This week, the Nigerian equities market saw an uptick, driven by bargain hunting in SEPLAT (+10.0%) and NESTLE (+9.5%). Consequently, the All-share Index advanced by 0.3% w/w to close at +39.4% YTD.
December 1, 2023/Cordros Report
Global Economy
Preliminary estimates released by Eurostat showed that headline inflation in the Euro area printed below market expectation (2.7% y/y), moderating by 50bps to 2.4% y/y in November (October: 2.9% y/y) – its lowest print since July 2021 (2.2% y/y). We believe the slowdown in consumer prices was underpinned by the decline in energy prices and softer food prices. Analyzing the breakdown, energy costs (-11.5% y/y vs. October: -11.2% y/y) remained in the negative trajectory for the sixth consecutive month, while prices for Food, alcohol & tobacco (+6.9% y/y vs October: +7.4% y/y) cooled to 26 months low driven by a relatively higher food supply. On a month-on-month basis, consumer prices declined by 0.5% in November (October: +0.1% m/m), reflecting the lowest level since January 2020 (-1.0% y/y). We expect consumer prices to maintain the downward path in December, primarily due to the favourable base effects from last year. Overall, the recent data print suggests a growing indication of an approaching success in overcoming inflation. However, we anticipate that the ECB will refrain from contemplating interest rate cuts in the near term, as they are likely to prioritize monitoring potential pressures arising from wage increases and the global oil market.
According to the Chinese National Bureau of Statistics (NBS), China’s factory activity, as measured by the Manufacturing PMI, remained below the 50-point psychological threshold, settling at 49.4 points in November (October: 49.5 points). We believe the slowdown reflects the marginal declines across new orders (49.4 points vs October: 49.5 points), foreign sales (46.3 points vs October: 46.8 points), and output (50.7 points vs October: 49.5 points). Elsewhere, the Non-Manufacturing PMI eased to 53.2 points in November (October: 54.5 points) in line with the weak new orders, subdued external demand, and lower employment levels in the review period. Overall, the Composite PMI slowed for the second consecutive month to 50.4 points in November (October: 50.7 points) – its lowest level since December 2022 (42.6 points) – reinforcing the growing concerns that the post-COVID recovery momentum in the Chinese economy remains feeble, highlighting the need for additional policy support. Looking ahead, while we expect supplementary stimulus measures to bolster a moderate recovery in domestic demand, we believe overall private sector activity will remain pressured by the faltering external demand and lingering real estate wobbles.
Global Equities
Global equities posed mixed performances this week, with positive sentiments buoyed by a decline in US PCE and eurozone inflation, reinforcing hopes of earlier rate cuts by the Federal Reserve and European Central Bank in 2024. However, in Asian markets, a blend of economic signals tempered optimism. At the time of writing, US equities (DJIA: +1.6%; S&P 500: +0.2%) appeared set for a positive week, as indications of moderating inflation and sustained economic resilience fostered optimism about a more accommodative Federal Reserve. Meanwhile, European equities (STOXX Europe: +0.4%; FTSE 100: -0.5%) traded with mixed sentiments influenced by (1) cooler-than-expected Eurozone inflation data, (2) sell pressures on China-exposed stocks due to worries of slowing growth in China, and (3) hawkish comments from the Bank of England Governor. In contrast, Asian markets (Nikkei 225: -0.6%; SSE: -0.3%) were largely bearish, following negative reactions to sluggish manufacturing PMI data amid China’s ongoing trend of foreign fund outflows. In other regions, Emerging (MSCI EM: +0.7%) and Frontier (MSCI FM: +0.1%) markets closed higher, driven by gains in Taiwan (+0.9%) and Vietnam (+0.2%), respectively.
Nigeria
Domestic Economy
On Wednesday, President Bola Ahmed Tinubu presented the 2024FY Executive budget proposal titled, “Budget of Renewed Hope” to the National Assembly. A breakdown of the proposal reveals that the FGN intends to spend NGN27.50 trillion (10.8% above the 2023 budget estimate: NGN24.82 trillion) comprising of non-debt recurrent expenditure (NGN9.92 trillion), debt service (NGN8.25 trillion) and aggregate capital expenses (NGN8.70 trillion). At the same time, the FG is projecting a total revenue of NGN18.32 trillion in 2024FY (65.8% above the 2023FY budget estimate: NGN11.05 trillion) with 43.3% of the projected revenue generated from oil-related sources, while 56.7% is to be generated from non- oil-related sources. Overall, the fiscal deficit (excluding GOEs & and project-tied loans) is estimated to settle at NGN8.26 trillion in 2024FY (2023FY FGN’s estimate: NGN12.00 trillion). The primary sources of funding for this deficit are anticipated to be (1) new borrowings amounting to NGN7.83 trillion, (2) multilateral and bilateral loans totaling NGN1.05 trillion, and (3) proceeds from privatization amounting to NGN1.05 trillion. At this run rate, we expect the fiscal deficit (excluding GOEs & and project-tied loans) to 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 9M-23 fiscal performance data are provisional estimates susceptible to errors and subject to further review.
Based on the data obtained from FMDQ, total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) increased by 15.6% m/m to USD1.43 billion in November (October: USD1.23 billion). We attribute the outturn to the higher inflows across local (81.5% of total transactions) and foreign sources (18.5% of gross transactions) in the period. Analyzing the breakdown, inflows from local sources increased by 8.2% m/m to USD1.16 billion in November (October: USD1.07 billion) driven by higher accretions from Individuals (+27.3% m/m), Non-Bank Corporates (+13.2% m/m) and Exporters (+3.8% m/m) segments, without any inflow from the CBN. Simultaneously, collections from foreign sources surged by 65.8% m/m to USD263.20 million (October: USD158.70 million), although still significantly below the pre-pandemic level (Q1-20 average: USD1.28 billion). Over the short to medium term, we anticipate a modest improvement in FX liquidity conditions, though frail relative to historical standards. Nonetheless, we expect foreign investors to closely monitor the development in the FX space, particularly focusing on the (1) expected FX inflows as guided by the authorities, (2) CBN’s actions in clearing its FX backlogs, and (3) firm direction of short-term interest rates.
Capital Markets
Equities
This week, the Nigerian equities market saw an uptick, driven by bargain hunting in SEPLAT (+10.0%) and NESTLE (+9.5%). Consequently, the All-share Index advanced by 0.3% w/w to close at +39.4% YTD. Trading activity was positive, as the total traded volume and value increased by 4.9% w/w and 70.5% w/w respectively. Elsewhere, sectoral performance was mixed, following gains in the Banking (+1.9%) and Oil and Gas (+6.0%) indices and losses in the Insurance (-2.0%), Industrial Goods (-1.2%) and Consumer Goods (-0.5%) indices.
Given the lack of notable positive catalysts to stimulate sentiments, we expect cautious trading to persist in the domestic bourse next week. Nonetheless, we reiterate the need for investors to seek 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
Just as we envisaged, the overnight (OVN) rate contracted by 826bps w/w to 16.3%, as the system liquidity was supported by inflows from FAAC disbursement (NGN583.60 billion) and FGN bond coupon payments (NGN5.63 billion) even as DMBs continued depositing excess funds at the CBN’s Standing Deposit Facility window. Accordingly, the average system liquidity closed at a lower net long position of NGN217.75 billion (vs a net long position of NGN341.67 billion in the prior week).
We believe system liquidity might be pressured next week, following the possibility of (1) a net NTB issuance at the Wednesday auction and (2) banks’ increased usage of the SDF window. Thus, we anticipate the OVN rate might trend upwards from current levels.
Treasury bills
Proceedings in the Treasury bills secondary market remained bullish this week as market players continued to demand bills with attractive yields across the curve. Consequently, the average yield across the market declined by 2bps to 10.9%. Across the market segments, the average yield pared by 1bp to 10.5% in the NTB secondary market and declined by 4bps to 14.6% in the OMO segment.
Next week, we envisage higher yields in the T-bills secondary market, following our expectation of tight liquidity. In addition, the DMO is scheduled to hold an NTB PMA on Wednesday (06 December), where it will roll over maturities worth NGN104.36 billion.
Bonds
Trading in the Treasury bonds secondary market turned bullish this week, underpinned by bargain hunting for short-dated instruments. As a result, the average yield across all instruments contracted by 22bps to 15.7%. Across the benchmark curve, the average yield declined at the short (-98bps) end following demand for the JAN-2026 (-196bps) bond but was unchanged at the mid and long segments.
Over the short term, we expect yields in the FGN bonds secondary market to trend higher, driven by the sustained imbalance in the demand and supply dynamics.
Foreign Exchange
Nigeria’s FX reserve fell further this week as the gross reserve level decreased by USD168.42 million w/w to USD33.00 billion (30 November) – the lowest point since 06 October 2017. Similarly, the naira depreciated by 14.3% to NGN927.19/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM). At the NAFEM, total turnover (as of 30 November 2023) declined by 30.0% WTD to USD481.03 million, with trades consummated within the NGN700.00 – NGN1159.00/USD band. In the Forwards market, the naira rate recorded appreciation across the 1-month (+4.0% to NGN875.84/USD), 3-month (+5.7% to NGN890.29/USD), 6-month (+8.2% to NGN910.27/USD), and 1-year (+7.1% to NGN960.14/USD) contracts.
Looking ahead, we expect FX liquidity conditions to remain tight, pending receipt of expected FX inflows. Thus, we expect the pressure on the local currency to persist in the near term. Nonetheless, we expect foreign investors to keenly watch the development in the FX space with regards to the (1) expected FX inflows as guided by the authorities, (2) CBN’s recent actions in clearing its FX backlogs, and (3) firm direction of short-term interest rates.
