The domestic bourse added to last week’s gains as investors’ interest in BUACEMENT (+12.6%) and DANGSUGAR (+7.4%) drove the NGX ASI higher by 1.1% w/w.
October 13, 2023/Cordros Report
According to the Bureau of Labour Statistics (BLS), consumer prices in the United States (US) were stable, albeit above market expectations (3.6% y/y), as the headline inflation remained at 3.7% y/y in September (August: 3.7% y/y). We note that the inflation print was on account of a softer decline in energy prices (-0.5% y/y vs August: -3.6% y/y), counterbalancing the slow inflationary pressures in the prices of food (3.7% y/y vs August: 4.3% y/y), shelter (7.2% y/y vs August: 7.3% y/y), and transportation services (9.1% y/y vs August: 10.3% y/y). High oil prices pose upside risks to consumer price pressures in the short term. In addition to lingering wage gains, the preceding may likely ensure that broad inflationary pressures remain intact, albeit significantly below the prior year. Nonetheless, the financial markets believe the US Fed may put a hold on further rate hikes over the rest of the year. Indeed, the CME FedWatch tool indicates probaiities of 90.3% and 67.0% that the Fed will keep rates unchanged at its November and December policy meetings, respectively.
China’s headline inflation was flat in September, relative to the 0.1% y/y price increase in August, underscoring the impact of sluggish demand and underscoring the lingering concerns surrounding the economic recovery’s sustainability. Parsing through the breakdown provided, food prices declined by 3.2% y/y in September (August: -1.7% y/y), supported by a sharper decline in pork prices (-22.0% y/y vs August: -17.9% y/y) in the period. Elsewhere, non-food inflation increased by 0.7% y/y (August: 0.5% y/y) due to higher price growth in the housing (0.2% y/y vs August: 0.1% y/y) and health (1.3% y/y vs August: 1.2% y/y) sub-baskets. On a month-on-month basis, headline inflation increased by 0.2% (August: 0.3% m/m). The inflation print suggests that deflationary pressures are still a significant risk to China’s growth prospects amid the (1) underwhelming domestic demand and (2) ongoing property market wobbles. We highlight that the preceding does not bode well for the Chinese economy, bolstering the need for additional monetary policy easing and fiscal support to keep the economy afloat over the short term.
Global Market
Despite heightened geopolitical concerns, global stocks were broadly positive this week following (1) lower bond yields, (2) hints from US Fed officials suggesting a potential peak in interest rates, and (3) encouraging earnings reports from major US banks. In line with this, US equities (DJIA: 0.7%; S&P 500: +1.0%) posted positive performances as investors reacted positively to earnings results from major banks. Likewise, European equities (STOXX Europe: +1.5%; FTSE 100: +1.8%) were on track for a weekly gain, riding the wave of positive global momentum despite lingering growth concerns. Mixed sentiments dominated Asian markets, as Japanese equities (Nikkei 225: +4.3%) rallied following buying interests in chip-related stocks that fell in recent selloffs. Conversely, Chinese equities (SSE: -0.7%) declined as optimism waned due to lower-than-expected producer and consumer prices in China. In other regions, Emerging (MSCI EM: +3.5%) and Frontier (MSCI FM: +1.3%) market indices concluded the week on a positive note, driven by bullish sentiments in Taiwan (+1.6%) and Vietnam (+2.3%), respectively.
Nigeria
Domestic Economy
Capital importation remained underwhelming as the new administration’s reform momentum in June was insufficient to turn the tides in capital inflows over Q2-23. According to the National Bureau of Statistics (NBS), capital importation into Nigeria declined by 32.9% y/y to USD1.03 billion in Q2-23 (Q1-23: USD1.13 billion | Q2-22: USD1.54 billion) – its lowest print since Q2-21 (USD875.62 million). Notably, foreign portfolio investments (-85.9% y/y to USD106.85 million) recorded the most significant decline given (1) lingering FX liquidity constraints and (2) uncompetitive domestic interest rates. Elsewhere, the uninspiring macro narrative also ensured that foreign direct investments (-41.5% y/y to USD86.03 million) remained underwhelming. Meanwhile, other investments increased by 32.7% y/y to USD837.34 million. We link this increase to parent companies of local subsidiaries stepping in to provide the needed US dollar liquidity required to meet obligations. We expect foreign investors to continue to adopt a wait-and-see approach over the short term, more so that reform momentum has slowed and global interest rates remain high. Consequently, if local FX liquidity improves significantly, market rates increase, and investors can easily repatriate capital, we expect foreign capital inflows to increase over the medium term.
According to the data from the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), crude oil production (including condensates) increased for the second consecutive month, rising by 11.1% m/m to 1.57mb/d in September (August: 1.41mb/d) – its highest level since January 2022 (1.68mb/d). Higher crude oil production across the Forcados (+85.0% m/m | 17.5% of total production in September), Bonny (+6.3% m/m), and Erha (+22.8% m/m) production terminals were the primary drivers of the overall crude oil production in the review period. Overall, oil production averaged 1.43mb/d in Q3-23 – 2.6% higher than the 1.39mb/d produced in Q2-23. While progress is still underway as regards the fight against crude oil theft and pipeline vandalism, we believe that (1) frequent leaks from pipelines and (2) intermittent oil terminal shutdowns for repairs pose downside risks to crude oil production in the near term. Thus, we maintain our 2023E average crude oil production estimate of 1.42mb/d (vs FGN’s estimate: 1.69mb/d), a relatively slight improvement compared to 2022FY production volume (1.37mb/d). Consequently, we expect the government’s oil revenue performance to remain underwhelming over the short term.
Capital markets
Equities
The domestic bourse added to last week’s gains as investors’ interest in BUACEMENT (+12.6%) and DANGSUGAR (+7.4%) drove the NGX ASI higher by 1.1% w/w. As a result, the Month-to-Date and Year-to-Date returns increased to +1.2% and +31.1%, respectively. However, the trading activity level was mixed, as the total traded volume declined by 39.6% w/w while the total traded value increased by 9.9% w/w. Meanwhile, sectoral performance was broadly positive, as the Industrial Goods (+5.0%), Consumer Goods (+1.4%), Insurance (+0.9%) and Oil and Gas (+0.3%) indices advanced while the Banking (-0.8%) index declined.
In the week ahead, we believe investors will be reluctant to leave gains in the market. As such, we expect intermittent profit-taking to persist. However, we expect this to be tempered by bargain-hunting activities as investors position themselves ahead of the upcoming Q3-23 earnings season. Notwithstanding, we advise investors to take positions in only fundamentally sound stocks as the fragility of the macro environment remains a significant headwind for corporate earnings.
Money market and fixed income
Money market
Just as we envisaged, the overnight (OVN) rate contracted by 3bps to 1.7% this week. We highlight that the depressed interbank rate was supported by prior week’s healthy system liquidity coupled with this week’s inflows from OMO maturities (NGN10.00 billion), which limited the impact of the week’s CRR debits (NGN430.43 billion) across the banking system. Accordingly, the system liquidity averaged a net long position of NGN479.10 billion this week (vs a net long position of NGN804.77 billion in the previous week).
In the coming week, we expect the OVN rate to trend upwards as the debits for the FGN bond auction (NGN360.00 billion) will likely offset the expected sole inflow from the FGN bond coupon (NGN145.98 billion).
Treasury bills
Proceedings in the Nigerian Treasury bills secondary market were bullish, driven by the combined impact of (1) the excess liquidity in the system this week and (2) participants covering for lost bids at the NTB auction held on Wednesday. As a result, the average yield across all instruments declined by 141bps to 6.6%. Across the market segments, the average yield at the NTB segment contracted by 147bps to 6.5% and declined by 3bps to 12.1% in the OMO secondary market. At this week’s NTB PMA, the DMO offered instruments worth NGN36.55 billion – NGN2.78 billion for the 91-day, NGN3.02 billion for the 182-day, and NGN30.76 billion for the 364-day bills – to participants and eventually allotted the total offer amount. The auction was highly contested as the subscription level settled at NGN321.14 billion, translating to a bid-to-cover ratio of 8.8x (previous auction: 4.4x). Hence, the auction stop rates closed lower at 3.67% (previously 4.99%), 5.11% (previously 6.55%), and 9.25% (previously 11.37%) on the 91D, 182D, and 364D bills, respectively.
Next week, we envisage lower demand for T-bills in the secondary market following our expectations of a squeezed system liquidity. Thus, we believe yields in the secondary market will head northward.
Bonds
This week, the FGN bonds secondary market traded mixed but with a bearish undertone as the average yield across instruments expanded by 4bps to 14.5%. Across the benchmark curve, the average yield dipped on the short end instruments (-22bps) due to investors’ interest on the MAR-2024 (-67bps) bond but expanded in the mid (+21bps) and long (+3bps) segments instruments, following profit-taking on the APR-2029 (+36bps) and JUN-2053 (+10bps) bonds, respectively.
Next week, we expect the result of the October 2023 FGN bond auction (16 October) 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 reserves recorded accretion this week for the first time since 19 May 2023, as gross reserves increased by USD1.72 million w/w to USD33.22 billion (12 October). Meanwhile, the naira depreciated by 2.3% to NGN759.20/USD (as of 12 October) at the I&E window (IEW), with total turnover at the window (as of 12 October 2023) increasing by 79.1% WTD to USD629.37 million, as trades were consummated within the NGN700.00 – NGN846.00/USD band. In the Forwards market, the rate depreciated across the 1-month (-0.4% to NGN789.34/USD), 3-month (-0.4% to NGN807.82/USD) and 6-Month (-0.1% to NGN837.95/USD) contracts, while the 1-year (+0.4% to NGN899.70/USD) contract appreciated.
Given the CBN’s recent circular stating that importers of all the 43 items previously restricted in 2015 can now purchase FX in the Nigerian Foreign Exchange Market (NFEM), we expect the official exchange rate to depreciate towards the parallel market while the parallel market rate appreciates towards the official market such that the two rates find a new middle ground in the near term based on current FX liquidity conditions. However, when the market realises that FX supply is still minimal at the official market, importers will return to the parallel market to fulfil their FX obligations. The preceding will lead to another round of FX pressures in the parallel market.