20bps), NOV-2029 (-22bps) and JAN-2042 (-18bps) bonds, respectively.

We retain our view that frontloading of significant borrowings for the year by the FG will result in an uptick in bond yields, as investors demand higher yields in the face of elevated supply.

Foreign Exchange

Nigeria’s FX reserve maintained the decline from the previous week, as the gross FX reserve declined further by USD52.97 million w/w to close at USD35.09 billion (30 May). Meanwhile, the naira was flat at N464.67/USD at the I&E window (IEW), with total turnover at the window (as of 01 June 2023) decreasing by 23.8% WTD to USD535.08 million, as trades were consummated within the NGN460.00 – NGN481.61/USD band. In the Forwards market, the naira depreciated across the 1-month (-2.4% to NGN482.48/USD) contract, 3-month (-5.0% to NGN511.30/USD), 6-month (-5.6% to NGN536.48/USD), and 1-year (-4.8% to NGN565.79/USD) contracts.

We believe the 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) decline in oil prices, FPIs which have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long-term.