Despite the shortened trading week, the local bourse rebounded from its three-week bearish trend as the All-Share index advanced by 0.1% w/w, resulting in the Year-to-Date return rising to +29.6%.
October 6, 2023/Cordros Report
Global Economy
According to the S&P Global, Manufacturing PMI in the United States (US) settled higher at 49.8 points in September (August: 47.9 points), albeit still below the 50-points threshold for the fifth consecutive month. The near stabilisation of factory activity stemmed from a renewed rise in output following greater hiring activity and expanded capacity. At the same time, the Services PMI (51.0 points vs. August: 50.5 points) slowed to its lowest level since January (46.8 points) as business activity stagnated due to weaker domestic and foreign client demand. Overall, private sector activity as measured by the Composite PMI was unchanged at 50.2 points (August: 50.2 points). While factory activity remains underwhelming, we understand that the (1) manufacturers’ expectations are rising, (2) supply conditions continue to improve, and (3) rate of order book decline has begun to moderate. However, we expect business activity to remain underwhelming amid high interest rates and increased cost of living at a time of diminishing savings. All told, overall private sector activity may likely remain on a weak footing in the near term.
In the United Kingdom (UK), overall private sector activity remains weak as factory activity continued to fall faster than business activity. According to the S&P Global / CIPS, the UK’s composite PMI settled lower at 48.5 points in September (August: 48.6 points), remaining below the 50-points growth threshold for the second consecutive month. Notably, the downturn in the manufacturing sector remains intact as the Manufacturing PMI settled at 44.3 points (August: 43.0 points) amid underwhelming consumer demand exacerbated by (1) ongoing market uncertainty, (2) the cost-of-living crisis, and (3) weak conditions in overseas markets. Elsewhere, the Services PMI (49.3 points vs. August: 49.5 points) maintained its downtrend, primarily due to (1) sluggish business conditions and (2) lingering downward pressure on demand amid rising borrowing costs. Looking ahead, we expect the overall private sector activity in the UK to remain underwhelming in the short-term. Our expectation is hinged on the lingering impact of the (1) rising cost of living and (2) recent rapid rise in interest rates on businesses and consumer demand.
Global Market
Global stocks plummeted for a third consecutive week as Treasury yields surged, prompted by jobs data that raised expectations of additional interest rate hikes by the Federal Reserve later this year. As of the time of writing, US equities (DJIA: -1.2%; S&P 500: -0.7%) were on track for a weekly loss as the tight labour market indicated the likelihood of further Federal Reserve rate hikes. Similarly, bearish sentiments dominated European equities (STOXX Europe: -1.5%; FTSE 100: -1.7%) as investors digested robust US labour market data and rising bond yields. Asian market (Nikkei 225: -2.7%) mirrored the broadly negative cues on Wall Street, with Chinese equities (SSE: 0.0%) unchanged due to China’s Golden Week holiday. Finally, Emerging (MSCI EM: -2.4%) and Frontier (MSCI FM: -1.6%) market indices closed in the red, driven by bearish sentiments in South Korea (-2.3%) and Vietnam (-2.2%), respectively.
Nigeria
Domestic Economy
The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in September (from the total revenue generated in August) was NGN1.10 trillion (+13.9% m/m vs. August: NGN966.11 billion). We understand that this represents 74.1% of the total revenue (NGN1.48 trillion) generated in the month, with the remaining balance spread across (1) NGN58.76 billion cost of collection, (2) NGN254.05 billion allocated to transfers & refunds, and (3) NGN71.00 billion saved for future needs. Furthermore, we note that funds from Value Added Tax (VAT), Electronic Money Transfer Levy (EMTL), and Import and Export Duties increased significantly, supporting the revenue generated in the review period. We expect the currency depreciation accompanying the FX market liberalisation to continue supporting 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.
In September, the total inflows into the Investors & Exporters Window (IEW) rose to a 3-month high, increasing by 49.1% m/m to USD1.31 billion (August: USD881.40 million), according to the data obtained from the FMDQ. The breakdown provided showed that the local inflows primarily drove the increase amid a decline in inflows from foreign sources. To put it in proper context, local inflows increased by 55.2% m/m to USD1.26 billion (August: USD810.80 million), supported by higher inflows from non-bank corporates (+89.3% m/m) and exporters (+49.7% m/m). Meanwhile, given that foreign investors remained cautious about returning in droves despite the significant currency depreciation since June, foreign inflows (-20.5% m/m to USD44.60 million) remain underwhelming. Looking ahead, we expect FX liquidity conditions to remain frail in the near term as FX reform momentum has slowed considerably. We also anticipate weak foreign inflows in the short term, as foreign investors will likely adopt a wait-and-see approach in the near term as they await the CBN’s actions in clearing its FX backlogs and the direction of short-term interest rates amid high inflation.
Capital markets
Equities
Despite the shortened trading week, the local bourse rebounded from its three-week bearish trend as the All-Share index advanced by 0.1% w/w, resulting in the Year-to-Date return rising to +29.6%. The positive performance was driven by gains on AIRTELAFRI (+8.5%) and BUACEMENT (+9.9%), which offset losses in DANGCEM (-8.8%) and MTNN (-5.3%). Likewise, the trading activity level was positive, as the total trading volume and value grew by 80.0% and 23.4%, respectively. From a sectoral viewpoint, the Banking (+1.4%) and Consumer Goods (+0.2%) indices closed in positive territory, while the Insurance (-3.1%) and Industrial Goods (-1.4%) indices declined. The Oil and Gas index was unchanged.
In the short term, we anticipate cautious trading in the domestic equities market due to the absence of significant positive catalysts to boost sentiments. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the unimpressive macro story remains a significant headwind for corporate earnings.
Money market and fixed income
Money market
This week, the overnight (OVN) rate declined by 170bps w/w to 1.7%. We highlight that the OVN was depressed throughout the week, as the disbursement of FAAC allocation (NGN668.86 billion) supported system liquidity despite CRR debits on Wednesday which amounted to c.NGN718.00 billion. Accordingly, the average system liquidity closed higher at a net long position of NGN804.77 billion (vs. a net long position of NGN137.20 billion in the previous week).
Next week, we expect the OVN rate to remain low given ample financial system liquidity and the additional inflows from OMO maturities (NGN10.00 billion) within the week amid the expected absence of significant outflows.
Treasury bills
Activities in the Nigerian Treasury bills secondary market were bullish for most of the week as the healthy liquidity position drove market players’ demand for instruments. Nonetheless, the secondary market closed the week on a bearish note, as the average yield across the market expanded by 2bps to 8.2%. Across market segments, the average yield advanced by 5bps to 8.0% in the NTB secondary market but declined by 3bps to 12.1% in the OMO segment.
We envisage sustained demand for T-bills in the secondary market next week following our expectations of a liquidity surfeit in the system. Thus, we believe yields in the secondary market will maintain a downtrend. Additionally, the DMO is scheduled to hold an NTB PMA on Wednesday (11 October), where it will be rolling over maturities worth NGN36.56 billion.
Bonds
Proceedings at the Treasury bonds secondary market were bullish, as investors demanded short-tenured instruments while they await the MPC meeting for rate guidance. As a result, the average yield contracted by 3bps to 14.4%. Across the benchmark curve, the average yield declined at the short (-18bps) end due to interest on the MAR-2024 (-99bps) bond but expanded at the long (+2bps) end as participants sold off the JUN-2053 (+22bps) bond. Elsewhere, the average yield closed flat at the mid segment.
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 reserves declined further this week, as the gross reserves level fell by USD10.59 million w/w to USD33.23 billion (05 October). Meanwhile, the naira appreciated by 1.8% to NGN741.85/USD at the I&E window (IEW), with total turnover at the window (as of 05 October 2023) decreasing by 42.6% WTD to USD271.06 million, as trades were consummated within the NGN700.00 – NGN819.90/USD band. In the Forwards market, the naira rate on the 1-month (+0.6% to NGN786.31/USD) contract appreciated but recorded depreciations across the 3-month (-0.2% to NGN804.88/USD), 6-month (-2.0% to NGN837.36/USD) and 1-year (-3.0% to NGN903.54/USD) contracts.
The narratives in the FX market have remained the same in recent weeks, as FX reform momentum has slowed down. Hence, barring any significant positive developments, we expect (1) the lingering low crude oil production and (2) a sustained dip in foreign investors’ net flows to weigh on FX supply in the short term. Consequently, we expect FX liquidity constraints to linger in the near term, ensuring the local currency pressures remain intact.
