The domestic equities market closed positively this week, as bargain hunting on BUAFOODS (+5.4%), ZENITHBANK (+7.4%) and DANGSUGAR (+6.0%) supported market performance. As a result, the All-Share index advanced by 0.9% higher to 68,143.34 points
September 8, 2023/Cordros Report
According to the Hamburg Commercial Bank (HCOB), the Eurozone’s private sector activity declined faster in August, as the Composite PMI settled lower at a 33-month low of 46.7 points (July: 48.6 points). To underscore the scale of things, excluding the COVID-19 pandemic period, the last time Eurozone’s private sector activity dropped this low was during the sovereign debt crisis in March 2013 (46.5 points). The breakdown provided showed that the Manufacturing PMI (43.5 points vs. July: 42.7 points) remains below the 50-point threshold for the 14th consecutive month, in line with the plummeting new orders and rapidly depleting backlogs of work. At the same time, the once stabilizing Services sector turned into a drag for the single currency union as the Services PMI declined to 47.9 points (July: 50.9 points). The disappointing PMI results imply that the growth outlook in the regional bloc remains gloomy, with a high likelihood of a contraction in Q3-23, more so that we believe factory activity is yet to bottom out. Overall, H2-23 will likely present a more significant challenge to the Eurozone than H1-23.
Economic activities in Japan grew for the third consecutive quarter in Q2-23, even as domestic consumption remained sluggish. According to the Japanese Cabinet Office, Japan’s real GDP grew by 1.2% q/q in Q2-23 (Q1-23: 0.7% q/q), albeit below market expectations (1.3% q/q). To wit, we note that the growth was primarily driven by net exports as exports rebounded (+3.1% q/q vs Q1-23: -3.8% q/q) while imports (-4.4% q/q vs Q1-23: -2.3% q/q) contracted at a faster pace. Elsewhere, we highlight that private consumption (-0.6% q/q vs Q1-23: +0.6% q/q) and capital expenditure (-1.0% q/q vs Q1-23: +1.6% q/q) declined in the review period. On a year-on-year basis, the Japanese economy printed 1.6% in Q2-23 (Q1-23: +2.0% y/y). Despite the positive growth, the weak domestic demand and capital expenditure underscore the country’s fragile state amid gloomy global economic activities. Thus, given the lingering decline in real wages, the risks to Japan’s overall growth in H2-23 remain tilted to the downside as private consumption is expected to frail. Consequently, we expect the Bank of Japan to keep monetary policy loose over the rest of the year.
Global Markets
The global equities space gave up early gains in the week as investors priced in the (1) weak Chinese export data (August: -8.8% | July: -14.5%), (2) higher treasury bond yields, and (3) fresh concerns of inflationary pressures in the US. Accordingly, bearish sentiments dominated trading in the US (DJIA: -1.0%; S&P 500: -1.4%) as investors’ fear of US Fed tightening weighed on market sentiments. Likewise, European equities (STOXX Europe: -1.0%; FTSE 100: -0.3%) recorded losses following worries about slowing global growth coupled with the lower-than-expected Eurozone GDP. Meanwhile, Asian markets (Nikkei 225: -0.3%; SSE: -0.5%) mirrored the losses in the US as investors reacted to the release of Japan’s Q2-23 revised GDP data amid the cancellation of trading in Hong Kong due to a storm warning. Finally, the Emerging (MSCI EM: -1.2%) and Frontier (MSCI FM: -0.5%) market indices declined following bearish sentiments in Iceland (-2.9%) and Brazil (-1.6%), respectively.
Nigeria
Domestic Economy
In line with our expectations, recently released data from the National Bureau of Statistics (NBS) shows that collections from Company Income Tax (CIT) increased significantly by 226.4% q/q to NGN1.53 trillion in Q2-23 (Q1-23: NGN469.01 billion) – its highest quarterly print on record. We believe the substantial increase was primarily driven by the combined impact of (1) NLNG’s one-off end-of-the-year corporate tax payment, (2) return to normalcy after the CBN’s naira-redesign-induced slowdown in CIT payments in Q1-23, and (3) improved tax compliance. Consequently, there was a broad-based increase across local collections (+240.8% q/q to NGN1.02 trillion) and foreign CIT payments (+200.7% q/q to NGN505.91 billion). On a year-on-year basis, total CIT collection increased by 114.3% (Q2-22: NGN714.40 billion). In the near term, we expect the impact of underwhelming demand and rising operation costs arising from FX liberalization and lingering increases in energy costs to slow down corporate performance and, subsequently, CIT collections. Nonetheless, we expect the collections from CIT to remain upbeat relative to the prior year, given an increase in voluntary tax compliance and improvement in the automation of the tax administration process.
According to the NBS, VAT collections in Q2-23 settled higher by 10.1% q/q to NGN781.35 billion relative to Q1-23 (NGN709.59 billion). We note that the improvement in VAT collection in the review period was in line with the (1) lingering increase in prices of goods and services and (2) continued improvement in the automation of the country’s tax administration processes, including the updated VAT filing processes. Accordingly, local (+17.4% q/q to NGN512.03 billion) and NCS-import (+3.5% q/q to NGN126.69 billion) VAT collections increased in the review period, counterbalancing the decline in foreign (-5.6% q/q to NGN142.63 billion) VAT collection. On a year-on-year basis, collections from VAT increased by 30.2% (Q2-22: NGN600.15 billion), primarily supported by local VAT collections. Without downplaying the slowdown in domestic demand arising from the short-term impact of lingering reforms, we think VAT collections will remain resilient over the rest of the year. We hinge our expectations on the lingering factors supporting VAT collections. Hence, we expect the combined impact of higher VAT and CIT collections to support FGN’s non-oil revenue over the short-to-medium term.
Capital Markets
Equities
The domestic equities market closed positively this week, as bargain hunting on BUAFOODS (+5.4%), ZENITHBANK (+7.4%) and DANGSUGAR (+6.0%) supported market performance. As a result, the All-Share index advanced by 0.9% higher to 68,143.34 points, pushing the MTD and YTD gains to +2.4% and +33.0%, respectively. Similarly, activity levels were stronger, as trading volume and value grew by 5.3% w/w and 38.5% w/w, respectively. Elsewhere, sectoral performance was mixed as the Banking (+5.5%) and Consumer Goods (+2.2%) indices gained, while the Insurance (-2.9%), Industrial Goods (-0.5%) and Oil and Gas (-0.1%) indices recorded losses.
Next week, we anticipate mixed sentiments in the market as we believe investors will hunt for attractive dividend-paying stocks amid the possibility of profit-taking activities on stocks that have recently experienced notable appreciation. Notwithstanding, we reiterate that investors should seek trading opportunities in fundamentally sound stocks as the weak macroeconomic story remains a significant headwind to corporate earnings.
Money market and fixed income
Money market
The overnight (OVN) rate expanded by 16.3% w/w to 18.8%, as regulatory CRR debits (c. NGN179.00 billion) across the financial system compressed the system liquidity this week. Accordingly, the average system liquidity settled lower at a net long position of NGN164.66 billion (vs. a net long position of NGN286.55 billion in the previous week).
In the coming week, we expect the OVN rate to trend higher as pressure mounts on liquidity in the financial system. For context, we believe the debits for this month’s FGN bond auction (NGN360.00 billion) will likely offset the expected inflows from the FGN bond coupon payments (NGN51.12 billion) and OMO maturities (NGN10.00 billion).
Treasury bills
This week, activities in the Treasury bills secondary market were bearish as the lower system liquidity weakened demand for T-bills. As a result, the average yield across the market expanded by 34bps to 8.2%. Across the market segments, the average yield in the NTB segment increased by 37bps to 7.9% but contracted by 3bps to 13.3% in the OMO secondary market. At this week’s NTB auction, the CBN offered instruments worth NGN214.74 billion – NGN1.03 billion for the 91-day, NGN10.55 billion for the 182-day and NGN203.15 billion for the 364-day – to market participants. Demand at the auction was lower than the previous PMA, as the total subscription level settled at NGN875.74 billion (previous auction: NGN1.54 trillion). Eventually, the CBN allotted precisely what was offered at respective stop rates of 4.50% (previously: 5.19%), 7.00% (previously: 8.00%), and 12.55% (previously: 13.94%).
Next week, we envisage sustained depressed demand for bills in the secondary market following our expectations of tight system liquidity. Thus, we believe yields in the secondary market will maintain its northward trend. Meanwhile, we expect market focus to be shifted to the NTB PMA holding on Wednesday (13 September), where the CBN is scheduled to roll over NGN152.20 billion worth of maturities.
Bonds
Similarly, the Treasury bonds secondary market traded on a bearish note this week as investors stayed on the sidelines ahead of this month’s FGN bond PMA scheduled for Monday (11 September). Accordingly, the average yield advanced by 10bps to 14.2%. Across the benchmark curve, the average yield contracted at the short (-9bps) end as investors demanded the MAR-2024 (-53bps) bond but expanded at the mid (+13bps) and long (+17bps) segments following sell pressures on the JUN-2033 (+23bps) and JUL-2034 (+45bps) bonds, respectively.
Next week, we expect the September 2023 Treasury bond auction result to influence the sentiments in the secondary market. At the auction, the DMO is offering instruments worth NGN360.00 billion through re-openings of the 14.55% FGN APR 2029, 14.70% FGN JUN 2033, 15.45% FGN JUN 2038 and 15.70% FGN JUN 2053 bonds. Over the medium term, we expect yields in the FGN bond secondary market to remain elevated, driven by the sustained imbalance in the demand and supply dynamics. However, we highlight that deliberate actions by the DMO to keep borrowing costs moderate remain a downside factor.
Foreign Exchange
Nigeria’s FX reserve declined this week, as the gross reserve position fell by USD181.45 million w/w to close at USD33.39 billion (06 September 2023). At the I&E window, the naira appreciated by 2.5% to NGN722.39/USD, with total turnover at the window (as of 07 September) decreasing by 63.3% WTD to USD292.02 million as trades were consummated within the NGN588.00 – NGN807.15/USD band. In the Forwards market, the naira rate appreciated on the 1-month (+1.4% to NGN780.80/USD), 3-month (+1.6% to NGN799.42/USD), 6-month (+1.8% to NGN827.77/USD) and 1-year (+2.2% to NGN888.07/USD) contracts.
While we understand that the NNPC’s crude repayment facility with the African Export-Import (AFREXIM) bank may have been put on hold, we highlight that there have been no further positive news flows regarding other measures to stem the slide of the naira. The preceding, in addition to the lingering low crude oil production and foreign investors remaining on the sidelines, are expected to weigh on FX supply in the near term. Consequently, we expect FX liquidity constraints to linger in the short term, ensuring the local currency pressures remain intact.