The Nigerian equities market reversed last week’s loss as bargain-hunting activities gained momentum. Thus, the All-Share index advanced by 3.9% w/w to close at 65,003.39 points.
July 21, 2023/Cordros Report
Global economy
Price pressures in the United Kingdom (UK) eased more than market expectations in June, potentially serving as a sigh of relief for the Bank of England (BoE), though more positives are needed to cause a change in policy direction. According to the Office for National Statistics (ONS), the UK’s headline inflation eased by 80bps to 7.9% y/y in June (May: 8.7% y/y) – its lowest level since March 2022 (7.0% y/y). The moderation was primarily driven by a 22.7% y/y decline in motor fuels, causing a drop in transport costs (-1.8% y/y vs May: 1.2% y/y). Nonetheless, the core inflation remained sticky at 6.9% y/y (May: 7.1% y/y). On a month-on-month basis, consumer prices settled lower at 0.1% (May: 0.7% m/m). Although the inflation print positively surprised the market, underlying price pressures remain intact, more so that prices remain significantly above the BoE’s comfortable level. Besides, high wage growth poses further risks to near-term price pressures. Consequently, the market is still pricing a further 50bps rate hike when the BoE meets on 3 August.
According to the National Bureau of Statistics of China, the Chinese economy grew by 6.3% y/y in Q2-23 (Q1-22: 4.5% y/y | Q2-22: 0.4% y/y), falling short of market expectations of 7.3% y/y. The growth in the review period was primarily driven by the low base effects from last year’s corresponding period when significant parts of the country were under strict COVID-19 lockdown. However, on a quarter-on-quarter basis, China grew slowly by 0.8% (Q1-23: 2.2% q/q), underscoring the impact of faltering consumer spending and subdued external demand as indicated by the PMI surveys in the quarter. Looking ahead, we expect the economic growth to moderate over H2-23 as the favourable base effects fade amid (1) underwhelming exports induced by the lingering global slowdown, (2) lingering real estate sector woes, and (3) fading domestic demand as uncertainties remain high. Consequently, the monetary and fiscal authorities may likely roll out policy measures to keep the economy afloat over the short term.
Global Markets
Whilst quarterly corporate earnings announcements remain the major theme in the global equities market this week, hopes for an end to the Federal Reserve’s interest rate increases aided sentiments amid encouraging economic data. As of the time of writing, US equities (DJIA: +2.1%; S&P 500: +0.7%) posted gains following positive reactions to better-than-expected Q2 earnings from some big banks like Bank of America and Morgan Stanley. Likewise, European equities (STOXX Europe: +0.7%; FTSE 100: +2.8%) were on track for a weekly gain as investors digested softer-than-expected UK inflation data. On the other hand, Asian markets — Japanese (Nikkei 225: -0.3%) and Chinese (SSE: -2.3%) equities – came under pressure following worries about the Chinese economy and weakness in technology stocks. Elsewhere, the Emerging (MSCI EM: -0.1%) market index declined following the loss in China (-2.3%) while the Frontier (MSCI FM: +0.3%) market index advanced, supported by positive sentiments in Vietnam (+0.5%).
Nigeria
Domestic Economy
According to the National Bureau of Statistics (NBS), headline inflation surged to a new 18-year high, rising by 38bps to 22.79% y/y in June (May: 22.41% y/y). While the direction is in line with our expectations, we highlight that the rate of increase is significantly below our expectations, primarily due to the positive surprise from core inflation. Precisely, the core inflation moderated by 7bps to 1.74% m/m in June, translating to 20.27% y/y (May: 20.06% y/y). Meanwhile, food prices rose by 43bps to 25.25% y/y (May: 24.82% y/y), driven by (1) festive-induced higher demand accompanied by the salah celebration and (2) crop infestation in the northern region of the country amid existing factors stoking food prices. We now expect price pressures to rise faster in the near term as the impact of the FX and fiscal reforms did not reflect much in June’s core inflation reading. Meanwhile, (1) Russia’s termination of the Black Sea grain deal and (2) the beginning of the lean season portends short-term risks to food prices. Overall, we forecast the headline inflation to settle at 2.39% m/m in July, translating to a 70bps increase in the y/y inflation rate to 23.49%.
Although the total revenue generated in June was NGN1.96 trillion, the amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in July (from the total revenue generated in June) was NGN907.05 billion (+15.4% m/m vs June: NGN786.16 billion) – its highest level since January 2023 (NGN990.19 billion). Thus, the remaining balance of NGN979.08 billion was saved, while NGN73.24 billion was the cost of collection. We understand that (1) a significant increase in Companies Income Tax (CIT) induced by NLNG’s one-off end-of-the-year corporate tax (USD699.61 million) payment and (2) substantial exchange rate gains were responsible for the sturdy revenue in the review period. We expect the currency depreciation that accompanied the FX market liberalisation to continue to support oil revenue in naira terms, although low crude oil production may likely ensure oil revenue remains underwhelming relative to pre-pandemic levels. At the same time, we maintain our expectation that the 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.
Capital Markets
Equities
The Nigerian equities market reversed last week’s loss as bargain-hunting activities gained momentum. Particularly, we observed strong buying interest in DANGCEM (+5.1%), following the conclusion of its share buyback programme and increased appetite for Tier-1 Banking names — FBNH (+25.6%), GTCO (+14.2%) and ACCESSCORP (+22.7%) — on the final trading session. Thus, the All-Share index advanced by 3.9% w/w to close at 65,003.39 points, pushing the Month-to-Date and Year-to-Date returns to +6.6% and 26.8%, respectively. Analysing activity levels, the total traded volume declined by 20.3% w/w while the total traded value increased by 56.2% w/w. Meanwhile, performance across our sectoral coverage was broadly positive, as the Banking (+15.8%) index recorded the most significant gain, followed by the Insurance (+5.6%), Industrial Goods (+2.8%), Consumer Goods (+1.7%), and Oil and Gas (+0.6%) indices.
In the interim, we expect the full swing of the H1-23 earnings season to dictate market sentiments and possibly drive positive performance as investors hunt for bargains in fundamentally sound stocks with a consistent history of interim dividend payments. In addition, we believe investors will closely watch the outcome of the MPC meeting scheduled to hold next week to gain further clarity on the movement of yields in the FI market. Overall, we advise investors to take positions in only fundamentally justified stocks as the weak macro story remains a significant headwind for corporate earnings.
Money market and fixed income
Money market
In line with our expectations, the overnight (OVN) rate increased significantly by 19.4% w/w to 21.0%, as the combined impact of (1) banks sterilizing excess funds and (2) debits for FGN bond auction (NGN657.83 billion) outweighed this week’s inflows from FGN bond coupon payments (NGN155.95 billion). As a result, the average system liquidity closed lower this week at a net long position of NGN103.19 billion (vs a net long position of NGN708.40 billion in the previous week).
Next week, we expect the OVN rate to temper from current levels as the expected inflows from the June FAAC allocation (NGN561.49 billion) and FGN bond coupon payments (NGN126.00 billion) will boost system liquidity.
Treasury bills
Proceedings in the Treasury bills secondary market remained bullish this week as participants looked to invest their excess funds in the space. As a result, the average yield across all instruments declined by 192bps to 4.3%. Across the curve, the average yield contracted at the short (-329bps), mid (-218bps) and long (-148bps) segments, following buying interest on the 34DTM (-381bps), 139DTM (-222bps), and 237DTM (-256bps) bills, respectively.
Following the anticipated inflows into the system next week, we envisage a higher demand for T-bills, which we expect will drive yields lower in the secondary market. Furthermore, we expect market participants’ focus to be shifted to the NTB PMA holding on Wednesday (26 July), with the CBN expected to roll over NGN264.33 billion worth of instruments.
Bonds
This week, the FGN bonds secondary market closed on a bullish note as investors looked to cover for their lost bids at Monday’s PMA. As a result, the average yield across all instruments contracted by 1bp to 12.7%. Across the benchmark curve, the average yield dipped at the short (-10bps) and long (-6bps) ends, following buying interests in the MAR-2025 (-47bps) and JUN-2053 (-31bps) bonds, respectively. Conversely, the average yield expanded at the mid (+10bps) segment as investors sold off the APR-2029 (+31bps) bond. At this month’s auction, the DMO offered instruments worth NGN360.00 billion to investors through re-opening of the 14.55% FGN APR 2029 (Bid-to-offer: 1.1x; Stop rate: 12.5%), 14.70% FGN JUN 2033 (Bid-to-offer: 0.6x; Stop rate: 13.60%), 15.45% FGN JUN 2038 (Bid-to-offer: 2.1x; Stop rate: 14.10%), and 15.70% FGN JUN 2053 (Bid-to-offer: 6.7x; Stop rate: 14.30%) bonds. The subscription level settled higher at NGN945.14 billion, translating to a bid-to-offer ratio of 2.6x (vs bid-to-offer ratio of 1.8x at last month’s auction). Eventually, the DMO allotted instruments worth NGN657.83 billion (including non-competitive allotments of NGN1.10 billion), resulting in a bid-to-cover ratio of 1.4x.
We expect yields in the FGN bond secondary market to remain elevated in the medium term, specifically driven by our expectation of a sustained imbalance in the supply and demand dynamics. However, we highlight that deliberate actions by the DMO to keep the cost of borrowing moderate and a possible maturity of CBN special bills present as downside factors.
Foreign Exchange
Nigeria’s FX reserves sustained its downtrend this week, falling by USD58.63 million w/w to USD33.98 billion (19 July). Meanwhile, the naira appreciated by 3.4% to NGN777.82/USD at the I&E window (IEW). At the IEW, total turnover (as of 20 July 2023) declined by 13.2% WTD to USD340.87 million, with trades consummated within the NGN699.50 – NGN853.00/USD band. In the Forwards market, the naira depreciated across the 1-month (-1.5% to NGN796.35/USD), 3-month (-0.1% to NGN807.45/USD), and 6-month (-0.6% to NGN825.67/USD) contracts, while it appreciated at the 1-year (+0.8% to NGN859.98/USD) contract.
We expect the currency pressures to remain intact in the near term, given seasonal-induced demand and still frail FX supply despite the CBN’s abolishment of its multiple FX windows. On FX supply, we expect foreign investors to remain on the sidelines in the near term, looking for signals on market interest rates and CBN’s plans to start clearing the existing FX backlogs and boosting FX supply to support the market in the near term.
