The domestic bourse closed in the green territory despite pressure from profit-taking activities during the week. Eventually, the NGX ASI rose by 0.1% w/w to close at 65,056.39 points.
July 28, 2023/Cordros Report
Global economy
After the “hawkish pause” witnessed in June, the Federal Open Market Committee (FOMC), at its July policy meeting, voted to increase the target range for the federal funds rate by 25bps to 5.25% – 5.00%, taking the cumulative rate hike to 100bps so far in 2023 (2022FY rate hike: 425bps). Like the previous meeting, the FOMC highlighted that in determining the extent of additional policy firming that may be appropriate to return inflation to 2.0% over time, the Committee would take into account the (1) cumulative tightening of monetary policy, (2) lags with which monetary policy affects economic activity and inflation, and (3) economic and financial developments. Although the Fed’s chair acknowledged during the press conference that inflation had moderated somewhat since the middle of last year, he stated that prices still have a long way to go in hitting the Fed’s 2.0% target, keeping the door open for future rate decisions. However, markets are currently pricing a better-than-even chance that we have reached the end of the US Fed interest rate hiking cycle, with the CME FedWatch tool indicating an 80.0% chance of a HOLD decision at the next meeting in September.
According to the Bureau of Economic Analysis (BEA), the world’s largest economy grew more than market expectations (1.8%), expanding higher by 2.4% q/q in Q2-23 (Q1-23: 2.0% q/q). We understand that the higher growth relative to the prior quarter primarily reflects an acceleration in business investments (+7.7% q/q vs Q1-23: +0.6% q/q) and an upturn in private inventories (+9.3% y/y vs Q1-23: +3.5% y/y), partly due to the fiscal impulse-driven construction frenzy of new manufacturing, particularly semi-conductor. Meanwhile, consumer spending (+1.6% q/q vs Q1-23: +4.2% q/q) eased sharply even as inflationary pressures slowed, while public expenditure (+2.6% q/q vs Q1-23: +5.0% q/q) also moderated in the review period. On a year-on-year basis, the economy grew by 2.6% y/y in Q2-23 (Q1-23: +1.8% y/y). We expect consumer spending to remain pressured in H2-23 as we understand that (1) savings built up during the pandemic are dwindling and (2) wage growth has slowed despite low unemployment. Asides that, we expect the lagging impacts of cumulative rate hikes to remain a key challenge. Consequently, we envisage the US economy will slow further in 2023E, relative to 2022FY levels.
Global Markets
In the global equities market, sentiments remained broadly upbeat as investors continued to digest corporate earnings releases, economic data, and monetary policy decisions of major central banks. As of the time of writing, US equities (DJIA: +0.7%; S&P 500: +0.9%) advanced as investors evaluated the (1) better-than-expected GDP report and (2) the Fed’s interest rate decision and outlook on the future path of rate hikes. Elsewhere, European equities (STOXX Europe: +1.2%; FTSE 100: +0.5%) were supported by dovish comments from the European Central Bank (ECB) and a positive GDP report from France. In the same vein, Asian equities (Nikkei 225: +1.4%; SSE: +3.5%) rallied on optimism about (1) an end to US Federal Reserve tightening campaign and (2) China’s pledge to support the real estate sector and revive the broader economy. Finally, the Emerging (MSCI EM: +2.0%) and Frontier (MSCI FM: +0.5%) market indices posted gains, driven by the rally in China (+3.5%) and Vietnam (+1.4%), respectively.
Nigeria
Domestic Economy
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to increase the Monetary Policy Rate (MPR) further by a smaller 25bps to 18.75% at its July policy meeting. In addition, the Committee voted to narrow the asymmetric corridor to +100/-300bps around the MPR (previously: +100/-700bps) while leaving other policy parameters unchanged; Cash Reserve Requirement (CRR) at 32.5% and Liquidity ratio at 30.0%. While we acknowledge that the purpose of reducing the asymmetric corridor around the MPR is to incentivise banks to deposit more with the CBN and reduce banking system liquidity, the current maximum amount (NGN2.00 billion) the banks can place with the CBN on an overnight basis pose as a downside risk to the effectiveness of using the asymmetric corridor to reduce banking system liquidity. Overall, the meeting’s voting pattern and the acting CBN governor’s stance on using other policy options available to the CBN other than the MPR to tame liquidity surfeit in the economy suggest to us that the MPC will likely keep the MPR unchanged at its next meeting on 25 and 26 September.
According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions in the domestic equities market increased for the third consecutive month, rising by 26.0% m/m to NGN406.76 billion in June (May: NGN322.91 billion) – its highest level since May 2022 (NGN607.25 billion). On the one hand, domestic transactions (88.8% of market transactions) grew by 26.3% m/m to NGN361.02 billion (May: NGN285.75 billion). On the other hand, foreign transactions increased by 23.1% m/m to NGN45.74 billion (May: NGN37.16 billion), although their contribution to gross transactions declined slightly to 11.2% (May: 11.5%). 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. At the same time, we expect to see improvement in foreign participation over the medium term, even as foreign investors are likely to adopt a wait-and-see approach in the near term. Our expectation is hinged on the policy pronouncements and reforms by the current administration, undoing the policy mistakes of the past eight years.
Capital Markets
Equities
The domestic bourse closed in the green territory despite pressure from profit-taking activities during the week. Eventually, the NGX ASI rose by 0.1% w/w to close at 65,056.39 points. Precisely, bargain hunting in SEPLAT (+21.0%) and STANBIC (+10.9%) amid sell-offs of NB (-19.0%) and FBNH (-6.6%) stocks drove the weekly gain. Based on the preceding, the Month-to-Date and Year-to-Date return advanced to +6.7% and 26.9%, respectively. On the other hand, activity levels wavered as the trading volume and value declined by 31.7% w/w and 62.0% w/w, respectively. Sectoral performance was broadly negative following losses in the Consumer Goods (-2.4%), Banking (-2.2%), Insurance (-1.6%), and Industrial Goods (-0.3%) indices. On the flip side, the Oil and Gas (+1.4%) index was the sole gainer of the week.
In the coming week, we expect a flurry of earnings releases on NGX’s floor as more companies publish their half-year numbers. Against the preceding, we think positive earnings surprises and possible interim dividend declarations from companies would spur increased bargain-hunting activities on the bourse. Nevertheless, we do not rule out the possibility of profit-taking activities on tickers that have experienced substantial appreciation. 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 market.
Money market and fixed income
Money market
Just as we envisaged, the overnight (OVN) rate contracted by 19.6% w/w to 1.4%, as the system liquidity was supported by inflows from FAAC disbursement (NGN561.49 billion) and FGN bond coupon payments (NGN126.00 billion). Consequently, the average system liquidity closed higher at a net long position of NGN363.38 billion (vs a net long position of NGN103.19 billion in the prior week).
We expect the liquidity in the system to remain buoyant next week, barring any significant outflows. Hence, we believe the OVN rate will remain depressed.
Treasury bills
The NTB secondary market closed on a bearish note this week, as the average yield across all instruments expanded by 278bps to 7.1%. We attribute this week’s performance to dampened interest in bills as market players took profits off some positions. Meanwhile, at the primary market, the CBN offered instruments worth NGN264.33 billion – NGN1.74 billion of the 91-day, NGN1.26 billion of the 182-day, and NGN261.33 billion of the 365-day bills – to participants. The auction was moderately contested with a total subscription of NGN398.17 billion (bid-to-offer: 1.5x), with more demand skewed towards the longer-dated bill (NGN383.88 billion; 96.4% of the total subscription). The auction closed with the CBN allotting precisely what was offered at respective stop rates of 6.00% (previously 2.86%), 8.00% (previously 3.50%), and 12.15% (previously 5.94%).
We anticipate a downward movement of yields in the T-bills secondary market in the coming week, following our expectation of healthy liquidity in the financial system.
Bonds
Similarly, trading in the Treasury bonds secondary market was bearish as investors reacted to the 25bps hike in the MPR earlier in the week. As a result, the average yield advanced by 41bps to 13.1%. Across the benchmark curve, the average yield expanded at the short (+84bps), mid (+10bps), and long (+37bps) segments due to sell-off activities on the MAR-2024 (+288bps), APR-2029 (+20bps), and JUN-2053 (+70bps) bonds, respectively.
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 demand and supply dynamics. However, we highlight that deliberate actions by the DMO to keep the cost of borrowing moderate remains a downside factor.
Foreign Exchange
Nigeria’s FX reserve declined by USD19.20 million w/w to USD33.95 billion (26 July). Meanwhile, the naira appreciated by 0.3% to N775.76/USD at the I&E window (IEW). At the IEW, total turnover (as of 27 July 2023) declined by 18.1% WTD to USD343.06 million, with trades consummated within the NGN650.00 – NGN869.00/USD band. In the Forwards market, the naira appreciated across the 1-month (+2.9% to NGN773.68/USD), 3-month (+2.9% to NGN784.86/USD), and 6-month (+2.3% to NGN807.08/USD) contracts. Meanwhile, the naira closed flat at the 1-year (NGN859.61/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.
