Despite a subdued start to the week, the Nigerian equities market witnessed a return of positive sentiments, driven by investors’ interest in GEREGU (+20.6%) and SEPLAT (+3.7%) which outweighed losses in MTNN (-1.2%) and STANBIC (-2.6%). As a result, the All-Share Index recorded a 0.3% w/w increase.
October 27, 2023/Cordros Report
Global Economy
Preliminary estimates from the United States (US) Bureau of Economic Analysis show that the US economy grew by 4.9% q/q in Q3-23 (Q2-23: 2.1% q/q) – its highest level since Q4-21 (7.0% q/q). The sturdy growth was primarily in line with the resilient labour market and moderation in inflationary pressures, which propelled household consumption amid spending from pandemic-era savings. Accordingly, consumer spending rose by 4.0% q/q (Q2-23: 0.8% q/q), exports (6.2% q/q vs Q2-23: -9.3% q/q) rebounded, and residential investments (3.9% q/q vs Q2-23: -2.2% q/q) recorded their first growth in two years. Besides, government spending (4.6% q/q vs Q2-23: 3.3% q/q) increased faster, and we understand that this is due to the restocking of ammunition after transfers to help Ukraine in the Russia-Ukraine conflict. The Q3-23 growth print may likely be the peak GDP figure as the US economy is expected to slow over Q4-23 and 2024E, given several factors, including (1) depletion of pandemic-era savings, (2) less expansionary fiscal policy amid an agreement to end a government shutdown, (3) feedthrough impact of the US Fed’s aggressive tightening cycle, and (4) increased geopolitical tensions.
In line with our expectations, the Governing Council of the European Central Bank (ECB) voted to leave the three key interest rates unchanged at their recently concluded October policy meeting. The decision makes it the first time the ECB did not increase rates since the monetary policy tightening cycle began in July 2022. In influencing its decision to keep policy rates unchanged, the Council highlighted that most measures of underlying inflation have continued to ease. Besides, the Council’s past interest rate increases continue to be transmitted forcefully into financial conditions, increasingly dampening demand and helping to push down inflationary pressures. Based on the meeting outcome, we now believe that the ECB has finally reached the end of its interest rate hiking cycle as (1) price pressures continue to ease, although the risks are tilted to the upside, and (2) the regional bloc has slowed significantly, more so that the chances of a recession remain high. That said, we do not expect the Council to consider cutting interest rates soon, with rates expected to remain at restrictive levels for some time.
Global Market
Global equities remained under pressure due to concerns about (1) the Israel-Hamas conflict, (2) cloudy corporate earnings, and (3) the continued rise in bond yields. As of the time of writing, US (DJIA: -1.0%; S&P 500: -2.1%) equities were headed for another weekly loss as investors digested mixed corporate earnings amid concerns signs of economic resilience could prompt the Fed to keep interest rates higher for longer. European equities (STOXX Europe: -0.2%; FTSE 100: -0.7%) also traded with a negative bias, driven by weak corporate earnings and ongoing global economic uncertainties. In Asia, Japanese (Nikkei 225: -0.9%) equities followed the downward trend on Wall Street, reflecting concerns about US tech giants and developments in the Middle East. In contrast, Chinese equities (SSE: +1.2%) closed higher, driven by positive reactions to buy-back proposals from leading Chinese companies. Elsewhere, Emerging (MSCI EM: -1.6%) and Frontier (MSCI FM: -2.2%) market indices closed in the red due to the selloffs in Taiwan (-1.9%) and Vietnam (-4.5%), respectively.
Nigeria
Domestic Economy
The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in October (from the total revenue generated in September) printed lower by 17.9% m/m to NGN903.48 billion (September: NGN1.10 trillion). The amount shared was 56.7% of the month’s gross revenue (NGN1.59 trillion vs August: NGN1.48 trillion), with the remaining balance spread across (1) NGN54.43 billion cost of collection, (2) NGN347.86 billion transfers & refunds, and (3) NGN289.00 billion saved for future needs. Moreover, a significant increase in inflows from the Petroleum Profit Tax (PPT) and Oil and Gas Royalties were the major drivers of 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 (1) continuous implementations of the provisions of the various Finance Acts and (2) growth in the different tax base amid an improvement in domestic economic activities.
According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions in the local bourse resumed its uptrend, rising by 12.7% m/m to NGN295.79 billion in September (August: NGN262.56 billion). The domestic investors primarily drove the increase as domestic transactions (88.1% of total transactions) increased by 15.6% m/m to NGN260.55 billion (August: 225.40 billion). Elsewhere, foreign transactions (11.9% of gross transactions) declined for the third consecutive month, decreasing by 5.2% m/m to NGN35.24 billion (August: NGN37.16 billion) as the government’s reform-induced momentum slowed, dampening foreign sentiments. We expect domestic investors to continue to dominate the domestic equities market over the short-to-medium term, even as higher fixed-income yields may constrain buying activities. Simultaneously, given the MSCI’s reclassification of the Nigeria indexes from Frontier Markets to Standalone Markets status, we believe the possible return of FPIs to the Nigerian market may take longer than previously envisaged, even if FX liquidity issues abate in the near term. This is because a sizeable portion of investors currently tracking and holding naira risky assets do so (or did) due to Nigeria’s indexes classification as a Frontier Market.
Capital markets
Equities
Despite a subdued start to the week, the Nigerian equities market witnessed a return of positive sentiments, driven by investors’ interest in GEREGU (+20.6%) and SEPLAT (+3.7%) which outweighed losses in MTNN (-1.2%) and STANBIC (-2.6%). As a result, the All-Share Index recorded a 0.3% w/w increase, bringing the MTD and YTD returns to +1.1% and +31.0%, respectively. Trading activity showed a 1.6% w/w decline in total traded volume but a 4.0% w/w increase in total traded value. Meanwhile, performance across sectors was mixed following losses in the Insurance (-1.1%) and Industrial Goods (-0.2%), indices and gains in the Oil and Gas (+2.1%) and Banking (+1.0%) indices, while the Consumer Goods index remained unchanged.
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
This week, the overnight (OVN) rate expanded significantly by 14.75ppts w/w to 14.8%, following the (1) CBN’s removal of the NGN2.00 billion limit on Standing Deposit Facility (SDF) and (2) debits for net NTB issuances (NGN262.21 billion), amid inflows from FGN bond coupon payments (NGN238.90 billion). On (1), we understand that DMBs placed their excess fund with the CBN, as the balance at the SDF window peaked at NGN400.60 billion on Thursday (vs NGN54.00 billion in the previous day). Consequently, the average system liquidity settled lower at a net long position of NGN46.48 billion (vs a net long position of NGN356.73 billion in the prior week).
Next week, we expect buoyant liquidity in the financial system as the inflows from FAAC allocations (NGN582.94 billion) will likely saturate the system. Hence, we believe the OVN rate will head downwards.
Treasury bills
Bearish sentiments continued in the Treasury bills secondary market this week, as the average yield across all instruments advanced by 21bps to 7.4%. We attribute this performance to participants exiting their positions to focus on the Wednesday auction. Across the segments, the average yield expanded by 22bps to 7.2% in the NTB segment but contracted by 3bps to 12.0% in the OMO secondary market. At the NTB primary auction, the DMO offered to participants instruments worth NGN108.13 billion – NGN2.85 billion of the 91-day, NGN7.95 billion of the 182-day, and NGN97.33 billion of the 364-day bills. The auction was deeply contested, with a total subscription of NGN638.13 billion (bid-to-offer: 5.9x), with more demand skewed towards the longer-dated bill (NGN615.02 billion translating to 96.4% of the total subscription). Surprisingly, the DMO over allotted at the auction with the total bills sold amounting to NGN370.34 billion – NGN7.85 billion for the 91-day, NGN12.95 billion for the 182-day, and NGN349.54 billion for the 364-day – at respective stop rates of 6.00% (previously: 3.67%), 9.00% (previously: 5.11%), and 13.00% (previously: 9.25%).
In the coming week, we envisage that the expected inflows into the system will likely drive demand for T-bills. Thus, we anticipate a downward tilt in T-bills yield, following our expectation of a higher system liquidity.
Bonds
Similarly, activities in the Treasury bonds secondary market were bearish as investors sold off instruments across the curve. As a result, the average yield expanded by 43bps to 14.9%. Across the benchmark curve, the average yield advanced at the short (+61bps), mid (+29bps) and long (+40bps) ends due to profit-taking activities on the MAR-2024 (+131bps), JUN-2033 (+39bps) and MAR-2034 (+64bps) bonds, respectively.
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 recorded another accretion this week for the third consecutive week, as the gross reserve level appreciated by USD51.97 million w/w to USD33.31 billion (25 October). Meanwhile, the naira appreciated by 2.3% to NGN789.94/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), with total turnover at the market (as of 26 October 2023) decreasing by 16.0% WTD to USD361.09 million, as trades were consummated within the NGN644.00 – NGN981.00/USD band. In the Forwards market, the naira rate depreciated across the 1-month (-3.4% to NGN834.18/USD), 3-month (-3.1% to NGN850.71/USD), 6-month (-2.7% to NGN876.57/USD), and 1-year (-1.5% to NGN933.51/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.
