July 5, 2023/Cordros Report
Financial Markets Review & Outlook
The performance of the Nigerian financial market so far in 2023 has played out as we envisaged, bucking the trend from emerging (EM) and Frontier (FM) peers, which remain rattled by the impact of policy tightening by global central banks amid inflationary pressures.
The NGX ASI is at its highest level since May 2008, settling at 60,715.04 as of 4 July. Also, the market return is at +18.5%, a towering figure relative to that of EM (+5.1%) and FM (+2.6%) peers. In contrast, the fixed income market return is currently +10.0%, 277bps and 122bps higher than the prior period (+6.7%) and the previous year (+7.3%), respectively. At the same time, the fixed income market was characteristically volatile in H1-23 as a combination of factors pressured market yields upwards and downwards in different periods.
The equities market resilience reflects heightened investor optimism for domestic growth with the new administration’s promulgation of long-needed policies. To buttress this, the market gained c.14.6% from when the new administration took office on 29 May, representing the bulk of the gains recorded in H1-23. Notably, domestic investors accounted for 88.5% of all transactions in the first five months of the year, with FPI participation still in limbo. While the equities market has resonated positively, the fixed-income market has been affected by the Federal Government’s increased reliance on the domestic market for deficit financing as they wound down the utilisation of CBN’s ways and means amid the demand/supply imbalance.
As some of the factors we highlighted in our 2023FY as market catalysts have started to materialise, we maintain our overall views for the year. However, we now foresee a better showing from the equities market.
We still expect yields in the fixed-income market to maintain an uptrend in H2-23, driven specifically by the continued demand and supply imbalance, with the government’s borrowings expected to exceed the budgeted amount. Therefore, assessing all the factors, we estimate that the average yields on Treasury bills and bonds will increase in the year and settle at c.6.6% and c.13.5%, respectively, by the end of 2023FY.
We revised our expectations for the equities market and now forecast a 25.8% positive return (Previous: +3.5%). This is because we believe that all risks are now tilted towards the upside, as the factors we cited as tailwinds for an overtly positive market, particularly around market-friendly reforms and an accommodative monetary policy stance, have started to materialise.
