The NGX ASI closed higher by 2.0% w/w to 104,421.23 points, with increased buying interest on DANGCEM (+9.9%) and BUAFOODS (+4.9%) offsetting losses in ZENITHBANK (-8.1%) and UBA (-8.2%).
February 2, 2024/Cordros Report
Global Economy
At the first policy meeting of the year, the Federal Open Market Committee (FOMC) voted to maintain the target range for the federal funds rate at 5.25% – 5.50%. Notably, the Committee signaled a reluctance to reduce the target range until confidence is built regarding the path of inflation moving towards the 2.0% target. In addition, the FOMC reiterated that it would continue reducing its holding of Treasury securities, agency debt and agency mortgage-backed securities in accordance with its previously announced plans. In our opinion, the Committee is proceeding cautiously and is wary about easing rates prematurely and triggering a resurgence of inflation. As a result, we anticipate the Fed will keep rates unchanged in the near term, allowing for a clearer assessment of the economy’s performance and trajectory. In line with this expectation, the CME FedWatch tool now indicates a 61.0% probability of a “Hold” stance at the March meeting and a 72.3% chance of a rate cut in May.
In the same vein, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted by a majority of 6 – 3 to “Hold” the bank rate at 5.25%. We highlight that this marks the fourth consecutive meeting that the central bank has maintained the key policy rate at the 16-year high level. Notably, there was a three-way split on the Committee’s decision amid concerns over the potential for inflationary pressures becoming entrenched – while six members opted to maintain the rate unchanged, two members pushed for a 25bps increase, and one member preferred a 25bps rate cut. Further out, the apex bank judged that the monetary policy would remain restrictive for an extended period to mitigate the risk of inflation persistently exceeding their 2.0% target. While we acknowledge the BOE’s unwavering commitment to tackling inflation, we believe the Committee has shifted away from a hiking bias, even as it remains cautious about cutting rates. This is premised on the ongoing concerns about potential risks in the near term, mainly stemming from disruptions to shipping in the Red Sea amid the Israel-Gaza conflict, which could potentially exert upward pressure on consumer prices. Accordingly, the market anticipates the BOE will maintain a “Hold” stance at its March meeting, while also pricing in five 25bp cuts in 2024, with a first cut expected in June.
Global Equities
Following the Federal Reserve’s dismissal of any expectations of early interest rate cuts this year, investors switched focus to a series of positive corporate updates and the upcoming release of US Non-farm payrolls data later today (2 February) for signals that could prompt a reassessment of the US Fed’s stance in March. Meanwhile in Asia, investors remained disappointed by the cautious and piecemeal government stimulus measures aimed at stabilising the fragile economy. Consequently, US equities (DJIA: +1.1%; S&P 500: +0.3%) rebounded from earlier losses driven by upbeat tech earnings from Meta and Amazon, alongside the Fed’s decision to maintain rates. European equities (STOXX Europe: 0.0%; FTSE 100: -0.2%) were mixed as the Bank of England kept interest rates unchanged and euro zone inflation figures gave a mixed picture. Elsewhere, Asian markets (Nikkei 225: +1.1%; SSE: -6.2%) remained mixed, with the Japanese market rebounding, buoyed by gains in semiconductor-related shares following the strong performance from tech giants on Wall Street. However, the Chinese market recorded huge losses due to concerns about corporate earnings and China’s economic recovery prospects, worsened by disappointing PMI data released earlier in the week. The Emerging market (MSCI EM: -0.3%) index declined following selloffs in China (-6.2%). Similarly, the Frontier (MSCI FM: -0.2%) index dropped due to losses in Vietnam (-0.2%) and Morocco (-1.2%).
Nigeria
Domestic Economy
Based on the data obtained from the FMDQ, the total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) declined significantly by 39.3% m/m to USD832.20 million in January (December 2023: USD1.37 billion), reflecting the second consecutive month of contraction and the lowest level since July 2023 (NGN818.70 million). The breakdown provided shows a broad-based decline across local (84.0% of total inflows) and foreign (16.0% of total inflows) sources. Precisely, inflows from local investors dipped by 38.3% m/m to USD699.00 million in January (December 2023: USD1.13 billion) following significant declines from the Exporters (-20.9% m/m) and Non-Bank Corporates (-52.7% m/m) collections despite growth in the Individuals segment (+94.4% m/m). Meanwhile, there has been no intervention by the CBN for the past three consecutive months. Elsewhere, foreign investors remained on the sidelines due to Nigeria’s FX market inadequacies. Specifically, inflows from foreign sources came in at a four-month low of USD133.20 million (December 2023: USD237.10 million). We expect FX liquidity conditions to remain frail in the near term, although recent CBN reforms to boost liquidity in the FX market could cause a shift over the medium-term. Simultaneously, we believe that foreign inflows will stay below the pre-pandemic level (Q1-20 average: USD1.28 billion) as foreign investors may adopt a wait-and-see approach. Nonetheless, we do not rule out the possibility of an improvement in foreign participation over the medium term, to be driven by (1) expected FX inflows as guided by the authorities and (2) CBN’s recent actions aimed at clearing its FX backlogs.
According to the Central Bank of Nigeria (CBN), credit to the private sector (CPS) increased by 49.8% y/y to NGN62.52 trillion in December (December 2022: NGN41.74 trillion), resulting in a CPS average of NGN52.19 trillion in 2023FY (2022FY: NGN38.95 trillion). We believe the sustained growth in CPS reflects the impact of the CBN’s enforcement of the 65.0% loan-to-deposit ratio and improved domestic macroeconomic conditions relative to 2022. Consequently, the broad money supply increased by 51.0% y/y to NGN78.74 trillion in December (December 2022: NGN52.16 trillion), aligning with growth in both narrow money (+43.4% y/y) and quasi-money (+56.6% y/y). In addition, the currency in circulation increased by 21.3% y/y to NGN3.65 trillion (December 2022: NGN3.01 trillion). Looking ahead, we believe 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 continue to compel commercial banks to generate risky assets over the short to medium term.
Capital Markets
Equities
Despite a run of bearish performances in the domestic bourse earlier in the week, the domestic stock market rebounded by the end of the week, led by Industrial Goods stocks. Particularly, the NGX ASI closed higher by 2.0% w/w to 104,421.23 points, with increased buying interest on DANGCEM (+9.9%) and BUAFOODS (+4.9%) offsetting losses in ZENITHBANK (-8.1%) and UBA (-8.2%). Accordingly, the Month-to-Date and Year-to-Date returns settled at +3.2% and +39.6%, respectively. Trading activity was positive, as total traded volume and value increased by 30.3% w/w and 63.4% w/w, respectively. Performance across sectors remained mixed, with gains in the Industrial Goods (+6.4%) and Consumer Goods (+1.3%) indices and losses in the Banking (-4.5%), Insurance (-4.1%), and Oil and Gas (-2.5%) indices.
In the ensuing weeks, we expect the NGX to be flooded with corporate earnings releases as more companies publish 2023FY numbers alongside dividend declarations. While this influx of results may stimulate buying activities on the bourse, we also anticipate potential profit-taking, especially on stocks that have seen notable price increases recently.
Money market and fixed income
Money market
The overnight (OVN) rate expanded by 237bps w/w to 21.2%, as the settlements from the FGN bond (NGN418.20 billion) and OMO (NGN350.00 billion) auctions outweighed the inflows from FAAC disbursements (NGN743.13 billion). Consequently, the average system liquidity closed lower at a net long position of NGN133.10 billion (vs a net long position of NGN487.45 billion in the previous week).
Next week, we anticipate a further squeeze in system liquidity as the expected sole inflow from OMO maturities (NGN26.00 billion) may be insufficient to support the financial system amid a possible net NTB issuance.
Treasury bills
Sentiments in the NTB secondary market remained bearish this week as the tight liquidity in the financial system triggered sell-offs across the curve. As a result, the average yield across all instruments increased by 269bps to 9.7%. Across the market segments, the average yield expanded by 293bps to 9.7% in the T-bills segment and advanced by 124bps to 9.7% in the OMO secondary market. At this week’s OMO PMA, the CBN offered instruments worth NGN350.00 billion – NGN75.00 billion of the 92-day, NGN75.00 billion of the 183-day, and NGN200.00 billion of the 365-day bills – to participants. Total subscription at the auction settled at NGN533.80 billion (Bid-to-offer: 1.5x), with more demand skewed towards the longer-dated bill (NGN518.80 billion). The auction closed with the CBN allotting precisely what was offered at respective stop rates of 10.00% (previously 10.00%), 13.50% (previously 13.50%), and 17.00% (previously 17.50%).
Yields in the Treasury bills secondary market will likely rise further next week, as our expectation of a possible liquidity dearth might weigh on bill demand. In addition, the CBN is scheduled to conduct an NTB PMA on Wednesday (07 February), with NGN417.06 billion worth of maturities available on offer.Bonds
The FGN bonds secondary market traded on a bearish note, as the average yield expanded by 97bps to 14.8%. Across the benchmark curve, the average yield advanced across the short (+172bps), mid (+72bps), and long (+63bps) segments due to profit-taking activities on the MAR-2024 (+396bps), APR-2029 (+134bps), and JUN-2038 (+223bps) bonds. The DMO conducted the first FGN bond auction on Monday, offering instruments worth NGN360.00 billion to investors through re-openings of the 16.29% FGN MAR 2027 (Bid-to-offer: 1.9x; Stop rate: 15.00%), 14.55% FGN APR 2029 (Bid-to-offer: 0.6x; Stop rate: 15.50%), 14.70% FGN JUN 2033 (Bid-to-offer: 0.8x; Stop rate: 16.00%), and 15.45% FGN JUN 2038 (Bid-to-offer: 3.5x; Stop rate: 16.50%) bonds. Demand was lower across the four instruments as the total subscription level settled at NGN604.56 billion (vs NGN886.41 billion in the previous auction), with the DMO allotting bonds worth NGN418.20 billion, translating to a bid-to-cover ratio of 1.5x.
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 paused its accretion trend after five consecutive weeks, as the gross reserves level dropped by USD18.03 million w/w to close at USD33.35 billion (30 January). Similarly, the naira depreciated by 37.9% to NGN1,435.53/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), majorly influenced by the FMDQ’s revision of the NAFEM rate calculation methodology amid the CBN’s circular on harmonization of reporting requirements of foreign currency exposure of banks. Total turnover at the NAFEM window (as of 01 February 2023) decreased by 4.9% WTD to USD429.46 million, as trades were consummated within the NGN701.00 – NGN1,531.00/USD band. In the Forwards market, the naira rates depreciated across the 1-month (-28.2% to NGN1,431.39/USD), 3-month (-28.2% to NGN1,461.88/USD), 6-month (-28.0% to NGN1,504.19/USD), and 1-year (-26.9% to NGN1,580.65/USD) contracts.
While we expect the pressure on the local currency to persist, we believe the CBN’s updated policy on limiting banks’ foreign currency exposure could potentially release much needed flows into the FX market. While this is insufficient to completely wipe out the FX backlog, it would go a long way to address that issue, which in conjunction with other expected inflows could significantly improve supply and drive appreciation over the short-term.
At the first policy meeting of the year, the Federal Open Market Committee (FOMC) voted to maintain the target range for the federal funds rate at 5.25% – 5.50%. Notably, the Committee signaled a reluctance to reduce the target range until confidence is built regarding the path of inflation moving towards the 2.0% target. In addition, the FOMC reiterated that it would continue reducing its holding of Treasury securities, agency debt and agency mortgage-backed securities in accordance with its previously announced plans. In our opinion, the Committee is proceeding cautiously and is wary about easing rates prematurely and triggering a resurgence of inflation. As a result, we anticipate the Fed will keep rates unchanged in the near term, allowing for a clearer assessment of the economy’s performance and trajectory. In line with this expectation, the CME FedWatch tool now indicates a 61.0% probability of a “Hold” stance at the March meeting and a 72.3% chance of a rate cut in May.
In the same vein, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted by a majority of 6 – 3 to “Hold” the bank rate at 5.25%. We highlight that this marks the fourth consecutive meeting that the central bank has maintained the key policy rate at the 16-year high level. Notably, there was a three-way split on the Committee’s decision amid concerns over the potential for inflationary pressures becoming entrenched – while six members opted to maintain the rate unchanged, two members pushed for a 25bps increase, and one member preferred a 25bps rate cut. Further out, the apex bank judged that the monetary policy would remain restrictive for an extended period to mitigate the risk of inflation persistently exceeding their 2.0% target. While we acknowledge the BOE’s unwavering commitment to tackling inflation, we believe the Committee has shifted away from a hiking bias, even as it remains cautious about cutting rates. This is premised on the ongoing concerns about potential risks in the near term, mainly stemming from disruptions to shipping in the Red Sea amid the Israel-Gaza conflict, which could potentially exert upward pressure on consumer prices. Accordingly, the market anticipates the BOE will maintain a “Hold” stance at its March meeting, while also pricing in five 25bp cuts in 2024, with a first cut expected in June.
Global Equities
Following the Federal Reserve’s dismissal of any expectations of early interest rate cuts this year, investors switched focus to a series of positive corporate updates and the upcoming release of US Non-farm payrolls data later today (2 February) for signals that could prompt a reassessment of the US Fed’s stance in March. Meanwhile in Asia, investors remained disappointed by the cautious and piecemeal government stimulus measures aimed at stabilising the fragile economy. Consequently, US equities (DJIA: +1.1%; S&P 500: +0.3%) rebounded from earlier losses driven by upbeat tech earnings from Meta and Amazon, alongside the Fed’s decision to maintain rates. European equities (STOXX Europe: 0.0%; FTSE 100: -0.2%) were mixed as the Bank of England kept interest rates unchanged and euro zone inflation figures gave a mixed picture. Elsewhere, Asian markets (Nikkei 225: +1.1%; SSE: -6.2%) remained mixed, with the Japanese market rebounding, buoyed by gains in semiconductor-related shares following the strong performance from tech giants on Wall Street. However, the Chinese market recorded huge losses due to concerns about corporate earnings and China’s economic recovery prospects, worsened by disappointing PMI data released earlier in the week. The Emerging market (MSCI EM: -0.3%) index declined following selloffs in China (-6.2%). Similarly, the Frontier (MSCI FM: -0.2%) index dropped due to losses in Vietnam (-0.2%) and Morocco (-1.2%).
Nigeria
Domestic Economy
Based on the data obtained from the FMDQ, the total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) declined significantly by 39.3% m/m to USD832.20 million in January (December 2023: USD1.37 billion), reflecting the second consecutive month of contraction and the lowest level since July 2023 (NGN818.70 million). The breakdown provided shows a broad-based decline across local (84.0% of total inflows) and foreign (16.0% of total inflows) sources. Precisely, inflows from local investors dipped by 38.3% m/m to USD699.00 million in January (December 2023: USD1.13 billion) following significant declines from the Exporters (-20.9% m/m) and Non-Bank Corporates (-52.7% m/m) collections despite growth in the Individuals segment (+94.4% m/m). Meanwhile, there has been no intervention by the CBN for the past three consecutive months. Elsewhere, foreign investors remained on the sidelines due to Nigeria’s FX market inadequacies. Specifically, inflows from foreign sources came in at a four-month low of USD133.20 million (December 2023: USD237.10 million). We expect FX liquidity conditions to remain frail in the near term, although recent CBN reforms to boost liquidity in the FX market could cause a shift over the medium-term. Simultaneously, we believe that foreign inflows will stay below the pre-pandemic level (Q1-20 average: USD1.28 billion) as foreign investors may adopt a wait-and-see approach. Nonetheless, we do not rule out the possibility of an improvement in foreign participation over the medium term, to be driven by (1) expected FX inflows as guided by the authorities and (2) CBN’s recent actions aimed at clearing its FX backlogs.
According to the Central Bank of Nigeria (CBN), credit to the private sector (CPS) increased by 49.8% y/y to NGN62.52 trillion in December (December 2022: NGN41.74 trillion), resulting in a CPS average of NGN52.19 trillion in 2023FY (2022FY: NGN38.95 trillion). We believe the sustained growth in CPS reflects the impact of the CBN’s enforcement of the 65.0% loan-to-deposit ratio and improved domestic macroeconomic conditions relative to 2022. Consequently, the broad money supply increased by 51.0% y/y to NGN78.74 trillion in December (December 2022: NGN52.16 trillion), aligning with growth in both narrow money (+43.4% y/y) and quasi-money (+56.6% y/y). In addition, the currency in circulation increased by 21.3% y/y to NGN3.65 trillion (December 2022: NGN3.01 trillion). Looking ahead, we believe 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 continue to compel commercial banks to generate risky assets over the short to medium term.
Capital Markets
Equities
Despite a run of bearish performances in the domestic bourse earlier in the week, the domestic stock market rebounded by the end of the week, led by Industrial Goods stocks. Particularly, the NGX ASI closed higher by 2.0% w/w to 104,421.23 points, with increased buying interest on DANGCEM (+9.9%) and BUAFOODS (+4.9%) offsetting losses in ZENITHBANK (-8.1%) and UBA (-8.2%). Accordingly, the Month-to-Date and Year-to-Date returns settled at +3.2% and +39.6%, respectively. Trading activity was positive, as total traded volume and value increased by 30.3% w/w and 63.4% w/w, respectively. Performance across sectors remained mixed, with gains in the Industrial Goods (+6.4%) and Consumer Goods (+1.3%) indices and losses in the Banking (-4.5%), Insurance (-4.1%), and Oil and Gas (-2.5%) indices.
In the ensuing weeks, we expect the NGX to be flooded with corporate earnings releases as more companies publish 2023FY numbers alongside dividend declarations. While this influx of results may stimulate buying activities on the bourse, we also anticipate potential profit-taking, especially on stocks that have seen notable price increases recently.
Money market and fixed income
Money market
The overnight (OVN) rate expanded by 237bps w/w to 21.2%, as the settlements from the FGN bond (NGN418.20 billion) and OMO (NGN350.00 billion) auctions outweighed the inflows from FAAC disbursements (NGN743.13 billion). Consequently, the average system liquidity closed lower at a net long position of NGN133.10 billion (vs a net long position of NGN487.45 billion in the previous week).
Next week, we anticipate a further squeeze in system liquidity as the expected sole inflow from OMO maturities (NGN26.00 billion) may be insufficient to support the financial system amid a possible net NTB issuance.
Treasury bills
Sentiments in the NTB secondary market remained bearish this week as the tight liquidity in the financial system triggered sell-offs across the curve. As a result, the average yield across all instruments increased by 269bps to 9.7%. Across the market segments, the average yield expanded by 293bps to 9.7% in the T-bills segment and advanced by 124bps to 9.7% in the OMO secondary market. At this week’s OMO PMA, the CBN offered instruments worth NGN350.00 billion – NGN75.00 billion of the 92-day, NGN75.00 billion of the 183-day, and NGN200.00 billion of the 365-day bills – to participants. Total subscription at the auction settled at NGN533.80 billion (Bid-to-offer: 1.5x), with more demand skewed towards the longer-dated bill (NGN518.80 billion). The auction closed with the CBN allotting precisely what was offered at respective stop rates of 10.00% (previously 10.00%), 13.50% (previously 13.50%), and 17.00% (previously 17.50%).
Yields in the Treasury bills secondary market will likely rise further next week, as our expectation of a possible liquidity dearth might weigh on bill demand. In addition, the CBN is scheduled to conduct an NTB PMA on Wednesday (07 February), with NGN417.06 billion worth of maturities available on offer.Bonds
The FGN bonds secondary market traded on a bearish note, as the average yield expanded by 97bps to 14.8%. Across the benchmark curve, the average yield advanced across the short (+172bps), mid (+72bps), and long (+63bps) segments due to profit-taking activities on the MAR-2024 (+396bps), APR-2029 (+134bps), and JUN-2038 (+223bps) bonds. The DMO conducted the first FGN bond auction on Monday, offering instruments worth NGN360.00 billion to investors through re-openings of the 16.29% FGN MAR 2027 (Bid-to-offer: 1.9x; Stop rate: 15.00%), 14.55% FGN APR 2029 (Bid-to-offer: 0.6x; Stop rate: 15.50%), 14.70% FGN JUN 2033 (Bid-to-offer: 0.8x; Stop rate: 16.00%), and 15.45% FGN JUN 2038 (Bid-to-offer: 3.5x; Stop rate: 16.50%) bonds. Demand was lower across the four instruments as the total subscription level settled at NGN604.56 billion (vs NGN886.41 billion in the previous auction), with the DMO allotting bonds worth NGN418.20 billion, translating to a bid-to-cover ratio of 1.5x.
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 paused its accretion trend after five consecutive weeks, as the gross reserves level dropped by USD18.03 million w/w to close at USD33.35 billion (30 January). Similarly, the naira depreciated by 37.9% to NGN1,435.53/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), majorly influenced by the FMDQ’s revision of the NAFEM rate calculation methodology amid the CBN’s circular on harmonization of reporting requirements of foreign currency exposure of banks. Total turnover at the NAFEM window (as of 01 February 2023) decreased by 4.9% WTD to USD429.46 million, as trades were consummated within the NGN701.00 – NGN1,531.00/USD band. In the Forwards market, the naira rates depreciated across the 1-month (-28.2% to NGN1,431.39/USD), 3-month (-28.2% to NGN1,461.88/USD), 6-month (-28.0% to NGN1,504.19/USD), and 1-year (-26.9% to NGN1,580.65/USD) contracts.
While we expect the pressure on the local currency to persist, we believe the CBN’s updated policy on limiting banks’ foreign currency exposure could potentially release much needed flows into the FX market. While this is insufficient to completely wipe out the FX backlog, it would go a long way to address that issue, which in conjunction with other expected inflows could significantly improve supply and drive appreciation over the short-term.
