The local stock market extended its winning streak for the fourth consecutive week. Accordingly, the All-Share Index rose by 8.3% w/w.
January 26, 2024/Cordros Report
Global Economy
According to the Bureau of Economic Analysis (BEA), the United States (US) economy expanded by 3.3% in Q4-23 (Q3-23: +4.9% q/q), beating consensus estimates (+2.0% q/q). We attribute the growth print to the robust consumer spending (+2.8% q/q vs Q3-23: +3.1% q/q) supported by a resilient labour market. At the same time, government spending (+3.3% q/q vs Q3-23: +5.8% q/q) moderated, although remained strong in line with increases in gross investment in structures and compensation of state and local government employees. Elsewhere, non-residential investments (+1.9% q/q vs Q3-23: +1.4% q/q) expanded due to a rebound in equipment and stronger intellectual property products, while residential investments (+1.1% q/q vs Q3-23: +6.7% q/q) surged at a slower pace. Overall, the economy grew by 2.5% y/y in 2023FY (2022FY: 1.9% y/y), defying projections that the elevated interest rates would lead to a recession. While we expect increased consumer spending and improved job numbers to continue to support overall economic growth in the near term, we believe the depletion of pandemic-era savings and persistent geopolitical tensions pose a downside risk to growth over the short to medium term. Elsewhere, we think the growth print suggests the Fed may opt to delay rate cuts until there is a heightened level of confidence. As a result, the market expects a “Hold” stance in both the January and March meetings, with the initial rate reduction anticipated in May.
At the first policy meeting in 2024, the Governing Council of the European Central Bank (ECB) voted to keep it’s key interest rates steady in line with market expectations. Notably, this marks the third consecutive time the ECB has opted to keep the key policy rates steady, maintaining the main refinancing operations, marginal lending facility, and deposit lending facility at 4.5%, 4.75%, and 4.00%, respectively. The council emphasizes that sustaining these ECB interest rates over an extended period will significantly contribute to achieving their 2.0% medium-term inflation target in a timely manner. Overall, the committee highlighted they will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, the Governing Council’s interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Body language of the ECB President signals that the committee remain resolute in bringing inflation to its 2.0% target, reflecting that the key interest rates will remain at restrictive levels for an extended duration. Notwithstanding, the financial market is factoring in the possibility of a rate cut in the April policy meeting.
Global Equities
Global stocks climbed higher this week, supported by positive corporate earnings and economic data from Europe and the United States. Optimism surrounding China’s stimulus measures also contributed to the positive sentiment. Accordingly, US equities (DJIA: +0.5%; S&P 500: +1.1%) edged higher, driven by (1) better-than-expected Q4-23 GDP growth, (2) strong PMI readings, and (3) a rally in tech stocks. Similarly, European equities (STOXX Europe: +2.3%; FTSE 100: +1.6%) recorded gains as investors digested the (1) European Central Bank’s latest decision to leave policy rates unchanged and (2) positive corporate earnings. Elsewhere, Asian markets (Nikkei 225: -0.6%; SSE: +2.8%) remained mixed, as hawkish signals from the Bank of Japan spurred profit-taking activities in the Japanese market. Meanwhile, the Chinese market rebounded from a three-week rout, driven by positive reactions to the People’s Bank of China’s announcement to cut banks’ reserve-requirement ratio to spur economic growth. The Emerging market (MSCI EM: +1.8 %) index posted a gain supported by the positive sentiment in China (+2.8%), while the Frontier (MSCI FM: -0.3%) market declined following the loss in Vietnam (-0.5%).
Nigeria
Domestic Economy
According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions in the local bourse settled at NGN3.56 trillion in 2023FY, signalling a 53.9% y/y increase from the NGN2.32 trillion in 2022FY. On a month-on-month basis, total transactions rose to a six-month high, expanding by 14.4% m/m to NGN343.90 billion in December (November: NGN300.67 billion). Analyzing the breakdown, we highlight that the improvement was mainly due to a 29.1% m/m increase in domestic transactions to NGN296.03 billion (86.1% of total transaction value). Precisely, the increase in domestic transactions was primarily driven by institutional investors (+49.7% m/m) amid a marginal contraction from retail investors (-1.2% m/m). Meanwhile, foreign inflows remained weak, as foreign transactions declined by 32.9% m/m to NGN47.9 billion (November: NGN71.40 billion) due to the effect of the lingering FX liquidity constraints. 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. Elsewhere, while we believe foreign investors will continue to adopt a wait-and-see approach in the near term, we envisiage improved foreign participation over the medium term driven by (1) expected FX inflows as guided by the authorities, (2) CBN’s recent actions in clearing its FX backlogs, and (3) firm direction of interest rates.
The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in December (from the total revenue generated in November) increased by 3.6% m/m to NGN1.13 trillion (November: NGN1.09 trillion). From the breakdown provided, we understand that this represents 67.3% of the total revenue (NGN1.67 trillion) generated in the month, with the remaining balance spread across (1) NGN62.25 billion cost of collection and (2) NGN484.57 billion allocated to transfers and refunds. We attribute the increased disbursement to the increased receipts from Companies Income Tax (CIT), Excise Duty, Petroleum Profit Tax (PPT), Value Added Tax (VAT), and Electronic Money Transfer Levy (EMTL), while collections from Import Duty, CET Levies and Oil & Gas royalties declined. We anticipate the currency depreciation accompanying the FX market liberalisation to continue supporting oil revenue in naira terms. However, relatively lower crude oil production may likely ensure oil revenue remains underwhelming relative to pre-pandemic levels. At the same time, we maintain our expectation that non-oil revenue will continue to support aggregate revenue, given the sustained improvement in economic activities and the impact of the provisions of the 2022 Finance Act.
Capital Markets
Equities
The local stock market extended its winning streak for the fourth consecutive week, buoyed by sustained interest in DANGCEM (+28.8%) and BUACEMENT (+21.0%). Accordingly, the All-Share Index rose by 8.3% w/w, surpassing the 100,000-points mark attained on Wednesday, to close at a record high of 102,401.88 points, taking the Year-to-Date return to +36.9%. Trading activity remained weak, as the total traded volume and value declined by 42.4% and 25.6%, respectively. Sectoral performance was mixed, as the Industrial Goods (+23.2%), Oil and Gas (+11.6%) and Consumer Goods (+5.3%) indices advanced, while the Insurance (-4.1%) and Banking (-1.6%) indices declined.
With the commencement of the 2023FY earnings season, we expect the NGX to be flooded with corporate earnings in the coming weeks as companies publish unaudited 2023FY numbers with accompanying dividend declarations. We believe this should provide a catalyst for buying activities and outweigh profit-taking activities.
Money market and fixed income
Money market
The overnight (OVN) rate contracted by 442bps w/w to 18.8%, as the inflows from the FGN bond coupon payments (NGN216.59 billion) and CRR refunds (c. NGN240.00 billion) supported financial system liquidity. Against the preceding, system liquidity settled higher at a net long position of NGN487.45 billion (vs a net long position of NGN334.16 billion in the previous week).
Next week, we envisage the OVN rate will likely decline further following inflows from FAAC disbursements (NGN743.13 billion) which should offset the impact of the debits for this month’s FGN bond (NGN360.00 billion) auction holding on Monday.
Treasury bills
This week, activities in the T-bills secondary market turned bearish as investors took profits on positions across the curve. As a result, the average yield across all instruments expanded by 286bps to 7.0%. Across the market segments, the average yield advanced by 333bps to 6.7% in the NTB segment but pared by 1bp to 8.4% in the OMO secondary market. At this week’s NTB auction, the apex bank offered instruments worth NGN231.82 billion – NGN7.85 billion of the 91-day, NGN6.44 billion of the 182-day, and NGN217.53 billion of the 365-day bills – to participants. Total subscription at the auction settled at NGN1.09 trillion (bid-to-offer: 4.7x), with more demand skewed towards the longer-dated bill (NGN1.04 trillion). The auction closed with the CBN allotting precisely what was offered at respective stop rates of 5.00% (previously 2.44%), 7.15% (previously 4.22%), and 11.54% (previously 8.40%).
Following our expectations of a liquidity surfeit in the system next week we expect yields to temper in the Treasury bills secondary market.
Bonds
Proceedings in the Treasury bonds secondary market was bearish this week, as market players seemingly opened short positions ahead of the January 2024 bond PMA after the release of the auction calendar by the DMO, which showed that all re-openings for the quarter would be on short to mid-tenor bonds. Consequently, the average yield advanced by 24bps to 13.6%. Across the benchmark curve, the average yield expanded at the short (+13bps), mid (+23bps) and long (+34bps) segments as investors sold off the MAR-2027 (+78bps), JUN-2032 (+50bps) and JUN-2037 (+78bps) bonds.
Next week, we believe the outcome of this month’s FGN bond auction holding on Monday (29 January) will influence the sentiments in the secondary market. At the auction, the DMO is set to offer instruments worth NGN360.00 billion through re-openings of the 16.29% FGN MAR 2027, 14.55% FGN APR 2029, 14.70% FGN JUN 2033 and 15.45% FGN JUN 2038 bonds. Nonetheless, based on 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 anticipate yields in the FGN bonds secondary market will trend upwards in the medium term.
Foreign Exchange
This week, Nigeria’s FX reserves expanded further, as the gross reserves level increased by USD77.69 million w/w to USD33.35 billion (23 January). Meanwhile, the naira appreciated by 1.2% to NGN891.90/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM). At the NAFEM, total turnover (as of 25 January 2024) decreased by 40.5% WTD to USD338.77 million, with trades consummated within the NGN700.00 – NGN1,399.00/USD band. In the Forwards market, the naira rates on the 1-month (-6.8% to NGN1,027.88/USD), 3-month (-7.1% to NGN1,049.08/USD), 6-month (-7.7% to NGN1,083.51/USD) and 1-year (-7.9% to NGN1,155.92/USD) contracts all depreciated.
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.
