According to China’s National Bureau of Statistics (NBS), the Chinese economy expanded by 5.2% y/y in Q4-23 (Q4-22: +4.9% y/y). We highlight that the improvement in economic growth aligns with the various measures implemented by the government to restore balance in the economy amid the low statistical base from the prior year. Notably, the 2023FY growth print (+5.2% y/y) surpassed the government’s target (+5.0% y/y) despite the challenges faced by the economy, including (1) the property sector downturn, (2) weakened consumer and business confidence, (3) mounting government debts, and (4) heightened global tensions. While we anticipate that government stimulus will support economic activities in the near term, we believe the lingering domestic and global headwinds pose a downside risk to overall growth prospects. Accordingly, the IMF forecasts China’s growth will settle at 4.5% y/y in 2024E relative to 2023FY (+5.2% y/y).

According to the Office for National Statistics (ONS), headline inflation in the UK rose above market expectation (3.8%), and settled at 4.0% y/y in December (November: 3.9% y/y). Notably, we highlight that alcohol and tobacco prices (+12.9% y/y vs November: +10.2% y/y) were the most significant drivers of the overall price increase following the implementation of an additional tax for the products. Notably, food prices (+12.9% y/y vs November: +10.2% y/y) maintained a downtrend for the tenth consecutive month. On a month-on-month basis, headline inflation increased by 0.4% (November: -0.2% m/m). We expect the broad inflationary pressures to remain intact in the near term given (1) the increase in energy price cap, (2) renewed supply chain pressures affecting food prices, and (3) increased wages. Thus, the financial market has adjusted its expectations for interest rate cuts this year, reducing the probability from an earlier estimate of 80.0% to the current 55.0% chance of a rate cut in May. Additionally, the market is now pricing in a 104bps cut in 2024, compared to the previous estimate of 124bps.

Global Equities

This week, sentiments in the global stock market turned sour following lacklustre economic (GDP) data from China and growing uncertainty about the prospective timing of rate cuts by the Federal Reserve. Accordingly, US equities (DJIA: -0.3%; S&P 500: -0.1%) retreated this week after robust US retail sales data cast fresh doubts on the possibility of a Federal Reserve rate cut in March. Likewise, European equities (STOXX Europe: -1.3%; FTSE 100: -2.2%) continued its losing streak for the third consecutive week on growing concerns that major central banks, particularly the Federal Reserve, will agree to early interest rate cuts amid sticky inflation. Elsewhere, mixed sentiments prevailed in Asian markets (Nikkei 225: +1.1%; SSE: -1.7%) as Japan’s slowing inflation and hopes of a switch to an accommodative monetary policy stance drove the Japanese market higher. Conversely, the Chinese market sustained its third consecutive weekly loss as investors expressed concerns about China’s bleak economic outlook fueled by disappointing economic reports and indications that authorities would refrain from implementing substantial stimulus measures to spur growth. Lastly, the Emerging (MSCI EM: -3.5 %) market mirrored the downtrend across major global stocks following losses in China (-1.7%) and India (-1.2%). On the other hand, the Frontier (MSCI FM: +0.2%) market stayed in the positive territory, buoyed by bullish sentiments in Vietnam (+2.0%).

Nigeria

Domestic Economy

Based on the National Bureau of Statistics (NBS) data, headline inflation closed 2023 at a 27-year high, rising by 72bps to 28.92% y/y in December (November: +28.20% y/y). As a result, 2023FY average inflation rate settled at 23.52% y/y (2022FY average: 18.77% y/y). During the review month, the increased price pressures primarily reflected the passthrough impact of (1) lingering currency pressures, (2) elevated energy prices, and (3) increased food demand associated with the Christmas and New Year festivities. Thus, food prices (+109bps to 33.93% y/y) remained at a 19-year high, while the non-food inflation rose faster by 51bps to 23.07% y/y. On a month-on-month basis, headline inflation increased by 20bps to 1.76% (November: 1.56% m/m), reflecting the second consecutive month of increase. We expect consumer prices to remain elevated over the short to medium term, partly due to the troika effect of (1) a below-average harvest season, (2) elevated energy costs, and (3) persistent currency pressures. Consequently, we expect the headline inflation to increase by 1.95% m/m, translating to a y/y reading of 29.48% in January.

According to the Central Bank of Nigeria (CBN), credit to the private sector (CPS) declined by 6.0% m/m in November (October 2023: +6.8% m/m to NGN63.57 trillion). On a year-on-year basis, CPS increased by 43.8% to NGN58.60 trillion (November 2022: NGN41.53 trillion). We attribute this positive trend to the CBN’s enforcement of the 65.0% loan-to-deposit ratio and improved domestic macroeconomic conditions relative to the same period in 2022. Simultaneously, the broad money supply increased by 39.3% y/y to NGN72.01 trillion in November (October 2022: NGN51.69 trillion), aligning with growth in both narrow money supply (+22.1% y/y) and quasi money (+49.3% y/y). Over the short to medium term, we expect that the improvement of domestic economic activities and the re-enforcement of the CBN’s limit on the loans-to-deposits (LDR) macro-prudential ratio for deposit money banks (DMBs) will drive the willingness of commercial banks to create risky assets in the short term.

Capital Markets

Equities

The Nigerian equities market sustained its bullish momentum for the third consecutive week, as the bourse recorded gains on all trading days. Accordingly, the All-Share Index surpassed the 90,000 points mark, driven by robust investors’ interest in diverse stocks across the Industrial, Insurance, Oil & Gas, and Consumer Goods sectors. More specifically, bargain hunting on DANGCEM (+53.9%) and BUACEMENT (+45.8%) spurred a 13.8% increase in the benchmark index to 94,538.12 points – the highest level on record. Consequently, the Year-to-Date return surged to +26.4%. However, trading activity weakened compared to the previous week, with the total traded volume and value decreasing by 9.4% and 12.4%, respectively. From a sectoral standpoint, the Industrial Goods (+46.9%) index recorded the most significant weekly gain, followed by the Insurance (+14.9%), Oil and Gas (+8.8%) and Consumer Goods (+8.2%) indices. The Banking (-0.1%) index was the sole loser for the week.

In the short term, we expect market performance to be dominated by the bulls, as positioning for 2023FY earnings releases and accompanying dividends declarations should outweigh profit-taking activities. Notwithstanding, we advise investors to take 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

In line with our expectations, the overnight (OVN) rate expanded by 545bps w/w to 23.3%, as debits for the OMO auction (NGN300.00 billion) outweighed the week’s major inflow from the FGN bond coupon payments (NGN65.36 billion). Nevertheless, the average system liquidity closed higher this week at a net long position of NGN334.16 billion (vs. a net long position of NGN250.11 billion in the previous week), highlighting DMBs’ sustained borrowing from the CBN’s SLF window.

The OVN rate is likely to remain elevated next week, as we believe debits for a possible net NTB issuances and OMO auction might offset the anticipated inflows from FGN bond coupon payments (NGN216.59 billion) and pressure the system liquidity.

Treasury bills

This week, activities in the T-bills secondary market were mostly subdued amid mild sell pressures on few short-dated papers. As a result, the average yield across all instruments expanded by 12bps to 4.1%. Across the market segments, the average yield advanced by 11bps to 3.4% in the NTB segment but pared by 1bp to 8.4% in the OMO secondary market. At this week’s OMO auction, the CBN offered NGN300.00 billion – NGN75.00 billion of the 92-day, NGN75.00 billion of the 183-day, and NGN150.00 billion of the 365-day – in bills. Total subscription at the auction settled at NGN520.10 billion (previous auction: NGN414.20 billion) with bid-to-offer ratio of 1.7x. Eventually, the CBN allotted NGN300.00 billion – NGN15.00 billion of the 92-day, NGN15.20 billion of the 183-day, and NGN270.00 billion of the 365-day – at respective stop rates of 10.00% (previously: 10.50%), 13.50% (previously: 14.00%), and 17.50% (previously: 17.75%).

We envisage yields on T-bills will likely inch higher next week, undermined by our expectation of a potential liquidity squeeze. In addition, we believe participants will shift focus to the NTB PMA holding on Wednesday (24 January), where the CBN is scheduled to roll over NGN231.82 billion worth of maturities.

Bonds

Trading in the Treasury bonds secondary market turned bearish this week, as the average yield expanded by 27bps to 13.6%. We attribute this cautious bias to the underwhelming Dec-23 inflation data released by the NBS on Monday coupled with market players anticipating the DMO’s release of Q1-24 FGN bond issuance calendar. Across the benchmark curve, the average yield advanced across the short (+8bps), mid (+54bps), and long (+12bps) segments due to sell pressures on the FEB-2028 (+44bps), APR-2029 (+85bps) and JUL-2034 (+35bps) bonds, respectively.

Given our analysis of the factors expected to influence market direction in 2024E – such as (1) monetary policy stance globally and domestically and (2) sustained imbalance in the demand and supply dynamics – we expect yields in the FGN bonds secondary market to trend upwards in the medium term.

Foreign Exchange

Nigeria’s FX reserve maintained its accretion trend this week, increasing by USD82.42 million w/w to close at USD33.20 billion (16 January 2024). Elsewhere, the naira depreciated by 1.3% to NGN902.45/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), with total turnover in the market (as of 18 January 2024) decreasing by 36.4% WTD to USD419.92 million, as trades were consummated within the NGN701.00 – NGN1,299.50/USD band. In the Forwards market, naira rate recorded appreciation across the 1-month (+2.7% to NGN958.29/USD), 3-month (+3.1% to NGN974.87/USD), 6-month (+3.9% to NGN1,000.61/USD) and 1-year (+4.7% to NGN1,064.51/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.