July 14, 2023/CSL Research

The reforms of the Tinubu administration have changed our initial views on the macro economy. Based on recent FX changes, we have revised our year end forecast for the Naira to N785.77/US$ from N510/US$. In the short term, we believe that there will still be a moderate disparity between the FX rates at the parallel market and the I&E window as more demand continues to go to the parallel market and supply remains constrained. .

Price pressures and the need to attract foreign portfolio investors (FPIs) amidst elevated interest rates in advanced countries have remained at the front burner for the monetary policy committee, as they have clearly prioritized these concerns over growth. Though a spike in inflation numbers implies a widening of the negative real interest rate and should call for more aggressive rate hikes, we do not believe the monetary authorities will be willing to raise the policy rate much higher than current levels given the new administration’s perceived bias for low interest rates.  Going into H2, we forecast at most a 150bps rise in rates till the end of the year.

Nigeria’s Real GDP grew by 2.31% in Q1 2023, lower than the growth rate of 3.11% y/y in Q1 2022 due the impact of the Naira cash crunch and the election induced slowdown in economic activities.  We believe the new reforms and the prevailing high interest rate environment will suppress growth in the non-oil sector while production in the oil sector has not improved as expected. We revise our 2023 real GDP forecast down to 2.8% y/y from 3.1% previously.

Contrary to our earlier projection of a moderation in inflation rate in 2023 to 18.20%, aided largely by base effect, recent price triggers from PMS price adjustment, currency pressure from the unification of the exchange rate, and likely rise in electricity tariffs make us believe inflation numbers are set to rise significantly. Beyond this, other policies such as the implementation of new import duties on selected goods and new taxes from the Finance Act will also contribute significantly to a rise in headline inflation in the near term. Overall, we forecast headline inflation will reach a peak of 29.8%.

In the second half of 2023, we project the current account (CA) balance will remain positive, riding the gains from an improved export condition. Specifically, we expect the devaluation of the currency at the official window to result in an increase in export value and a decrease in imports as imports become more expensive.

Again, we may likely see an improvement in the country’s fiscal position. The government expenditure for 2023 was estimated at an all-time high of N21.8 trillion. Given expected savings on subsidy, impact of the currency devaluation on FX revenue and expectations of growth in tax revenue from new taxes introduced in the new Finance Act, the target budget deficit of N11.34tn may as an exception to the recent pattern, not be exceeded. The country’s fiscal deficit has surpassed the target by an average of c.65% over the last 5 years due to ambitious revenue estimates amidst volatile crude oil prices.

We believe the valuations of many stocks remain attractive despite recent gains. Within our coverage universe, we maintain Buy ratings on UBA, Access, Zenith, Guaranty Trust Bank, Lafarge Africa, DangCem, and MTNN. Though many of these stocks have been re-rated following significant price increases over the past weeks, we still believe sustained interest in the stock market will lead to a further re-rating of these stocks. Moreover, apart from GTCO which is currently trading at a PBV of 1.0x, all the tier one banks are still trading at a significant discount to their book values (Access 0.4x, FBNH 0.6x, UBA 0.5x, Zenith 0.7x)

Liquidity in the fixed income market improved in H1 2023 to N67.5bn (+47.15% y/y from N45.9bn in H1 2022) as investors positioned themselves in instruments with attractive yields. The Nigerian Treasury Bill (NTB) average yield settled at 6.16% in H1 2023 (compared with 3.67% in H1 2022) with buy interest at the mid-end of the curve in the secondary market. Demand across all tenors of the Federal Government of Nigeria (FGN) Bonds was relatively heightened in the period as average yield settled at 11.77% compared with an average yield of 10.37% in H1 2022. Based on expectations of only a moderate increase in the MPR in H2, we forecast that yields may expand by 100 basis points (bps) at the mid and long ends of the curve.

Real GDP: Economic growth to slow in H2.

We revise our 2023e real GDP growth forecast down to 2.8% from our earlier forecast of 3.1%. Nigeria’s Gross Domestic Product (GDP) growth fell to 2.31% in Q1 2023 from 3.11% recorded in Q1 2022, and 3.52% in Q4 2022 according to the National Bureau of Statistics (NBS). The decline in the country’s growth rate was attributed to the adverse effects of the Naira cash crunch which disrupted economic activities during the quarter. The service sector was the major driver of the country’s GDP, recording a growth of 4.35% and contributing 57.29% to the aggregate GDP. The agriculture sector declined by -0.90%, lower than the growth of 3.16% recorded in Q1 2022, as the sector continues to be hampered by incidences of insecurity. Growth of the industry sector improved to 0.31% relative to -6.81% recorded in Q1 2022. Despite this, the agriculture and the industry sectors contributed 21.66% and 21.05% to the aggregate GDP in the quarter under review.

The oil sector which has been in recession improved to -4.21% in Q1 2023 compared with -26.04% in Q1 2022, as crude oil production improved during the quarter. The NBS pegged the average daily oil production for Q1 2023 at 1.51mbpd, higher than the daily average production of 1.49mbpd recorded in the same quarter of 2022 and higher than the Q4 2022 production volume of 1.34mbpd. The oil sector contributed 6.21% to the total GDP in Q1 2023, down from the figure recorded in the corresponding period of 2022 and up from the preceding quarter, where it contributed 6.63% and 4.34% respectively. The non-oil sector grew by 2.77% in Q1 2023. This rate was lower by 3.30ppts compared to the rate recorded in the same quarter of 2022 and 1.6ppts lower than Q4 2022.

We believe that the decline in Nigeria’s economic growth rate in Q1 was largely due to the Naira scarcity and the 2023 general elections which disrupted economic activities in the country. The improvements seen in the fortunes of the oil sector can be attributed to improved production volumes as the country reaped the benefits of its aggressive clampdown on crude oil theft. Average crude oil production volume (with condensates) of 1.52mbpd was reported in Q1 2023 with an average price of US$83.97/bbl. Oil production slowed down in Q2 2023 with an average production volume of 1.38mbpd and an average price US$77.73/bbl. We have revised our forecast for production for FY 2023 to 1.48mbpd from 1.6mpbd previously. However, we expect the devaluation of the currency to lead to improved output numbers for the oil sector and as such we retain our forecast that the oil sector will exit a recession in 2023.

Y/y growth across major sectors of the economy

Source: NBS, CSL

The manufacturing sector grew modestly by 2.4% in 2022, reflecting the negative impact of CBN’s hawkish rendition, especially in the second half of the year. In fact, the sector contracted by 1.91% in Q3 2022, the first contraction since covid hit in 2020. Though at a slower pace, the CBN has maintained its hawkish stance and the fortunes of the sector appeared to have worsened with the latest reforms of the new administration such as the fuel subsidy removal and the unification of the exchange rates at the various windows. In Q1 2023, the growth rate reduced to 1.61% compared with 2.83% in Q4 2022 and believe conditions will worsen in H2.

However, we expect the service sector to maintain its growth pace in the second half of 2023, supported by gains from ICT. In our view, the rollout of the 5G network and the growing expansion of mobile money should drive ICT output. Elsewhere, we expect trade to positively impact on the services sector, profiting from an improved export position.

Monthly crude oil production including condensates.

Source: NUPRC, CSL Research

Quarterly crude oil production

Source: NUPRC, CSL Research

Crude oil production and oil sector growth

Source: NBS, CSL Research

We revise our GDP forecast for 2023 down to 2.8% based on the following assumptions:

• The oil sector, which has been in a three-year recession, showed some improvement in Q1 2023 but production numbers declined in Q2 2023. We believe production numbers will likely perform below our expectations. Our expectation was based on the increased pipeline surveillance and the clampdown on oil theft by the government. However, production numbers have not recovered as fast as expected and oil prices have softened. We project an average crude oil production (including condensates) of 1.50mbpd in H2 compared with 1.45mbpd in H1, implying average production of 1.48mbpd for 2023 compared with our earlier forecast of 1.6mbpd for 2023. That said, we believe the impact of the Naira devaluation on oil sector output numbers will aid the sector’s recovery.
• We had expected the completion of Dangote’s refinery to boost refined petroleum exports while simultaneously offering structural tailwinds to FX liquidity but the likelihood of operations beginning this year seems remote.
• We also expect growth in the agricultural sector to remain subdued as the insecurity issues persist in the food producing regions and weather conditions remain unpredictable.
• We expect inflation and the rising interest rate environment to continue to depress consumer purchasing power and raise the cost of doing business over the year while the constrained fiscal space will likely depress government consumption.

Inflation: Set to spike

Nigeria’s inflation rate maintained its upward trajectory in H1 2023, as inflation surged to a new 19-year high of 22.41% in May 2022. The country’s headline inflation rate was up 19bps to 22.41%y/y in May 2023 from 22.22%y/y in Apr 2023 driven by heightened price levels in all the components of the Inflation basket. On a month-on-month (m/m) basis, headline inflation was up by 1.94% in May 2023 which was 3bps higher than the growth rate of 1.91% reported in April 2023. Nigeria’s inflation has been on the rise and is currently one of the highest globally. The rise in headline inflation could be attributed to the insecurity and flood issues in the food producing regions, multiple devaluations, hikes in utility costs and trade restrictions. The CBN has tried to implement measures to control the country’s rising inflation such as increasing the monetary policy rate (MPR) by a cumulative 700 basis points since March 2022 but the increases have not been effective in curbing inflation as the country’s inflation remains driven by supply-side factors. The reduction in purchasing power from high inflation has increased poverty in the short term, pushing an estimated 4 million Nigerians below the poverty line between January and May 2023 as estimated by the world bank.

Amidst the continued rise in food prices, the food Inflation rate settled at 24.82% y/y in May 2023, 21bps higher than the 24.61% y/y reported in April 2023. This was caused by the increase in price levels of yam and other tubers, bread and cereals, oil and fat, fish, meat, and vegetables. The food index expanded by 6bps to 2.19% m/m in May 2023 from 2.13% m/m in the prior month. We anticipate a mild respite to increasing food prices when the harvest season begins in September. However, we believe the recent removal of fuel subsidies will have a pass-through effect on food inflation, given its impact on transport costs. Also, the worsening insecurity situation will also continue to limit food production.

The core inflation rate (“all items less farm produce index”) advanced by 20.06% y/y in May 2023 which is 8bps less than the growth rate of 20.14% y/y recorded in April 2023. This came on the back of a relatively elevated supply of FX and reduced prices in kerosene and diesel in comparison to the prior year. Despite the drop in the index, the core inflation rate grew to 1.81% m/m in May 2023 from 1.46% in April 2023.

Contrary to our earlier projection of a moderation in inflation rate in 2023 to 18.20%, aided largely by base effect, recent price triggers from PMS price adjustment, currency pressure from the unification of the exchange rate, and likely rise in electricity tariffs make us believe inflation numbers are set to rise significantly. Beyond this, other policies such as the implementation of importation duties on selected goods and new taxes from the Finance Act amongst others will also contribute significantly to a rise in headline inflation in the near term. We project inflation will likely reach a peak of 29.8%.

Headline, Food and Core Inflation (L2Y)

Source: NBS, CSL Research

Exchange Rate

FX Rate: A Paradigm Change

Keeping up with the agenda of his administration, the newly elected President Ahmed Bola Tinubu through the Central Bank of Nigeria (CBN) collapsed all official FX windows into the Importer and Exporter (I&E) window in H1 2023. Consequently, the Naira opened at N664.04/US$ from the previous close of N471.67/US$ following the announcement of the unification of FX which reflected a c.40% immediate devaluation of the nation’s currency.

Other changes effected include;

•                Re-introduction of “willing buyer, willing seller” model at the I&E window

•                Pegging of the operational rate for all government transactions at the weighted average rate of the preceding day’s transactions

•                Proscription of trading limits on oversold FX positions and nil on overbought positions

•                Re-introduction of two-way quotes with bid-ask spread of NGN1.00

•                Cessation of the RT200 Rebate Scheme and the Naira4Dollar Remittance Scheme from 30th June 2023

Source: Bloomberg, CSL Research

Outlook

Based on recent FX changes, we have revised our end-of-year forecast for the Nigerian Naira from N510/US$ to N785.77/US$. In the immediate term, we believe that there will still be a moderate disparity between the FX rates at the parallel market and the I&E window as the former continues to have a higher demand for FX. The opening of the Dangote refinery may aid to temper down exchange rate as both the official window and the parallel market rate converge but we are sceptical that production will commence before the end of the year.

Monetary Policy

In line with our projections of a slower pace of rate hikes in H1 2023, the MPC raised the MPR rate by a cumulative 200bps in H1 2023. At the end of the third Monetary Policy Committee (MPC) meeting of 2023 in May, the MPC raised the MPR for the seventh consecutive time by 50bps to 18.5% from 18% previously. The CBN noted that the decision to continue its contradictory monetary policy approach is to stem inflation. The apex bank noted that loosening its monetary policy stance was not considered because it would compound inflationary pressure and trigger further macroeconomic instability.

Inflation has always played a major part in the decision of the MPC to retain its hawkish monetary policy approach. In the May MPC meeting, the MPC noted the marginal rise in headline inflation (year-on-year) in April 2023, to 22.22%, from 22.04% in March 2023, an 18bps increase. The committee noted that while the continued rise in headline inflation remained a significant problem confronting the economy, other macroeconomic variables are moving in the right direction, despite observed headwinds.

Inflation in Nigeria has been surging, rising to 22.41% in May 2023, and is currently at a 19-year high. The CBN has tried to implement measures to control the nation’s rising inflation by increasing the monetary policy rate (MPR) by a cumulative 700 basis points, but these hikes have had a very minimal impact in curbing inflation given that the country’s inflation rate is not mainly driven by increased money supply. The rate hikes have significantly increased borrowing costs for manufacturers and business owners, who may also likely be impacted by the FX unification and removal of fuel subsidies.

Price pressures and the need to attract foreign portfolio investors (FPIs) amidst elevated interest rates in advanced countries have remained at the front burner for the monetary policy committee, as they have clearly prioritized these concerns overgrowth and we believe the expectations of a surge in inflation rate implies the CBN might not be ready to halt the rate hikes yet.  However, an increase in the pace of rate hikes in reaction to the expected spike in headline inflation, in our opinion, will jeopardize the country’s fragile growth while doing little to reduce inflation. Nigeria’s real GDP increased by 2.31% in the first quarter of 2023, compared with 3.11% in the same quarter of 2022 and 3.52% in the previous quarter (Q4 2022). The economy’s growth though still positive, slowed. 

Though a spike in inflation numbers implies a widening of the negative real interest rate, we expect the authorities to keep a watch on interest rates given the news administration’s bias for low interest rates. Going into H2, we forecast at most 150bps rise in rates till the end of the year but we believe we may more likely see rates left constant.

Interbank versus MPR

Source: CBN, CSL Research

External imbalances to moderate

In the second half of 2023, we project CA to remain positive, riding the gains from an improved export condition. Specifically, we expect the devaluation of the currency at the official window to result in an increase in export value and a decrease in imports as imports become more expensive.

Based on the data released by the National Bureau of Statistics, Nigeria’s foreign trade position in Q1 2023 was a surplus of N927.2bn as exports (N6.5tn) exceeded the value of the country’s imports (N5.6tn) in the period. Relative to Q1 2022, total exports of N6.5trn was 8.68% y/y lower that the N7.1trn reported in Q1 2022 while total imports of 5.6trn was 25.83% y/y lower that the import value of N7.5trn reported in Q1 2022.

Fiscal position to improve

The government expenditure for 2023 was estimated at an all-time high of N21.8 trillion. Given expected savings on subsidy, impact of the currency devaluation on FX revenue and expectations of growth in tax revenue as recommended in the new Finance Act, the target budget deficit of N11.34tn may not be exceeded as has been the case in the last few years. Recurrent spending will likely overshoot targets while capital spending will be lower than planned. This year may likely be an exception as the fiscal deficit has surpassed the target by an average of c.65% over the last 5 years due to ambitious revenue estimates and volatile crude oil prices.

We believe recurrent spending will come in a little higher than the N8.33trn targeted in the budget. With the election of new officers for the new administration, spending will likely intensify over the course of the year. Again, debt servicing costs on the FX portion of the country’s debt position is expected to grow as the quantum of external debt rises with the devaluation. Capital spending historically has come below target and we believe this will be the case again in 2023.

On the revenue side, given the expectations of continued inflationary pressures, we expect VAT revenue to maintain the growth momentum since VAT is deducted by applying VAT rate on the value of transactions. An increase in prices of goods and services will necessarily imply growth in VAT collections.  However, we expect revenue from Company Income Tax (CIT) to decline as the profitability of businesses decline amidst increasing cost pressures. That said, taxes from new sources introduced in the new finance act such as the N10 per litre tax placed on carbonated drinks, tax on phone calls etc. should support accretion to non-oil revenue if they kick-start before year end. The President through several executive orders has postponed the commencement date of many of these taxes.

For oil revenue, while we believe the oil prices may come in slightly higher than the government’s expectation of US$75/bbl considering H1 average price target of US$81.93/bbl, we do not think that the target oil production of 1.69mbpd is achievable. Going by the latest data released by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), average daily oil production (including condensates) for the first half of the year was .1.45mpd. The perennial issues of pipeline vandalism, theft, and terminal shut-downs have continued to constitute clogs. Though the government has been making efforts to clamp down on theft, production numbers in the first half of the year have not been too impressive. That said, the devaluation of the currency at the I&E window and the FX unification bodes well for oil receipts and as such oil revenue will likely exceed budgeted numbers this year. Again, expensive subsidy payments also engulfed over 75% of gross oil revenue in 2022, limiting the amount paid to the federation account. With the subsidy eliminated, the country’s revenue position should improve considerably.

Debt to surpass IMF benchmark

Based on the most recent data released by the Debt Management Office (DMO), Nigeria’s total foreign debt for the period ending 31 March, 2023, rose to N49.85 trillion (US$108.30 billion) from N46.25 trillion as of 21 December 2022. CBN official exchange rate of N460.35/US$1 as of 31 March 2023 was used in converting the domestic debts to dollars. The figure consists of the domestic and external total debt stocks of the federal government and the sub-national governments (36 state governments and the Federal Capital Territory). The country’s public debt increased by N3trn between January and March 2023. The DMO noted that the recently securitized ways and means exposure of N22.719 trillion will be included in the total public debt stock from June 2023.

In March 2023, total external borrowing grew to N19.64tn from N18.70trn recorded in December 2022. Assuming an exchange rate of US$750, that figure should increase to N32tn. Total domestic debt stock also grew from N27.55trn in December 2022 to N30.21trn in March 2023. We believe new borrowings by the FGN and sub-national governments, primarily to fund budget deficits and execute projects were the main drivers of the growth seen. We note that the domestic debt stock is made up of major instruments like FGN bonds, treasury bills, treasury bonds, savings bonds, FGN Sukuk, promissory notes, and green bonds.

Nigeria’s total public debt has been growing significantly in in recent years. In the last eight years, it has surged by 266.96%. Debt servicing and personnel costs remain a huge part of total spending. Though we do not expect to see an increase in the planned fiscal deficit, we still expect debt levels to increase during the year in line with planned borrowing. We forecast debt to GDP ratio to 40.27% in 2023. With the exception of further borrowing in 2023, total debt to GDP ratio (after including ways and means and after revaluing the foreign debt component at current exchange rate) comes to 41.96% (2022 GDP).

Fixed Income: Mixed sentiments ruled

Amid mixed sentiments in the fixed income market, liquidity improved in H1 2023 to the tune of N67.5bn (+47.15% y/y from N45.9bn in H1 2022) as investors positioned themselves in instruments that had attractive yields. The Nigerian Treasury Bill (NTB) average yield settled at 6.16% in H1 2023 (compared with 3.67% in H1 2022) with investors’ buying interest tilting towards to the mid-end of the curve in the secondary market. Demand across all tenors of the Federal Government of Nigeria (FGN) Bonds were relatively heightened in the period as the average yield settled at 11.77% compared with an average yield of 10.37% in H1 2022.

In the primary market, the total allotment of NTBs was N2.40bn (in excess of the total offer of N2.10bn) in H1 2023. However, this was lower by 3.4% y/y than the total allotment of N2.48bn in H1 2022. The average discount rate of the NTB across its tenors ended at 5.72% in H1 2023 from a 3.55% yield in the prior year. In the same vein, the Debt Management Office (DMO) had allotted the sum of N3.16bn across its tenors FGN Bonds which was above the total value of N2.2bn with an average margin rate of 15.1% in H1 2023.

NTB Yields (L2Y)

Source: Bloomberg, CSL Research

Outlook

The Monetary Policy Committee (MPC) may likely increase the monetary policy rate further due to the expected spike in inflation occasioned by the new reforms of the current administration. Therefore, we envisage that yields may expand by 100 basis points (bps) at the mid- and long- end of the curve. Based on the big changes seen on the macro-economic front, investors’ demand will be pulled towards the short – and mid – end of the curve.   

Equities: Market optimism tied to leadership and policy changes

We began 2023 noting that save for corporate actions and positive news around the high market capitalised stocks on the exchange which could drive activities in the stock market, the narrative for 2023, appeared mildly negative. This view played out largely in the first half of the year, but the new administration’s pro-market economic policies and reforms have driven the stock market performance much faster than we projected. We have also begun to see foreign investors’ renewed interest in Nigerian equities towards the end of H1, and we believe this sentiment will continue in H2. We, however, believe a significant comeback will not happen till foreign investors get clarity of the FX situation.

We remain optimistic about the performance of some of the players in the sectors we cover. Though interest in the banks in H1 has led to a re-rating of many banks, current P/BV valuations still remain low in our view. We believe the banks stand to benefit for many of the new policies of the new administration such as the FX reforms and the CRR relief. We also expect banks with significant net long FX positions to make windfall gains in the form of revaluation gains due to the depreciation at the I&E window since end of period reports are done using I&E window rates.

Since the emergence of the geo-political tensions amidst the exiting supply chain disruptions, commodity prices have risen further. Hence, prices adjustments have been and will be needed to save margins. While we expect consumers to remain price-sensitive, we believe consumer businesses with a wide product portfolio to cater for all income categories, can sustain a positive performance in H2 2023.

The Nigerian cement players have also faced challenging times, ranging from energy pressures to the cost impact of FX depreciation and to inflationary pressures. However, they have remained resilient, benefiting from major price increments. Though, we believe the challenges are far from over, demand remains strong and should support revenue growth. That said, the downside risk to our outlook is the impact of torrential rainfall which may dampen cement demand.

The pandemic had adverse effects on many sectors, yet it was positive for the telecoms sector, and since then, the sector has remained the bright spot in the Nigerian economy. Despite the regulatory policy barring outgoing calls for unlinked SIMs, we expect increased adoption of communication via Voice over the Internet Protocol (VoIP), to support growth in data usage. Also, both MTNN and Airtel Africa commenced their PSB operations in Q2 2022 and we expect more boost to Fintech Revenue for the players in the long run.

We believe the valuations of many stocks remain attractive despite recent gains. Within our coverage universe, we have Buy ratings on UBA, Access, Zenith, Guaranty Trust Bank, Lafarge Africa, DangCem, and MTNN. Though many of these stocks have been re-rated following significant price increases over the past weeks, we still believe sustained interest in the stock market will lead to a further re-rating of these stocks. 

Equities Review

In sync with the bullish sentiments which have prevailed the global equities market and the African market (save for Kenya), the domestic equities market started the year on a positive note with the bulls wielding the upper hand till the NSE All-Share Index peaked at 60,968.27pts (the highest in 15 years).  At the end of H1, the nation’s bourse’s ytd return was 18.96%, driven mainly by the new administration’s pro market policies.  

 In our 2023 economic and financial markets outlook ‘A tipping point’, we posited that we could not overemphasize the weighty impact of corporate announcements and actions on the market’s direction. Rightly so, the news of Transcorp majority takeover by Femi Otedola in late April, set the market on the path of recovery in Q2 2023. However, much of the positive growth seen in H1 was driven by the policies and reforms of the new administration which are perceived to be market friendly. The All Share Index between 30 May and 30 June returned 14.34%, more than the 3.5% from the beginning of the year till the inauguration day.

m/m return (%)

Source: NGX, CSL Research

Interestingly, the low foreign investor participation in the local bourse has been insulating the equities market from external shocks. Reflecting the slowdown in the participation of foreign investors in the local bourse, data from the Nigerian Stock Exchange (NGX) showed that ytd, foreign investors share of transactions declined to an all-time low of 4.43% in April 2023 from 13.15% in the corresponding period of 2022. However, the new economic policies and reforms announced by the new administration appears to be eliciting the interest of foreign portfolio investors seen in the 339% upsurge in inflow in May to N37.16bn from N8.47bn in April.

Impressive sectoral performances in H1 2023.

Performances across sectors were impressive in the period. While the oil and gas insurance, banking and consumer goods sectors grew respectively by 67.76%, 58.91%, 54.59% and 51.93% in H1, the Industrials grew marginally by 3.66%. The strong positive performance recorded in the banking sector can be closely linked to the perceived expansive policies of the new administration, many of which appear to be positive for banks. For example, the relaxation of the rules around CRR which implies more liquidity and better interest income for the banks. Therefore, significant growth were witnessed in the banking stocks of ACCESS (120.4%), GTCO (95.41%), UBA (81.2%) and ZENITH (80.27%) to 120.43% In H1 2023. For the oil and gas sector, stable oil prices and deregulation was good for the upstream players like MRS OIL (+460.28% ytd; ETERNA: +222.46%; CONOIL: +213.21%y; TOTAL: +100.60% in H1 2023. A few companies in the Consumer Goods segment (BUAFOOD: +108.85%ytd DANGSUGAR: +67.07%) also saw significant growth in H1 2023.

Equities market outlook: Sentiments to remain positive.

We forecast the market to close on a sustained positive note driven by a mix of some of the factors below;

Corporate actions and announcements: We cannot overemphasize the impact of corporate actions & announcements on market’s direction. Hence, positive announcements such as strategic investments, particularly around the heavy weighted stocks will have a major impact on the direction of the market.

Possible return of foreign portfolio investor: Recent reforms by the new administrations have elicited the interest of foreign investors. We, however believe their return will be dependent on more clarity around the FX situation and improved liquidity.

Worsening negative real interest rates in the fixed income market: Expectations of a spike in inflation means real interest rates in the fixed income market become more negative and investors looking for better yield may look towards the equities market.