Local stocks ended the week on a negative note, driven by selloffs of STANBIC (-13.1%) and GEREGU (-7.2%). As a result, the All-Share Index shed 0.4% w/w to close at 66,915.41 points.
October 20, 2023/Cordros Report
Global Economy
According to the National Bureau of Statistics of China, the Chinese economy beat market expectations (4.4% y/y) as it grew by 4.9% y/y in Q3-23 (Q2-23: 6.3% y/y). The better-than-expected growth print reflects the impact of the recent policy measures to lift consumption, which counterbalanced the (1) prevalent property sector crisis and (2) weak external sector. Some of the policy measures include (1) reducing interest rates, (2) relaxing capital control measures, and (3) accelerating infrastructure projects. On a quarter-on-quarter basis, the world’s second-largest economy grew by 1.3% in Q3-23, relative to the 0.5% q/q growth in Q2-23. Given that the economy grew by 5.2% y/y in 9M-23, we highlight that it only needs to grow by about 4.4% in Q4-23 to hit the government’s 2023FY 5.0% growth target. Nonetheless, we believe that the ability of the government to spur medium-term growth relative to recent decades will be limited by the (1) shrinking labour force, (2) rising geopolitical tensions, (3) lingering domestic property market weakness, and (4) depressed private sector confidence.
In the United Kingdom (UK), consumer prices held steady in September, emphasizing the mounting inflationary pressures in the country. According to the Office for National Statistics (ONS), the UK’s headline inflation was 6.7% in September (August: 6.7% y/y). We understand that the monthly rise in motor fuel costs was the primary driver of the September inflation print, leading to a smaller year-on-year decline in energy costs (-0.2% y/y vs August: -3.2% y/y). The preceding outweighed the moderation in the food (12.1% y/y vs August: 13.6% y/y) and furniture & household goods (3.7% y/y vs August: 5.1% y/y) sub-baskets. On a month-on-month basis, consumer prices increased by 0.5% (August: 0.3% m/m). Despite the negative inflation surprise, the financial markets expect the Bank of England (BoE) to leave the key policy rate unchanged at its November meeting. Still, interest rates may likely stay around current levels for most parts of 2024E as underlying inflation remains entrenched in the economy. Notably, core (6.1% y/y vs August: 6.2% y/y) and service (6.3% y/y vs August: 6.1% y/y) inflation remain robust, suggesting that the progress in bringing inflation down is slow.
Global Market
Global stocks plummeted this week due to concerns about the potential escalation of the Israel-Hamas conflict in the Middle East. In addition, hawkish comments from the Federal Reserve Chairman on the possibility of further interest rate hikes and weak corporate earnings contributed to the risk-off sentiments. Accordingly, negative sentiments dominated trading in the US (DJIA: -0.8%; S&P 500: -1.2%) as investors reacted to (1) a surge in the 10-year Treasury yield, (2) mixed corporate earnings reports, and (3) hawkish remarks from the Federal Reserve Chairman. Similarly, European equities (STOXX Europe: -2.1%; FTSE 100: -1.3%) were on course to close lower due to disappointing corporate earnings, rising concerns related to the Middle East conflict and interest rate uncertainty. Equally, Asian markets (Nikkei 225: -3.3%; SSE: -3.5%) followed the negative trend on Wall Street amid lingering concerns about China’s property sector. In other regions, Emerging (MSCI EM: -2.2%) and Frontier (MSCI FM: -2.9%) market indices posted bearish performance due to losses in China (-3.5%) and Vietnam (-5.5%), respectively.
Nigeria
Domestic Economy
According to the recently released data by the Budget Office of the Federation, the FGN’s retained revenue settled lower at NGN4.83 trillion in 7M-23 – 3.9% below the prorated budget (NGN5.03 trillion). Nonetheless, the print is significantly higher than our expectations, given a significant increase in grants (NGN480.19 billion vs prorated budget: NGN25.10 billion) and non-oil revenue’s 27.7% overperformance. Meanwhile, aggregate expenditure (NGN8.45 trillion) underperformed the prorated budget (NGN10.77 trillion) by 21.6% due to the underperformance across the non-debt recurrent (-20.3% vs prorated budget: NGN3.93 trillion) and capital (-66.2% vs prorated budget: NGN2.44 trillion) expenditure. Given the higher expenditure underperformance relative to revenue, the fiscal deficit (excluding GOEs and project-tied loans) settled lower at NGN3.62 trillion (vs prorated budget: NGN5.74 trillion). Based on the past experiences, these estimates are subject to revisions. At this current pace, the fiscal deficit (excluding GOEs & project-tied loans) may settle at NGN6.19 trillion in 2023E (2022FY: NGN6.80 trillion) amid a surprisingly underwhelming expenditure performance. Notwithstanding, it is pertinent to note that the 7M-23 fiscal performance data are provisional estimates susceptible to errors and subject to further review.
Consumer prices maintained their uptrend in September amid pressures across the food and non-food baskets. According to the National Bureau of Statistics (NBS), headline inflation increased to its highest level since August 2005, rising by 92bps to 26.72% y/y in September (vs August: 25.80%). On the one hand, food prices increased by 130bps to 30.64% y/y as the low base effects from the prior year added a layer of pressure to the existing factors stoking food prices. On the other hand, the non-food basket (+56bps to 22.10% y/y) remains pressured, and we attribute the higher prices in September to the troika impact of (1) lingering currency pressures, (2) PMS subsidy removal, and (3) higher gas and diesel prices. We expect food prices to temper in October due to the impact of the primary harvest season, although the downside risks that could limit food supplies remain intact. At the same time, we see no respite yet for the non-food inflation. Overall, we see a 1.90% m/m headline inflation in October, translating to an 83bps increase in the y/y inflation rate to 27.54%.
Capital markets
Equities
Local stocks ended the week on a negative note, driven by selloffs of STANBIC (-13.1%) and GEREGU (-7.2%). As a result, the All-Share Index shed 0.4% w/w to close at 66,915.41 points. Accordingly, the MTD and YTD returns moderated to +0.8% and +30.6%, respectively. The trading activity level was mixed, as the total traded volume increased by 1.8% w/w while the total traded value declined by 0.6% w/w. Sectoral performance, however, showed a mixed picture with losses in the Insurance (-1.0%), Consumer Goods (-0.5%), and Industrial Goods (-0.1%), indices but a gain in the Banking (+3.5%) index. Elsewhere, the Oil and Gas index closed flat.
We expect the direction of market performance to be shaped by the ongoing Q3 earnings season as investors cherry-pick fundamentally sound stocks. Overall, we reiterate the need for taking positions in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings.
Money market and fixed income
Money market
The overnight (OVN) rate expanded by 53bps w/w to 2.2%, as the debits for FGN bond PMA (NGN374.76 billion) and late CRR (c. NGN160.00 billion) outweighed the inflows from FGN bond coupon payments (NGN145.98 billion) and CRR refunds. Nonetheless, we highlight that the rate remained at single digits throughout the week, as the average system liquidity closed at a net long position of NGN454.07 billion (vs. a net long position of NGN479.10 billion in the previous week).
Barring significant outflows next week, we expect the OVN rate to remain depressed as inflows from FGN bond coupon payments (NGN285.82 billion) will likely keep the system liquidity afloat.
Treasury bills
This week, activities in the Treasury bills secondary market were bearish as market participants continued to exit positions across the mid and long segments of the curve. As a result, the average yield across the market expanded by 40bps to 7.2%. Across the market segments, the average yield advanced by 39bps to 6.9% in the NTB secondary market but contracted by 3bps to 12.1% in the OMO segment.
In the coming week, we envisage lower yields in the T-bills secondary market as we believe the liquidity surfeit in the financial system will drive the demand for bills. In addition, the DMO is scheduled to hold an NTB PMA on Wednesday (25 October), where it will roll over NGN108.13 billion worth of maturities.
Bonds
The Treasury bonds secondary market traded with bullish sentiments following investors’ interest in shorter-dated instruments and participants looking to the secondary market to fill unmet bids from Monday’s PMA. Consequently, the average yield declined by 1bp to 14.4%. At this month’s FGN bond auction, the DMO offered instruments worth NGN360.00 billion to investors through re-openings of the 14.55% APR 2029 bond (Bid-to-offer: 0.5x; Stop rate: 14.9%), 14.70% JUN 2033 (Bid-to-offer: 0.3x; Stop rate: 15.8%), 15.45% JUN 2038 (Bid-to-offer: 0.7x; Stop rate: 15.8%), and 15.70% JUN 2053 (Bid-to-offer: 2.8x; Stop rate: 16.6%) bonds. The subscription level settled at NGN383.11 billion, translating to a bid-to-offer ratio of 1.1x, with demand skewed towards the JUN 2053 bond (bid-to-offer: 2.8x). The DMO eventually over-allotted instruments worth NGN374.76 billion (non-competitive allotments: NGN40.00 billion), resulting in a bid-to-cover ratio of 1.0x.
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 improved further this week as the gross reserve level increased by USD18.31 million w/w to USD33.24 billion (18 October). Elsewhere, the naira depreciated by 5.4% to NGN808.27/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), with total turnover at the market (as of 19 October 2023) decreasing by 50.6% WTD to USD348.91 million, as trades were consummated within the NGN700.00 – NGN1,000.00/USD band. In the Forwards market, the naira rates recorded depreciation across the 1-month (-2.1% to NGN805.92/USD), 3-month (-2.0% to NGN824.20/USD), 6-month (-1.7% to NGN852.67/USD) and 1-year (-2.2% to NGN919.65/USD) contracts.
Given the CBN’s unbanning of importers of all the 43 items previously restricted from the NAFEM in 2015, the market realised that FX supply is still minimal at the official market faster than we anticipated. Accordingly, importers have returned to the parallel market to fulfil their FX obligations. In addition, the incentives for holding the naira continue to be limited by the day, coupled with the panic-buying arising from the expectations of further currency pressures amidst limited FX supplies. Consequently, barring any significant FX inflows or convincing action by the policymakers to turn the tide, we expect the exchange rate pressures to linger in the short term.
